How I sell properties depends on the kind of control I have on the property and the type of sale.
In general, when I am buying a property to wholesale it, I use an option contract. My option contract has several features that are supportive of wholesaling:
- It grants me the right to assign the buyer’s rights at any time during the life of the option.
- It grants me the right to market the property prior to closing. This includes giving me the right to list the property on the Multiple Listing Service (MLS). Note that the MLS in your area may not allow this, but the contract does not get in the way if it is possible.
- It spells out to the seller that I have equitable interest in the property
- It contains a section that, if initialed, spells out the terms of seller financing for the property. The language includes the term, interest rate, when payments should be made and the date of the first payment (in cases when there is no payment for the first X months.
- It contains a section that, if initialed, spells out that the title will be passed subject to existing financing. The existing financing is identified by lender, account number, balance and payment. There is language to explain to the seller that they are still responsible for this debt and points out that the seller must execute some additional documents to support the buyer in taking over the payments on these liens.
When I use this option contract to buy, there are several different ways that I sell the property.
I will sell the property in one of two ways:
- Straight Assignment. In this method, I take a fee to assign the buyer’s rights to another party. My rule is that I will aggressively market the property for sale until somebody gives me cash. When a third party hands me cash, I sign an assignment form that gives the buyer’s rights to that third party.This is the cleanest transaction for me since it takes me completely out of the transaction.
- Option to Sell. In this method, I sell an option to the third party. This option gives the third party the right to buy the property from me for a set price. Again, I only sign this type of option when cash is handed to me – the amount of cash is the option fee. Later, the third party will need to bring the option price (minus the option fee) to the closing table.
I use this method when the option price is fairly large or if there is a lot of risk to the transaction and I can’t find anybody to just pay me for an assignment.
This method leaves me with the risk of a failed transaction. To compensate me for that risk, I demand a higher total fee (option fee + profit from the sale). If the buyer wishes for a smaller fee, then they will have to take on some of the risk and use a straight assignment.
For a seller financed or a subject-to purchase, here are the methods I use to sell:
- Wrap Around Mortgage. With this method, I sell the property to the third party using an option contract and we specify that I will be providing seller financing. Again, cash for the option fee is required up front before I sign the option contract. Later, at closing, the third party will need to bring the down payment (less the option fee) and will need to sign the wrap around mortgage for the amount that I am financing of the purchase.
Generally, the wrap note balance, interest rate and term are slightly higher than the underlying note’s balance, rate and term. If underlying note must be paid off with a balloon, then the wrap also requires a balloon payment a month or two earlier. All of this is to insure that the underlying note gets paid as agreed.
This method keeps me involved in the transaction for the life of the seller financing note. I generally use this method so that I can track the payments that are being made on the underlying financing. My thought is that I have told the original seller that I will take over their payments. I want to make sure that those payments are being made on time and that my reputation with that seller remains in good standing.
- Lease Option. With this method, I lease the property to the third party with an option for them to buy it at a later date. With this method, the rent payment must be higher than the underlying note’s payment. Additionally, the purchase price specified in the option must be higher than the balance of the underlying note.
This method also keeps me involved in the transaction for the length of the option period. Again, I generally use it to track the payments on the underlying note.
- Straight Assignment. Basically the same as described above with the extra aspect that I want to make sure that the underlying note gets paid. I try to use this method only with seasoned investors that have a good reputation.
- Option to Sell. Basically the same as described above. Again, generally only used with seasoned investors with good reputations.
Since I am licensed as a real estate agent, I also wholesale listed property. The way that this works is that I may negotiate a purchase and sale contract on a listed property and then assign my rights as the buyer to a third party. When this happens, I have two fees – the assignment fee and the commission that I will earn as the buyer’s agent. Both fees are disclosed as part of the closing.
This kind of wholesale is most likely to be a short sale, bank owned (REO), or commercial property.
Duty To Perform
Several times, I mentioned that I require cash to sign a contract. The reason for this is simple – once I sign a contract I have a duty to perform. Unfortunately, this duty may require me to allow a transaction to fail or may delay the transaction to the detriment of the seller.
For example, some time back, I accepted a check for an option to sell a property that I had under contract. The original seller wanted a quick closing and this buyer wanted to buy the house near hers and claimed to have cash. I accepted a check and signed an option to sell. I sent both the option contracts (my buying the property and my selling the property) in to the closing agent to get things moving and deposited the check. Surprise! The check bounced.
At this point, the title folks told me that I had a problem since they knew of an option contract that I had signed giving her the right to buy the property from me. I spent several days trying to get hold of her to get her to release the contract. I also had to find a new buyer for this property. I did accomplish both, but what a waste.
The lesson learned was that I only accept cash and I charge more for transactions in which I have to stay involved. My time is worth it. Same is true for my clients and customers.