A Brief Introduction About the Wholesale Agreement
A Wholesale Agreement is a way to get in the market of real estate investments. Real estate wholesaling does not need massive amounts of capital to get started and could provide wealth-building investments. The difficulties of these contracts are a deterrent for some investors. Even qualified real estate agents could struggle with understanding a Wholesale Agreement.
When you sign a wholesaling contract to buy a property from a seller, you then have an equitable interest in the property. This is known as the doctrine of equitable conversion, and it permits a buyer to become the equitable proprietor of the property while the seller maintains the bare lawful title to the property under the terms of the agreement.
Who Takes the Wholesale Agreement?
In this agreement, a wholesaler mediates between the sellers and the buyers. They would have a contract with the seller and provide the contract with a buyer after marketing. It is important that the wholesale agreement specifies the purpose of the agreement or else the sellers and the buyer may be confused because their expectations were not met/
Purpose of the Wholesale Agreement – Why Do You Need It
In a wholesale purchase and sale agreement, the wholesalers make a profit from the difference between the sum the buyer pays and the contracted charge they have with the seller. The key is towards finding a seller who would sell much lower than the fair market value and then end up reselling towards a buyer at a higher price. In a real estate wholesale contract, time is important. In case it takes too long to get a buyer, the wholesaler would end up paying out from his own.
Also, reverse wholesaling is another kind of wholesaling. This is the same as real estate wholesaling, but the agreement order is reversed; thus, the wholesaler could find a buyer before finding a seller. Finding a buyer could provide the wholesalers with a good idea of what they are looking for and more time when they are finding a property that is suitable for the buyer. The wholesaler’s money doesn’t require to be spent in this, and he could choose what strategy to use.
Contents of the Wholesale Agreement
The basic contents of this agreement include:
- Listing parties involved
- Describing the real estate property.
- Denoting any personal property which is included in the sale.
- Details of the purchase cost and financing options.
- Discussing monetary terms and a contingency plan.
- Confirming the physical condition of the property during the transfer.
- Providing for a contingency plan by reason of failed inspection.
- Making the necessary lead paint disclosure
- Establishing the closing date deadline
- Discussing the deed type
- Providing security in case sale falls through because of the inability to pass title or buyer can’t get title insurance.
- Listing state-specific adjustments (like taxes, water, sewage, etc.
- Having both a buyer’s as well as the seller’s default clause
- Statement of risk and damage.
- Disclosures as well as addendums.
How to Draft the Wholesale Agreement?
The first step in creating a wholesale purchase and sale agreement is to find an interested seller. It is important to find interested sellers and have contracts at very low costs. Next, clarify the intent and have the contract signed. When making offers towards the sellers, the offer requires having an explanation of what would be done.
The seller requires being aware of the following:
- There are no plans for purchasing the property from the wholesaler themselves.
- The contract would be sold to someone else who shall then buy it.
- The seller would be communicated throughout the procedure.
- If a buyer is not found, the transaction shall not happen, and the contract would expire.
You should explain what the basics are, but don’t give them additional information that is not required. It is required to follow all state, local, and federal laws.
Negotiation Strategy
The wholesaler is not the actual buyer, so it is not important to remember every detail about the property in the agreement. The main point is to clarify all the vital details while emphasizing the fact that they are receiving a good deal. The wholesalers are only responsible for assigning a contract to the buyer within a certain time frame. Any home repairs shall be the buyer’s obligation and not the wholesaler’s responsibility.
Benefits and Drawbacks of the Wholesale Agreement
A wholesale agreement is a better alternative for purchasing outright, which includes when:
- The property’s true market value is uncertain.
- There are potential issues that you cannot resolve.
- You have no money for investing.
- The price is higher, but there is some profit margin, as well.
- The property is not local and current liability concerns.
Drawbacks
The drawbacks of a wholesaling contract include:
- Not being authorized towards making improvements.
- It cannot offer seller funding.
- A buyer should pay all-cash.
- Illegality in few states to market a non-owned property.
- Being considered brokering real estate, which is unlawful without a real estate license in some states.
- Some freedoms in “flipping” vs. “wholesaling.”
What Happens in a Case of Violation?
Many remedies take place in case there is a breach of this agreement(1), and the type of remedy that a court shall assign towards a specific breach of contract case is specific to the facts and conditions of that case. There are some common types of relief that in a breach of contract defendant could be ordered to conform with. The most common types of damages in a breach of contract matters are compensatory damages as well as punitive damages(2).
Wholesaling is dissimilar from buying a property. Having a well written wholesale agreement is important in order to find an interested seller or having a good buyer lined up.