Kevin Amolsch is an investor and a hard money lender who has participated in over 2,000 transactions. PineFinancialGroup.com.
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They say wholesaling is the best way to become a real estate investor. “They” are often the gurus out there selling coaching and training seminars. So, are they right?
A real estate wholesaler is an investor who buys or controls properties at steep discounts and sells those properties to other real estate investors for a profit. Two advantages of becoming a wholesaler are it does not take cash or credit and there is very little risk when done correctly. This is why they advise newer investors to start here.
I cannot say whether they are right or wrong. Each investor needs to take their own path. However, what I will say is that I know a lot of wholesalers who have become extremely successful, and it is true that you don’t need cash or credit, so if those are your obstacles, wholesaling is worth considering.
There are several ways to close on a wholesale deal once the wholesaler locates the deal and finds the buyer. The easiest of them all is to assign your contract for a fee. The way this works is you, as the wholesaler, would get a property under contract to buy with a motivated seller and then you simply assign your rights in that contract to someone else for a fee. So, if I have a contract on a house for $100,000 and have a buyer for $105,000, I can draft a contract assignment that spells out who the new buyer is and that there is an assignment fee of $5,000. They pay you the $5,000 and you sign the assignment. You are done. No getting a loan, no closing on the house, no rehab, no other problems. You take your $5,000, say thank you and move on to the next one. They send that assignment to the title company and close on the deal for $100,000.
Banks, however, tend not to view contracts assignments so favorably. As a seller of the property, the bank is looking for the highest possible price. If an investor can buy the property and resell it for a higher price, it indicates that the bank did not receive full value. It is also not uncommon for deals that have been assigned to fall apart. Most listing agents qualify the buyer by reviewing proof of funds, but when there is an assignment unknown to the seller, there is no way for the seller to vet the new buyer. During the credit crash in 2008, every bank I know of started prohibiting contract assignments. They would put a clause in their contracts stating the contract is not assignable, making it near impossible for an investor to mark up the property and resell it without closing. You can probably see how this created a problem for real estate wholesalers.
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As a hard money lender, I frequently see a type of transaction that allows for the assigning of non-assignable contracts. Many investors now use this strategy to wholesale bank foreclosures without closing on the purchase. Although there are not many foreclosure properties available right now, this strategy will become more relevant as we see more banks start to foreclose again.
The concept is the wholesaler puts the house under contract in the name of an entity, which is normally an LLC. Then they find their buyer, but instead of signing a contract assignment for a fee, they sign a transfer of the LLC for a fee. The owner of the LLC changes from the wholesaler to the buyer, and the buyer closes on the house in the name of the LLC they now own. When doing this, wholesalers need to be sure the company operating agreement, which they will put together, spells out that they can transfer ownership of the LLC and that any assets, including contracts, and obligations will stay with the LLC.
To deploy this strategy, wholesalers need to set up an LLC for this one purpose. If the company has done any other business, a buyer will probably not take it. How the buyer finances the project is critical as well. Most conventional lenders will not loan to an LLC, so the buyer would need to use a creative business bank, a hard money lender, a private money lender or cash. Wholesalers should dig into how the buyer plans to finance it before the transaction so that everyone knows the deal will close.
There are pros and cons to this strategy. The biggest pro, of course, is that it enables deals to get done! Having this strategy in the arsenal allows wholesalers to do deals other investors would not be able to. It also prevents them from being required to close on the transaction as the buyer. If forced to close on a contract, the wholesaler would incur closing fees, reducing profits.
It is important to understand that this requires a legitimate entity in order to work. That means filing the correct documents with the state you are doing business in when required. A small fee is typically associated with filing documents, but it may be waived in certain circumstances so wholesalers should discuss these options with a competent real estate attorney. One final downside that could come up is the need to open a bank account. If any checks are paid to the entity itself, they will be hard to cash or deposit into your personal account or another business account.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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