I was asked a basic, but very important question today: “Tom, I don’t understand what you mean by ‘wholesaling’. How exactly is it that you make money doing this?”
An excellent question. Let me explain the basics in a nutshell.
Here’s how it works:
1. I market for motivated sellers looking to sell their property.
2. I negotiate a great deal with these sellers.
3. I put the property legally under contract.
4. I then contact rehabbers that I know who are always looking for properties to fix up and resell. I tell them about the property I have under contract and ask if they are interested (at a higher price than I have it signed for).
5. I choose a solid buyer and give them an Assignment Contract. This contract basically states that they are taking over all my rights AND responsibilities in the contract. They get this privilege for a fee, which is my profit.
6. At settlement, the attorney does all the paperwork and the house transfers directly from my seller to my buyer, but I never own it or go on the chain of title.
7. The seller gets their money and the house is off their hands, the buyers gets a great deal to start renovating, and I go to the bank with a very healthy paycheck.
It’s win, Win, WIN!
This works because I am offering the property to my buyers at a price that they want to get it at anyway. And I’ve made it easy for them, as I am serving up a great deal on a silver platter. They don’t have to market, negotiate or deal with the seller at all, aside from signing the paperwork at the settlement. I get to focus on the parts of the business I like to do (marketing, negotiation, and cashing checks!) The parts I don’t like I can avoid (tenants, managing crews, etc.)
Simple? Yes. Easy? No.
You have to know what you are doing, you need the marketing materials and know-how, legal contracts, and forms to make it happen, and you need to know how to handle and navigate the issues that will come up along the way.
That’s why you just can’t wing it or try to reverse engineer the things I tell you daily. It just won’t work. If you want to do it right, then it is like any other trade, you need to get trained to do it right. Then the sky will be the limit.
Yes, but… Is it legal? YES! It is legal. Very legal. Assignment of Contract is based on old English contract law. Yes, that jolly old England. The one that our country initially sprang from. And so, the basic elements of our laws have a long history. Assignability of your “interest” in a real estate contract is one of them. When you are the buyer on a contract, you have “equitable interest.” And you have the right to do with that interest as you please, which includes selling it for a profit. (The good ol’ American way!) With real estate contracts, any contract is assignable, unless it specifically states otherwise. The usual Realtor board contract says it isn’t assignable, therefore that specific contract therefore isn’t. But that is just what they choose to do, it doesn’t make it illegal or immoral to do otherwise if all parties involved so choose. And it isn’t “brokering without a license” because you are actually on the contract as the buyer, therefore you are not brokering it as a third party. (So don’t let any real estate agents bother you about this point either.)
Notice that I said “real estate contracts” are assignable. I didn’t say ALL contracts. There are types of contracts that are not assignable, like “Personal Services Contracts.” If I’m a jazz singer and you give me a personal services contract to sing at your club, I can’t assign that contract to anyone else. After all, you want my singing talents, not someone else’s. But that’s Personal Services contracts, not real estate contracts.
Okay then… So why do people refer to it as “illegal flipping”? Well, it wasn’t the flipping that was illegal, it was what they did in the process. Usually some sort of fraud. Like a fraudulent appraisal. Or fraudulent loan papers. The FRAUD was the illegal part, not the flipping. But the baby got thrown out with the bath water and misinformed or uninformed people therefore fell for the myth that wholesale flipping is illegal (and sometimes they continue to spread the myth). But it’s not true.
Does that make sense? On top of it all, I close all my deals (and all my student deals) with a licensed settlement attorney or escrow agent. I don’t do kitchen table settlements or go around taking deeds. I want it all done out in the open and under the care and direction of a competent — and licensed — attorney or escrow agent. That way there is no question whatsoever that the transaction was done right. After all, an attorney/escrow agent won’t risk their license, reputation, errors and omissions insurance, AND their entire livelihood just to close an illegal deal for me. Think about that. So yes, wholesaling is perfectly legal when you do it right. Obviously, none of this is legal advice. For that you should consult a lawyer, which I am NOT. What I am is a very talented real estate mentor who can teach you how to build up a very profitable business doing wholesale flipping and rehabbing