Instructions
Students can reference this document for key highlights of new/updated regulations and best practices regarding wholesaling.
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Wholesaling: Wholesaling is a short-term real estate investment strategy where you find properties to purchase significantly below market value that you will sell either the contract or the property to another buyer.
Note: Only individuals with an active real estate license may be paid a referral fee for locating properties for investors to purchase directly from the current home owner(s). This concept is commonly referred to in the marketplace as “bird dogging”.
The following essential points apply to both wholesale closing strategies; assignment of contract and double-close. Always seek counsel from experienced, licensed and insured professionals in your specific market area (including real estate attorneys and real estate brokers) for additional state and local requirements as these will vary between locations. It’s highly recommended you secure legal representation on every transaction.
1. Be a Principal. Always act as a principal in each part of the transaction – which means, you’re acting as a buyer when dealing with the original homeowner, and acting as a seller when dealing with the third party buyer;
2. Execute Valid Agreements. Always use and fully execute valid and binding written purchase and sales agreements that conform to the requirements in your specific market area;
3. Include The Required Agreement Language. Always include the relevant agreement language that’s permissible and/or required in your specific market area, including the proper assignment/sale of contract language if an assignment/sale is allowed;
4. Include a Minimum $500 Deposit. We recommend on most transactions that you include an earnest money deposit that no less than $500. Although you can put down less money it may make you appear to not be a serious buyer and raise red flags with the seller or listing agent. Make sure the earnest money deposit is properly exchanged per the agreement;
· The offer, acceptance and exchange creates a valid agreement that gives you a contractual interest and equitable ownership interest in the property;
· $500 is the recommended minimum deposit/consideration. The deposit should be a meaningful amount that is typical for transactions in the your market area.
5. Purchase With The Intent To Rehab. Always analyze a deal and enter into a transaction with the intention to either rehab the property or keep it as a rental property.
· Intent includes both the mental willingness, and the financial capacity to close.
i. Intent does not mean you can’t back out of an agreement if, whether through inspections, or a more detailed due-diligence, the deal doesn’t make sense. It just means that if everything checks out and the end wholesale contract buyer cannot close, you have the willingness and financial capacity to buy the property.
6. Only Market and Sell The Interest That You Own. (***see below) A signed purchase agreement only gives you a contractual and or an equitable interest in the property (i.e., the right to buy the property at the agreed upon terms), and does not give you legal title to the property.
· Only market and sell the purchase agreement itself, and not the property. Disclose in all your marketing and to the buyer that you are a contract holder and not the owner on title.
· When you are marketing your contract please include a disclosure that clearly discloses who you are in the transaction. An example disclosure is below to include in all of your marketing:
Selling a Contract
· Disclaimer: I signed a valid purchase agreement with the seller of the property which allows me to assign my rights to purchase the property. I am not currently the owner of record of the property, so I am only selling the contract and my right to purchase the property.
Purchasing the Property and Then Reselling the Property
· Disclaimer: I am not currently the owner of record of the property, however I have signed a valid purchase agreement and will be closing escrow in the near future. Due to time constraints I am currently considering reselling the property after I take ownership.
7. Disclose Agent Licensing. It's necessary to discloseagentlicensing in marketing, and clearly communicate you are actingas a principal/direct buyer to purchase the home in the transaction (i.e.if you have a real estate license, but for this transaction, you are the actual buyer/seller and not acting as anyone's agent).
· Any verbiage that conveys you are licensed is sufficient.Including the license number is advisable.Example: Broker, agent, Realtor, etc., and #01306190. (see http://www.dre.ca.gov/files/pdf/forms/re858.pdf).
8. Be Fully Transparent With All Parties. Always be fully transparent about all aspects of the transaction with all of the parties involved, and make sure the disclosures are proper and timely.
***State Specific Double Close Policy:
Some states[1] such as Ohio, require you to close on the property first before entering into an agreement to sell the property to a third party. The reason is because these states only allow you to sell the legal interest that you currently own, and nothing more. If you only have an agreement to purchase the property, you only own the contract that gives you an equitable interest – so that’s all you can sell. If you want to sell the whole property, you must close and become the owner of record before signing a purchase and sales agreement to resell the property. These policies are a moving target and depend on interpretation of the local Department of Real Estate, so always seek legal guidance from a local attorney or legal professional.
Potential Options for Wholesaling in Ohio:
(i) close on the property first before signing a second purchase and sale agreement to sell the property to another buyer.
(ii) Sell(assign) your interest in the purchase and sale agreement instead of purchasing and reselling the property.
[1] E.g., Ohio on 2/5/2015.