Wholesaling Made Simple! A Comprehensive Guide to Assigning Contracts
BY SETH WILLIAMS
“There MUST be a better way to monetize these deals without putting up any of my own money.”
I kept seeing deal after deal hit my desk – and they were great deals – but they just weren't great enough for me to justify investing my own money. Sure, 40% – 50% of market value is great for the average investor, but if I couldn't get a property for a next-to-nothing price tag, they just weren't “risk-free” enough for me to tie up my limited funds!
It was about this time that I started exploring the idea of assigning contracts (i.e. – wholesaling, arbitrage, etc.). Rather than signing a purchase agreement and buying each property outright, there was an ingenious way of signing a purchase agreement and then selling that contract to another investor so that THEY could buy it outright – with me just acting as a middle man in the deal.
In some ways, assigning a contract wasn't all that different from acting as a realtor, because I would be wearing a lot of the same hats and doing some of the same things a realtor would do for their client. The difference was – I had a signed purchase agreement between myself and the seller, which gave me an equitable interest in the property. This contract was like a paper asset, which I could sell to a third-party and get paid an “assignment fee” without ever owning the property myself.
This presented a few obvious benefits:
- I didn't need to put up any of my own cash.
- I didn't need to shoulder any liability as a property owner.
- I didn't need to stress out if I couldn't find a buyer immediately (because once the trial period expired, I was free to walk away from the deal).
As I found myself increasingly strapped for cash (all while the opportunities continued to pour in faster than I could handle), this whole “Assignment” business sounded like the PERFECT solution to my problem.
Disclaimer: Before we get any further, please be aware that I am not an attorney and the information in this article should not be interpreted as “legal advice”. Every state has different laws and every real estate transaction has unique variables that can affect the legality of the steps listed below. Even though these are the exact steps & documentation I use when wholesaling real estate – don’t assume that this information is the “gospel truth” in the area where you're working. Before you act on anything described below, be sure to consult with an attorney in your area to confirm that these are the correct procedures to follow where you're working.
The Mechanics of Assigning a Contract
Now, the idea of assigning contracts (aka – “wholesaling”) always sounds great on paper – but let me tell you, I struggled for YEARS to understand the mechanics of how this process really works.
I understood the “20,000-foot-high” concept of what wholesaling was all about, but when it came down to figuring out the real, nitty-gritty details (for example)…
- What kind of Purchase Agreement was I supposed to use?
- What kind of “Assignment Agreement” needed to be signed?
- How was I supposed to get the deal closed?
- Where could I find the right title company or closing attorney?
- When would I get paid?
- What if the buyer went behind my back and talked to the Seller?
- What if I couldn't find a buyer before the original contract expired?
…I got so many different opinions from so many different people on how the process was supposed to work. All the advice I saw on the various real estate forums and blogs would constantly contradict with each other – which made it even harder for me to nail down the correct way to move through this process.
Since I struggled with it for such a long time, I'm going to save you a ton of hassle and confusion by laying it all out for you below.
How Wholesaling Works
Wholesaling is (in theory) a pretty simple concept.
When an investor (“Buyer A”) finds a great real estate deal and signs a Purchase Agreement with the Seller, they have the option (if their Purchase Agreement contains the right language) to “assign” (aka – sell) this piece of paper to another investor (“Buyer B”).
When Buyer A sells/assigns the Purchase Agreement to Buyer B, they do it with a simple, 1-page document called an “Assignment Agreement”. This document legally transfers all of Buyer A's rights to Buyer B. It also releases Buyer A (“Assignor”) from any liability or obligation and substitutes Buyer B (“Assignee”) in their place.
Essentially, Buyer B jumps into the shoes of Buyer A and can purchase the property directly from the Seller, at the same price, at the same terms, with the same deadlines, everything that was stated in the original Purchase Agreement now applies to Buyer B instead of Buyer A.
I always find that visual aids are helpful, so here's my best attempt at showing you another representation of how the process works:
Stage 1: Contract Signed between You (Buyer A) and Seller
Stage 2: You (Buyer A) Find an Outside Investor (Buyer B)
Stage 3: You (Buyer A) Assign the Contract to the Outside Investor (Buyer B) and Get Paid a Non-Refundable Deposit
Stage 4: Outside Investor (Buyer B) Closes With the Seller and You (Buyer A) Get Paid the Balance of Your Assignment Fee
As you can see, the Wholesaler (i.e. – You/Buyer A/Assignor) is acting as the “middle man”, getting paid in the form of an “Assignment Fee” from the Outside Investor (i.e. – Buyer B/Assignee).
In the process I follow (which I'm about to explain further), a portion of this payment is made when the Assignment Agreement is signed by both parties (Stage 3 – above) and the remainder is paid when the deal is closed and the property officially changes hands (Stage 4 – above).
The Typical Process
Over the years, I have heard numerous explanations (all of which were very different) as to how the wholesaling process is supposed to flow, from start-to-finish.
Most of these explanations only got me about 80% of the way to the finish line. They never closed the loop on how to get through the closing process, abide by the law, get paid ANDnot be a scumbag along the way. The process outlined below seems to check all of these boxes and get the job done.
Step 1: Find the Motivated Seller
There are a few specific techniques I use to find motivated sellers and get deals under contract at ridiculously low prices. I've already explained these techniques pretty thoroughly in a number of articles throughout this blog. If you aren't sure where to start, you can reference these posts below:
- How I Find Motivated Sellers – Step 1, Step 2, Step 3
- How to Create a Buying Website in Less Than 15 Minutes
- Million Dollar Postcard Templates That Work
- How Much Should You Offer For That Property?
- How To Write Offers That Get Accepted (With 3 Simple Pages)
- Everything You Need To Know About Getting Your County's Delinquent Tax List
- The Ultimate Negotiation Technique That Nobody Talks About
- How to Avoid the Guilt Trip When Sending Low Offers
- Understanding the Motivated Seller
- Getting People To Say Yes
Step 2: Explain Your Intent & Get the Contract Signed
When you start making offers to these motivated sellers, your offer needs to be accompanied by a thorough explanation of what you intend to do.
Wholesaling is a very different type of transaction than buying a property outright. The Seller needs to know what you're planning to do (because by itself, your Purchase Agreement doesn't imply what is actually going to happen).
If you don't explain your intentions to the Seller, they're going to get confused (and probably upset at you) because when you fail to properly set a person's expectations, things can get ugly.
To put it simply, there are a few key points your Seller needs to be aware of:
- You're not planning to buy their property yourself.
- You're planning to sell the contract to someone else and then THEY are going to buy it outright.
- You will communicate with the Seller throughout the process (they won't ever be left in the dark).
- If you aren't able to find a Buyer, the contract will expire and the transaction won't happen.
Given that a wholesale transaction involves a couple of additional steps along the way, it might be tempting for you to over-complicate the story as you're trying to explain things to the Seller.
It's important to explain all the basics, but you'll want to avoid bombarding them with information that they don't need to know. You don't want to confuse the Seller, because rather than being made to feel stupid, most people will just say “No” to save their pride (even if this arrangement really is in their best interests).
When I explain the process to a potential Seller, my email/letter/conversation will look/sound something like this:
“Thanks for contacting us regarding your property! After reviewing the specific details of your property, we would be interested in marketing your property to our nationwide network of real estate investors.
For the next 180 days, we would be willing to invest our time and resources to find a cash buyer at no cost to you. If/when we are able to find a buyer, we will coordinate with you and the buyer to schedule a closing and ensure that you are paid the full amount listed in this purchase agreement.
You will not incur any costs in this process. We will be compensated by the buyer (which we will find) and when the transaction is closed, you will receive the full sale price stated in the attached purchase agreement.
In order to start the process, we will need a signed copy of the attached purchase agreement. In this contract, our company will be listed as the Buyer and our intent will be to assign this contract to another cash buyer in our network.”
In order to assign your purchase agreement (as explained above), you need to make sure your contract contains an “assignment clause” allowing you to assign it to a third-party (because without this clause, the rest of this process isn't going to work). There are many different ways to state this in your contract, but if you need an example, this is what my Assignment clause looks like:
ASSIGNMENT: Buyer has an unqualified right to assign its rights under this contract to a third-party. No notice to the Seller of an assignment is necessary. Such an assignment will create a novation and release the original Buyer from this contract and substitute the assignee in its place.
Reminder: Whatever documentation or language you end up using, you'll want to make sure you're running it by an attorney in your area to make sure it's a valid, legal document that abides by your local, state and federal laws.
Step 3: Due Diligence & Property Prospectus Report
Since you're not the actual end-buyer, it's not imperative that you learn every intricate detail about the property you have under contract. However, you do need to know the basic, relevant details about it, because you're going to market this thing to the public, to your buyers list (if you have one) and to anyone else who may be a potential cash buyer.
So how much do you need to know? As a general rule, I try to uncover any potential disasters that would kill a deal if I were buying it outright (i.e. – what kinds of things would make me turn and run the other direction?). I also need to gather enough information to fill out a property prospectus report.
What is a property prospectus report? Mine looks something like this…
As you can see – it's just a single page that lists all of the basic details about the property:
- Listing Price
- Property Address
- Parcel Number
- Legal Description
- Property Size
- Terrain & Surroundings
- Road & Utility Access
- Parcel Map
- On-Site Photo(s)
- Breakdown of Costs
- Comparable Listings (to give a basis for my asking price)
…and that's pretty much it. Here's a video overview of how I fill it out:
The goal with this document isn't to inform them of every last detail about the property. The point is to tell them just enough to make it obvious that they're looking at a deal with some great potential.
That being said, if I do find any big problems in my due diligence process, I'll either walk away from the deal (if I don't think I'll be able to sell it for a profit) or at the very least, I'll be sure to disclose any “Other Issues” that I'm aware of at the bottom of the report.
Step 4: Find the Buyer, Assign the Contract, Collect the Deposit
When you start getting calls and emails from interested buyers, you're likely to find that there are A LOT of tire-kickers out there. People will get your hopes up, only to go AWOL when it's time to sign on the dotted line. People are extremely fickle, so if someone wants you to take their offer seriously, they're gonna have to agree to it in writing AND put their money where their mouth is.
When I find an interested buyer, this is how I would communicate the next steps to them:
“Thanks for your interest in this property! If you'd like to move forward with this purchase, I'll need two things from you:
1. Please sign the attached Assignment Agreement and fax or email it back to me by 5:00pm today.
2. Please send us a $______ deposit by 5:00pm today via wire transfer.
Note: The property will not be reserved until both items are received.
Once both items are received, the property will be reserved in your name and we will contact <<Title Company Name & Location>> to begin the closing process. They will contact you in the next few days and will send you the closing documents and preliminary title report for your review and approval.
Our tentative goal is to close this transaction by <<30 days later>>. This means you will need to submit your funds and all the required paperwork to <<Title Company Name>> by (or before) that time.“
Notes Regarding the Deposit:
When it comes to the deposit, I usually ask for anywhere from $1,000 (for the cheaper deals of $10,000 and below) to $3,000 (for anything $30,000 and up). For anything in between, I'll ask for approximately 10% of the total purchase price.
When you collect these funds from the buyer, don't run out and spend this money just yet. You need to wait until the transaction is closed and the property has been transferred from the seller to your buyer.
Believe me – there are all kinds of obstacles that can get in the way of closing (title issues, funding issues, inspection issues, you name it). With this in mind, you should NEVER touch this deposit until the deal is done. Just take a look at this section from my Assignment Agreement:
Assignee has the right to a full refund of the Down Payment, upon demand, if any action or inaction of either Buyer/Assignor or Seller prevents the closing of the sale of Property according to the terms of the Purchase Agreement.
Remember, even though you have this money in your bank account, you're still “on the hook” to pay it back until the deal is done, so hang onto it until you've crossed the finish line!
Notes Regarding the Assignment Agreement:
You might find that some people (buyers, sellers, closing agents, etc.) will have a tendency to over-think this document, simply because they don't have experience with assignments and they aren't familiar with its function.
As I explained above, this agreement is a relatively simple document that takes your rights as the original “Buyer” of the property and transfers them to a third-party (i.e. – the new person or entity that has the cash and desire to jump into your shoes and become the actual end buyer of the property).
If you ever come across an individual who just doesn't get it – I found this video from Michael Jake on how the process works (and I thought it was an awesome, easy-to-understand explanation):
Step 5: Deliver Documentation to Title Company, Close, Get Paid
Once you have both the Assignment Agreement and the funds required for your deposit, you'll need to deliver the following documentation to your Closing Agent (i.e. – Title Company or Closing Attorney):
- Copy of the fully executed Purchase Agreement
- Copy of the fully executed Assignment Agreement
- Proof of the funds that you've received for the deposit
This should be everything they need to order title insurance, prepare the necessary paperwork for all parties to sign and then move forward with closing the transaction.
Given that this is a cash deal (with no mortgages or outside financing involved), this shouldn't be a terribly complicated transaction for your closing agent to pull off. That being said – I should warn you that not all closing agents are created equal.
When I first started trying to assign contracts, I found that some title companies have no idea what they're doing (they acted like I was asking them to move heaven and earth or do something illegal). The title companies in my area seem to be particularly incompetent with these deals – and it threw a huge wrench in my progress for a long time.
If you run into this dilemma, just keep calling around to various title companies or closing attorneys in your area until you find someone who understands what you're talking about. Don't let their ignorance act as an obstacle to the evolution of your business.
Knowing When to Wholesale
When I look back on all the properties I've listed and sold on my own behalf, most of them sold in about 6 months or less (assuming the properties were desirable, usable, priced right and I was marketing them consistently).
Whenever a property took longer than 6 months to sell, it was usually because of one or two issues:
- My assumptions about the property's market value were WAY off (and I didn't have the kind of profit margin I thought I would).
- Something was fundamentally wrong with the property (e.g. – it didn't perc, it wasn't buildable, the location was terrible, etc).
As you can imagine – neither of these things are ever a fun realization to have, but whatever the case may have been, I found that when a property sat on the market for more than 6 months and the sale still hadn't occurred, something big needed to change.
By the time I got to this point with one of my properties, it had become clear that if I could do it all over again, I wouldn't have sunk my own money into this property. It would have been far better for me to simply assign the Purchase Agreement (if I even could) rather than buying it outright. As you can imagine, if there's ever something wrong with a property – it's better for this problem to be in the Seller's lap than mine.
Here are some issues that typically push me to consider wholesaling rather than buying outright:
- When I'm not very confident about the property's true market value.
- There are potential problems with the property that I can't get resolved.
- I don't have the money to invest myself and buy it outright.
- The Seller isn't willing to lower their asking price to my liking (but there's still enough meat on the bone to make a hefty profit).
- The property isn't local and I don't want to take on the liability of ownership.
It's important to remember that even if you do have money to buy a property, it doesn't necessarily mean you should. There are all kinds of menacing issues that can come up with any property – and in some cases, these issues can become MAJOR obstacles to getting it sold. For many investors, this kind of uncertainty is more than enough reason for them to stick to wholesaling almost exclusively.
Drawbacks to Wholesaling
While there are certainly a lot of benefits that can come with wholesaling, there are a few drawbacks that you should be aware of as well. When your intent is to assign a contract, you'll have to deal with a few limitations (which may or may not be a problem – depending on what you're trying to do). For example:
- You won't be able to make any improvements to the property (because you don't own it and it's not yours to improve).
- You won't have the freedom of offering seller financing (because you're not the Seller and it's not yours to finance).
- You'll have a much shorter window of time to get the deal done (because your contract won't last forever).
- The closing process will require more attention to detail than the simplicity of a cash closing (which can be done in-house if needed).
- Your buyer MUST have the ability to pay all-cash (because most mortgage lenders aren't willing to deal with the minor complexities of an assigned contract).
It's also worth noting that some states (like Ohio, for instance) have laws and statutes that essentially make it illegal to market a property you don't own in your name. It's considered to be the “brokering of real estate” – and if you don't have a real estate license in that state, you could get fined and/or charged with a misdemeanor for working outside of this box.
One potential way to get around this is to make it abundantly clear in your listing that you are selling a CONTRACT to purchase the property, not the property itself. For example, you could include a short paragraph in your listing that reads something like this…
“This property is available via our Assignment Program. We have entered into a purchase contract with the current owner to buy the property for $________ (this price includes payment to the owner and all associated fees and estimated closing costs) and for an assignment fee of $_______, we will sell our rights in this contract to a third party. A reputable title company and/or attorney will be enlisted to handle the closing and transfer of title.”
With this kind of statement included in your listing, it should be clear to any interested parties that you are not the current owner. You are simply selling a piece of paper that gives you (and ultimately, your end buyer) the right to purchase the property for a certain price.
When you decide to buy a property outright and flip it (i.e. – the old-fashioned way), there are a lot of freedoms you'll have that simply aren't available when you choose to assign the contract. So before you swear off buying properties outright, remember that every deal has a number of considerations you need to think about. Depending on your end goals, these issues may or may not make the property an ideal fit for wholesaling.
As with anything, there are pros and cons to every approach.
It's An Ongoing Education
I'll be completely honest – at the time of this writing, I still don't consider myself an “expert” in wholesaling (because I've only been through the process a handful of times myself). On the same coin, I can say that I've been through enough wholesale deals to know that this process works.
Wholesaling is a great way to make money in real estate, but it's still not my primary technique for handling most deals. My experience with wholesaling hasn't reached the same comfort level that I have with simply buying properties for cash.
That being said, wholesaling is an extremely helpful sidearm to have at my disposal when I come across deals that don't fit perfectly inside the “cookie-cutter mold” that I like to see (and as you can probably imagine, this happens pretty frequently).
My goal is to get a lot more experience with this technique, because there are PLENTY of times when wholesaling would have been a much better fit for some of the deals I've pursued in the past.