Wholesaling Contract: What is it? What to Include

What Is a Wholesaling Contract?

A wholesaling contract is a legally binding agreement used between a seller (property owner) and a wholesaler that grants a wholesaler the right to buy the property. Wholesalers use these contracts when transacting with sellers.

In real estate, wholesaling is an investment strategy that allows someone to act as a middle person between a seller and an end buyer to earn a profit.

Wholesalers do not buy the actual property or hold the title, rather they buy the contractual right to sell the property, which is then sold to an end buyer at a premium. The wholesaler then assigns the right to buy the property from the seller to the buyer.

What’s Included in a Wholesaling Contract

A wholesaling contract has many concepts you will find in a purchase and sale agreement or other types of real estate contracts that detail the exchange of property. Below are some terms you will often see:

• Parties Involved: This section identifies the seller (current property owner) and the buyer (wholesaler or investor).
• Property Description: Includes the full legal description of the property, typically including address, parcel number, and any other identifiers.
• Purchase Price: This section states the agreed-upon purchase price between the seller and wholesaler.
• Earnest Money Deposit (EMD): This section defines the amount of the deposit, where it will be held (typically in escrow), and the terms under which it can be returned or forfeited.
• Inspection Period: This section specifies a duration during which the buyer (or their representatives) can inspect the property.
• Contingencies: This section outlines any conditions that must be met for the contract to proceed. Examples can include financing, property inspection results, etc.
• Closing Date : This section specifies when the transaction will be finalized.
• Closing Costs : This section outlines who is responsible for covering various closing costs such as title search and escrow fees.
• Assignment Clause : This is important in wholesaling. It allows the wholesaler the right to assign the contract to another buyer for a fee – which is how a wholesaler makes their profit.
• Default Terms: This section outlines what happens if either party does not fulfill their obligations in the contract.
• Dispute Resolution : This section outlines the procedure for how disputes will be handled.
• Governing Law : Specify the jurisdiction or state laws that will be used to interpret the contract.

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Who Uses a Wholesaling Contract?

A wholesaling contract is used between a property owner (seller) and a wholesaler. A wholesaler is typically an individual or business entity who serves as a middle man that looks to profit off of the “spread” by making a market for real estate.

Wholesalers will purchase the ‘contractual right’ to purchase the property from the seller. This means they don’t actually purchase the property outright or hold the title.

What wholesalers then do is sell the ‘contractual right’ to buy the property to a buyer, typically using an assignment agreement. They hope to sell for a higher price than they paid to the original seller so they can make a profit.

It is important to note that every state has its laws and restrictions regarding wholesaling and assignment of contract. Therefore, you should carefully review these regulations and consult with a local real estate lawyer if you have any questions.

Wholesalers often look for distressed property that needs repairs and renovations. However, unlike someone who buys, renovates, and sells a house after it’s been flipped, the wholesaler looks for a buyer eager to close on a good deal.

The buyer can acquire a property that needs repairs for a reasonable price, which they then use to either flip and resell, rent out, or reside in.

Here is an article that offers an overview of wholesaling real estate.

Image via Pexels by Devon Rockola

How to Write a Wholesale Real Estate Contract

The easiest way to write a wholesale real estate contract is to look for purchase agreement contract templates online. These offer a solid foundation for you to modify to suit your needs.

You can also consult with a real estate lawyer, who can draft a real estate contract for wholesaling properties. You can use this contract in the future to approach buyers you are interested in purchasing a property from, editing it as needed to suit the circumstances.

If you decide to write a wholesaling contract on your own, you will need first to research the wholesaling real estate laws in your state. Failure to do so could result in legal penalties.

Once you know what you can and cannot do in your wholesaling process, you can draft your contract. It should include the following:

• Your legal name.
• The legal name of the seller.
• The address and a description of the property.
• The agreed-upon purchase price for the rights to the property.
• Any good faith or earnest money deposits you paid.
• Deposits, holding locations, and financing terms.
• A contingency contract with details about inspection, financing, and other contingencies.

The contract should also contain information about the deed type and a marketable title. A marketable title allows the buyer to get their deposit back and waive their purchase rights if the seller cannot pass the title or the buyer cannot obtain insurance.

There should also be a buyer’s and seller’s default clause that outlines how parties shall proceed if the buyer or seller defaults on their agreed terms.

Here is an article that discusses contingencies and defaulting in real estate.

Can I Get Out of a Wholesaling Contract?

Contingencies allow a buyer to get out of a wholesaling contract without facing any penalties.

Certain contingencies can help protect buyers from properties that would not ultimately become profitable to them. Below are three common contingencies in real estate that can be helpful to include in a wholesaling contract.

Contingency 1. Home Inspections

As it is not uncommon for a wholesaler to sell a distressed property to a flipper, home inspections are an important precaution. Though some damages may be expected in some instances, underlying issues may make the house dangerous or too difficult to sell.

There should be a specified period of due diligence for the investor to conduct an inspection or have a professional inspector evaluate the property within 14 days of signing the purchase of rights.

During the inspection, there may be specific issues that allow the buyer to back out of the agreement, such as mold, foundational damage, roof damages, pests and termites, lead-based paint, radon, structural damages, and so on.

Expressing this contingency in full detail, and arranging an inspection as soon as possible, is the best way to protect yourself.

Contingency 2. Home Insurance

It is not uncommon for a seller to require a buyer to purchase their home insurance before acquiring the title's rights.

Having homeowner’s insurance protects the buyer’s investment in the event of natural disasters, fire, flooding, etc. However, it can be difficult to attain insurance for a wholesale property.

The buyer may add a contingency to the contract that allows them to back out of the agreement if they cannot secure proper insurance before closing a sale.

Contingency 3. Right to Assign

The right to assign contingency is standard in any wholesale real estate purchase agreement. This entitles the buyer to back out of their agreement if they cannot secure and transfer rights to a new buyer in a set timeframe.

This contingency offers protection to the buyer and security to the seller. For example, suppose the buyer cannot come through on their bargain end. In that case, the seller can resume looking for a buyer in the traditional housing market.

Where Do I Get a Wholesaling Contract?

The best place to get a wholesaling contract is through a real estate attorney in your state. Because real estate investment and wholesale laws differ throughout the U.S., a lawyer is the best resource for the most accurate, up-to-date information.

You can also look online for wholesaling contract templates, which you can modify and send to a lawyer to review.

Consulting with a professional real estate attorney facilitates the wholesale process tenfold, ensuring you can move forward with complete confidence in the legality of your contract.

Here is an article that explores reasons to work with a lawyer in wholesaling.

Who Buys the Wholesaling Contract?

The wholesaling contract is purchased by the investor who wishes to purchase rights to a title from a seller.

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