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Investing Strategies

Are You Using These 3 Wholesale Contract Clauses? (You Should Be)

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surgeryWholesaling real estate is a very simple process:

  • Find someone who REALLY wants to sell their property
  • Put it under contract for a low price
  • Market the property with your commission added  
  • Flip the property to a cash buyer
  • Cash your check

I do that process month-in and month-out and regularly find great  deals.  Deals that mean quick cash for me.  I’m talking $6-$10,000 range on almost every deal.  Not a bad gig – I must say.

But it wasn’t always that way.  There was a big learning curve for me at first.  Now I’m happy to team up with the folks at Real Estate Mogul to shorten that learning curve for you.  We want you to close the same kind of deals I’m closing (or even better ones!) as soon as possible.

One of the biggest leaps in profitably from my business came when I added three simple clauses to all my contracts with sellers.  The sellers you want to deal with – the motivated sellers – are going to be nervous about the deal.  They will have lots of questions and will be worried that you might be out to ‘screw’ them. 

Of course you want to take care of the seller as well as the buyer.  That is the best way to deal with people in general.  But you need to make a profit.  Why else would you be in this business?  You make sellers feel much more comfortable by laying out everything up front.  Let them know what you will do and then do it.  Sellers don’t like surprises.  These three contract clauses will let the seller know right away exactly what you are going to do.

Best of all, they will be in writing.  On a contract that the seller signs.  So the seller can’t say later:

“You never told me that.”

Without further ado, let’s get into the three clauses that will make sellers feel more comfortable, increase your profitability, and help you move on to your NEXT deal that much faster.

explicitNumber 1:  Explicitly State Your Contract is Assignable

An assignable contract allows you to change the name on the contract from you to someone else – in wholesaling it would be your cash buyer.  You are not selling the property, you are selling the contract.  Unless you are planning to buy the property yourself, you will need to transfer the contract for the property to someone else.

In common law, all contracts are assignable unless there is wording that says it is not assignable.  The wording can be in the contract itself or in an amendment or addendum to the contract.  As long as you don’t put that it is not assignable in any part of your Purchase and Sale or Option Agreement, you are legally allowed to transfer (assign) it to a cash buyer.

But the seller might not know the contract is assignable if there is nothing that says it is.  The seller normally thinks at first that you will be buying the property.  If you never mention anything about assigning the contract, the seller might become irate when you do assign it.

To calm the seller, all you have to do is make it obvious that the contract is assignable.  It’s simple to do.  When you sign the contract, all you have to do is put ‘and/or assigns’ after your signature.  You can explain to your seller that one of your ‘funding partners’ (meaning your cash buyers) might buy it.  But you want to have a written record showing that everyone agreed this contract is assignable.

Number 2:  The Right To Market and Show The Property

Many sellers want to get the deal done quickly.  The house is a nightmare for them and they want to be rid of it.  When they sign the purchase and sale agreement with you, they think that’s it.  But this is a big investment for you, right? You need your ‘team’ to see the property and verify your estimates.

The seller should know up front that you will have to show the property to your ‘funding partners’, contractors, lenders or anyone else you think should see it.  Hopefully it will be steady stream of cash buyers that come to see the property. 

How do you make sure the seller has no issues with people coming onto the property?  Put it in the contract.  Here is the exact clause I use:

“Buyer has the right to show the property to prospects, lenders, contractors, or partners, and to post signs for sale, rental or rent-to-own before closing.”

escapeNumber 3:  The Escape Clause

Unless you want to buy the property yourself, you want to get out of the deal if you can’t find a cash buyer.  With no cash out of your pocket.  Continuing with my theme of setting expectations for the seller up front, I find honesty is the best policy:

“This agreement is subject to finding a qualified buyer.”

Simple. Elegant. Powerful.  Your contract clause doesn’t need to be any more complex than that.  I use it on my contracts and it works great.

Now if you are using this contract with a realtor, such as an REO property, the qualified buyer clause probably won’t work.  For some reason the realtors think it is their job to find a qualified buyer, not yours.  Crazy, huh?

This clause almost always works, however, when you are dealing directly with a motivated seller.  Recently one of my students was dealing with a seller who countered my student’s offer with a higher offer.  I advised my student to put this clause in the contract and tell the seller she would try to find a buyer at his (higher) price.  He agreed and she found a buyer.  The clause helped turn a nothing deal into a $2,000 profit for her.

Setting expectations and protecting yourself legally can mean the difference between large profits and a short-lived real estate investing career.  Not only are you doing business the right way, but the seller will feel good about the transaction.  That can lead to potential other leads as the seller tells their friends about you, or maybe at least a testimonial for your advertising.  At least it will boost your reputation while keeping you out of trouble.


Do It To It! Immediate Action Steps

Create a Contract – If you plan on wholesaling and are just getting your business off the ground, make sure you have a solid purchase and sale or option agreement in place.

Review Your Contract – Make sure your contract has these three important clauses, or at least wording that has the same effect.

Seek Legal Advice – Although there are many good contracts you can download from the internet, some of them may not work in your wholesale area.  Make sure a local lawyer has reviewed the contract and everything will work in your state.

Set Expectations – When you are talking to sellers, explain the whole process to them up front.  Answer any questions they have and make them feel comfortable.  That way they become more motivated to deal with you!

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