Saturday, March 26, 2016

Is "Wholesaling" Being Outlawed?

Many of the "infomercial gurus" promote a strategy they call "wholesaling". Let's first begin by calling it what it really is - assigning. The gurus use the term "wholesaling" to trap the unwary, when in reality, all real estate investing is wholesaling - buy low, sell high. So, we'll stick with the real name.

Now there arises a problem with the strategy they teach. Most states have a law that states, in one way or another, that anyone who acts on behalf of another at the time the contract is signed is essentially acting as an agent or broker. And that requires a license.

What the other gurus generally teach is that you get a distressed property under contract, then sell (assign) that contract to one of the "cash rich" investors in some pool provided by the guru, or those you have found for yourself. Sounds OK. But it technically violates most state laws, as you are acting on behalf of those cash-rich investors. So far, only two states have begun prosecuting for this, but there is promise of more to follow as "wholesaling" becomes so prevalent.

But there is still a way to assign without getting into trouble with the law. You would start by understanding you cannot use a "pool" of buyers that are already on the sidelines, waiting for properties you will contract for. And you probably would not be looking for distressed properties, simply because you won't have that "pool", and you will need to make a quick sale of the contract to a buyer you do not yet have. To accomplish that, you first determine what the buyers in your area are looking for - determine the target. For example, if you live in Winter Haven Florida, where the majority of buyers are retirees, you would target 2 bedroom, one level homes on small lots - elders do not like stairs, or maintaining large parcels.

Once you know your target property, use the online MLS to find the ones available, and make 75-80% offers on all. Most will be rejected, but that does not matter - you are only farming for motivated sellers - those most likely to offer a bargain. Those sellers will respond, either by accepting your offer or by making a counter offer.

Once you have a seller willing to give a bargain, get the property under contract, making certain the contract includes some version of the "or assigns" clause. The contracts in "The Simple Man's Guide to Real Estate" already have all the necessary clauses.

Now you advertise that you have the place for sale. You should avoid advertising through a Realtor as their commission can eat up your profit. Instead, advertise everywhere you can - Craigslist, super market bulletin boards, Shoppers Guides, classified ads.

Let's say you have a nice place in a decent neighborhood (a must) that is worth $200,000 and you have it under contract for $165,000. Your ad might say, "Nice 3 bed, 2 bath home in such-n-such neighborhood, appraised $200,000 - yours for just $165,000 if you act fast!"

Any homebuyer looking for a $200,000 home in that area will call. You then offer to sell him the contract, making him the buyer instead of you. You negotiate an assignment fee for having put the deal together. The assignment fee can be whatever the two of you negotiate, but I typically shoot for a MINIMUM of 10% of the equity I am passing on. In the example given, I am passing on $35,000 equity ($200,000-$165,000) so the least I would want is $3500. Of course, if I can only get $2000, I would take it rather than lose the deal altogether.

The point is, this method is legal in every state, because you are not acting on behalf of another when you contract for the property.

There are a couple of other details you need to be aware of, such as knowing what, exactly, local buyers are looking for (price range, for example), and making sure your contract gives you a) time to find a buyer and b) an escape if you cannot find one in time. Again, the contracts included with "The Simple Man's Guide to Real Estate" cover those bases for you, and also includes the necessary Assignment forms.

So there you go - you can quickly make money by assigning, and the method we teach is legal everywhere.

Good Luck!

1 comment:

M Morris said...

Thank you Mr.Vaughn. this was very simple. Without any training at all in real estate, I was able to follow you. I believe, I have found the right guy and program.