If you are new to working with real estate investors there are some common practices that are not very well known outside of the real estate investing world that may impact the sale of your house. Wholesaling a house is one of the terms that is a common practice in Real Estate Investing and if you are selling to an investor we will cover several questions like:
- What is Wholesaling?
- Should I work with a wholesaler?
- How do I know if I am working with a Wholesaler in Texas?
- Why do some investors, who are end buyers, also wholesale?
- How is working with a Wholesaler different from a Realtor?
If you are already a wholesaler in the Texas this article should help you maximize each interaction you have with sellers by helping you set clear expectations and delivering the highest value to sellers and buyers alike. A great Wholesaler will be very good at solving problems and setting clear expectations so we will focus on the core areas seller’s need to provide a WIN, WIN, WIN for all parties.
Key Points In This Article:
- Definition: Wholesaler, in real estate, is someone who places a property under contract to purchase a home but then they use an assignment contract to assign their rights to purchase to another end buyer. They typically make money doing this by adding an assignement fee
- Working with a wholesaler can be beneficial but you need to be ok with flexible closing times and potentially not making the dollar amount agreed upon.
- You won’t always know if you are working with a wholesaler in Texas but there are a few signs to look for
- Wholesalers have several differences to Realtors but the main differences are how the transactions are done and the government training and background checks required of realtors that are not the case for wholesalers.
We are J&A Home Buyers. We are an actual end buyer located in Katy, TX and we invest in houses in any condition in the greater Houston area and all of the surrounding areas of Houston and Katy, TX. We thought we would put together some content for common questions we get from working with sellers and outline how to avoid frustration from not understanding some commonly used terms in real estate investing.
What is Wholesaling?
In a wholesale transaction a seller would seek out a cash buyer/ investor and negotiate a contract to sell their home. In Texas this contract is usually the TREC One to Four contract. When you and the buyer sign the contract the buyer has rights to purchase your house as outlined in the contract. If the buyer chooses to they can assign those rights to another end buyer with a separate legal document that the seller is typically not involved in signing. Wholesalers make money by including an assignment fee in their assignment agreement with the end buyer. Here is an example of a transaction with a wholesaler. A seller wants to sell their house for $200,000 and they find an investor who is willing to purchase the house. That investor writes them a cash offer and then once all parties have signed they know another investor that would be willing to pay $205,000 for that house so they add an assigment fee of $5,000 to their assignment contract and at closing the new investor pays the $205,000 and $5,000 of that would go to the wholesaler.
Should I Work With A Wholesaler?
Working with a Wholesaler can be a WIN, WIN, WIN if it is done correctly. The seller can get the $200K they asked for in the example above, the Investor that was the end buyer was brought a deal that meets their criteria and the wholesaler made $5,000. If you are new investor wholesaling can be an easy way to get started and doesn’t require a lot of capital to get started. Deals are one of the harder things for new investors to find so the Wholesaler is trained on conquering one of the biggest challenges and they don’t have to manage all of the headaches of doing repairs or selling the properties after repairs. Although new wholesalers can get started with hustling you will see that well established wholesalers become a well tuned marketing company that spend a lot of money on marketing to close more deals every month.
In some scenarios you will want to make sure you are working with a qualified end buyer or a reputable wholesaler. We have seen sellers with a similar story to this: The seller was facing foreclosure in two weeks and they decided not to take our offer and they chose to work with a wholesaler. Unfortunately the wholesaler didn’t use good estimates on repairs and offered more than the house was worth. They were unable to find an end buyer that was willing to pay what was offered and the wholesaler didn’t have the money in place to close on the transaction. We received a call a day before the foreclosure and there was not enough time for us to help them close.
When you decide to work with a wholesaler there are two things that are important for seller’s to evaluate.
- What would happen if I didn’t close at the time on the contract?
- If I have to settle for a lower price because the first estimate was off will that upset me?
If you are simply looking to maximize your offer and you have flexibility on time then Wholesalers can actually be a great resource to work with because an experienced wholesaler will have a really solid network and they may be able to get you that top dollar. Selling a house can be a really emotional experience so approaching the transaction with a level head can help you keep your cool when expectations are not met. This is why J&A Home Buyers works diligently to set clear expectations and what we plan to do with the property when we write you a contract.
How do I know if I am working with a Wholesaler in Texas?
The best way to know is to ask them directly. In Texas there are two ways to assign a contract (AKA Wholesale).
- The buyer may write the words “or asignee” after their name on the contract. This doesn’t guarantee they will assign it but they may.
- The buyer writes a standard contract in which case you won’t know. At closing the wholesaler will bring the money to purchase your house then within minutes they will have a second closing to sell that house to the end buyer. In this case the original seller won’t always know what the house is being sold for.
The thing to keep in mind is you won’t know for sure if the buyer plans to assign your contract so asking good questions on what the buyer plans to do with the property and how they plan on funding the transaction may help you assess their experience.
Another thing to look out for is did they pay their earnest money or option fee to the escrow company? In the TREC One to Four contract the buyer has three days from the signature date to deliver these funds. Without these funds the contract is not considered a valid contract in Texas. If your buyers have not brought funds in three days make sure you inform them. Wholesalers often make many offers and some newer investors don’t always want to bring earnest money and option to escrow until they find an end buyer. Checking for this may help you know if you are wasting your time with a buyer that may not be ready to close. If you do plan on backing out of an offer make sure you request help from an attorney.
Why do some investors, who are end buyers, also wholesale?
There are a few scenarios an actual end buyer may also want to wholsale a property so there are end buyers that write “or assignee” on every contract even though they intend on buying your property.
- If an investor gets too many projects under contract they may not have contractors or staff to manage them all so they may assign some deals to cover their marketing costs and keep their lead funnel moving.
- If an investor buys $200k deals or $1M+ deals they often have very different rehabs and procedures so they tend to stick to one type of investment property. If they get a lead for a different type of property they may assign properties that are not in their “buy box”
How is a wholesaler different from a realtor?
- Similarities
- They both act as a middle person in a real estate sale
- They both are good at solving problems in real estate
- They both often have a wide network of expertise or buyers they can lean on
- They both typically get paid when your house is sold so they are both incentivized to help you SELL!
- Differences
- Realtors are licensed
- Must go through classes and tests
- Must pass a background check
- Abide by a code of ethics set by TREC These are standards of honesty and communication that realtors are required to abide by.
- How they get paid
- Realtors are contracted to represent their client in a transaction and in turn their brokerage is paid a commission and the realtor gets a split of that pay.
- Wholesaler puts the property under contract and gets paid by an assignment fee when they find a buyer and property closes. The seller has no say on what the wholesaler gets paid.
- Realtors work for a brokerage who double checks a lot of paperwork and provides a second set of eyes on a transaction
- Wholesalers are really well connected in the real estate investing world so they may be able to help you sell faster than a realtor
- Realtors are licensed
J&A Home Buyers are end buyers but many on our team are also realtors. We like this because realtors help us keep our business up to speed with the latest laws, contracts and ensure that we abide by a higher standard of ethics. If we can help you with any questions don’t hesitate to call us or fill out the form on this website. One of our team members will reach out to you and get you the information you need.