Wholesaling Real Estate: Assign or Double Close?

Wholesaling real estate involves getting a property under contract for the lowest possible price. This typically takes into consideration, approximately 60-70% under the market value for the property when it's totally fixed (ARV), minus repair costs and your wholesale fee or profit. For investors who like to (or want to) wholesale there is the constant question/issue of how much you should be paid for assigning the contract to your buyer. This really comes into play when there is a "large" profit for you, the wholesaler.

How far under value you need to purchase the deal really depends on where the property is located, such as: in a high-value neighborhood, low-income rental area, middle class area, etc. Next, you should make a judgment on the expense for rehab, based on the prior criteria. You present your offer and hopefully get the signed contract for your purchase. Now, you either need to assign the contract to your buyer (that you immediately have or with guns-ablazing are marketing for to find quickly) or you close on the deal yourself.

Most investors love assigning contracts because it's easy and very low risk. However, there is some risk involved in the form of an often under diagnosed, communicable disease called Investor Ego-itice. If you have never heard of Investor Ego-itice, you either: a) have it and it's undiagnosed, or
b)have yet to encounter it. To be fair, we all suffer from it at times, depending on which side of a deal we are on. However, it is best to know what this dreaded disease is before your closing or you may have to develop some really persuasive story-telling skills fast.

Here is an example of the disease, the diagnosis, and how to treat it before it spreads.
1) You get a contract on a house for 30% of ARV (after repair value), and that includes repairs. You are ecstatic.

2) You put your marketing out immediately with bandit signs, ads on craigslist and at your local REIA group, and whatever other methods you may choose to utilize.

3) You find a buyer who loves a great deal and is ready to rehab the house. The offer is what amounts to a purchase price of 50% of the ARV, giving you a potential profit of $15k. You are delighted at your good fortune, and eagerly sign the contract (after some grimaces, negotiating, hemming, and hawing so your buyer will know that it pains you to accept his offer).

4) You sign the assignment of contract form, which includes the "assignment fee", and give it to your buyer. He happily takes the contract ready to sign, and then stops in his tracks when he sees what appears to him like Huge, Glaring, Red numbers: $15,000.00. Immediately, the one-sided conversation sounds like this: "What the? Are you kidding me? This is not a huge, high-end house and you are taking MY profit! You had better take 10 grand off this right now. You know what, just forget it. That's crazy. You're not the one doing the work! Wholesalers should only make $2,500-$3,000 on a deal." He gets up and walks away, leaving you wondering what in the world just happened. You have just been exposed to Investor Ego-itice, the deal-killing disease.

This real-world example is proof that an ounce of prevention is the best medicine to stave off this disease. With this much profit (usually over $5k or more), a double closing would probably be a better solution. This will safeguard your deal, shield your profit, and prevent a flare up of Investor Ego-itice.

Just set up the closing with your seller and buyer the same day only at different times. When you have a cash buyer, which is ideal, their money goes into an escrow account and is mixed in with whatever other money is there. Then once the second closing is complete have your friendly title company or attorney cut you a check for the difference. Eventually, your buyer could do research to find out how much you paid for the property, but usually by that point they are knee-deep in rehab work and have moved on. Besides they made an offer you excepted, so why should there be a problem?

I learned this on my very first wholesale deal when my original buyer pressed hard for my purchase price. I refused to reveal this information, since this was not required for him to know. It actually drove me to find a private money lender to lend me a quick $10k, close on the deal with an ARV of $95k, and sell it 3 days later for $27k. It was a good lesson, teaching me what I would be dealing with in the wholesaling world, and how to get private money as a bonus. So make your profit, give your buyers a great deal, and please refrain from causing too much Investor Ego-itice. It 's for everyone's good to keep this disease contained!