We started out with no capital and little experience. All we had was our time and our savings – which didn’t amount to much.
In this industry, raising millions of dollars from rich relatives to start a business venture happens a lot. We didn’t have any rich relatives to support us.
Fortunately, a tech start-up like us doesn’t require a lot of start-up capital.
It is as simple as registering a web domain and building a simple website. With the use of the internet, you can target and cover a large market without needing additional resources.
This means there is the potential for a huge upside with little money needed to start. I think that real estate wholesaling is comparable to the tech start-up industry.
In real estate investing, the goal is to minimize your spending while maximizing your potential profit.
Even if you don’t have capital (like we did), have bad credit or you are simply looking for a great investing strategy, wholesaling could be used to gain substantial profits with almost no capital investment.
I always hear people say that they can’t enter the real estate investing game because it’s too expensive, has bad credit or else. Wrong.
Just like our startup, only sweat equity is required to get into the game.
There are some legal aspects to wholesaling that one needs to understand before investing or you can run the risk of being fined or sued.
But first, let’s explain the process of wholesaling?
What is real estate wholesaling?
Wholesaling is the process of finding distressed properties for sale and helping the owner to sell the property.
As a wholesaler, you’re acting as the middleman, connecting the seller (homeowner) and buyer (generally an investor) in order to make a commission from the purchase and sale of the distressed property.
Sounds a lot like a brokerage but it is slightly different and doesn’t require a real estate license.
There are two parts to the transaction. The first part of the transaction is known as the “A to B transaction”, and is between the wholesaler and the seller; this is where you would buy the property.
The second transaction is called the “B to C transaction” and is where you sell the property to your end buyer.
Now, there are many ways to wholesale but we’ll focus on the method we consider to be the best (and legal) for people with low starting capital: double-closing.
“Is wholesaling legal? Yes. As long as it’s not property brokering. The act of brokering is when you “broke” the interest “for another” in exchange of a commission. In wholesaling, you sell “your” property or legal right in it or on a contract in exchange of a commission.”
Note: Some states laws have slightly different language but the concept remains the same.
No, it doesn’t require you to have an excellent credit score nor to have money for a big down payment. It is not that complicated and is completely legal.
(for wholesaling through “assignable contract” see my next post on the subject)
In a nutshell, you will be closing twice on the property: first by acting as the buyer and the second, acting as the seller.
From a legal standpoint, this structure avoids all the shenanigans relating to acting as a “broker” when using “assignable contract” (not that it’s illegal but there are more legal constraints).
By closing on a property, you effectively own the property and have the right to sell it to get a fee for the operation. Even if you only owned the property for a couple of minutes.
Now I can hear you say: “I don’t have the money to close on a property!”
There are two good options for you:
- Transactional financing
(we are assuming here that you don’t have access to a conventional loan or private money)
Transactional funding is borrowing money for a very short term usually with a high-interest rate and high fees. But with that loan, you will be able to pay the first closing.
Normally there is no credit check or income verification required for transactional funding. The only requirement is that you have to have an end buyer lined up to purchase the property.
**Don’t forget to find good lenders for this kind of funding before entering into any deal.
(Fees are substantial, and may range up to $5,000. It doesn’t really matter. You can make up to $10,000 from your first deal – pretty nice return on investment given the fact that you had zero money down!)
Once you have a deal lined up, your transactional fund will issue a “proof of money” to use to put the deal together.
Ideally, you want to process the double close on the same day to avoid needlessly paying additional interest on the transactional funding.
You are essentially closing on the property with the seller and a few minutes later you are reselling to your buyer/investor.
That’s all there is to a wholesale deal through transactional funding.
Another benefit of this type of funding is that when the property is bank owned, wholesaling through “assignable contract” usually won’t be allowed.
Banks will require to close on the property yourself.
Transactional funding is also useful to show you have the mean to close on a property and an “interest” in it. (this is important when using assignable contract)
To determine if you’re operating within the law regulators will look if you have an “interest” in the property since otherwise, you’d be selling “for another” and therefore brokering without a license.
Lastly, remember to always look at the terms of the loan because interest rates and fees are higher compared to a bank.
Now let’s talk about the second option.
Another way of wholesaling is through the “dry-closing” method.
During a dry-closing, the funds to close the property transaction are delayed and arrive after the closing.
Dry closing occurs frequently often due to delays related to wire transfers (for example during a holiday weekend).
In these cases, the buyers are unable to move into the property because until the money is received, the ownership has not been legally transferred to the buyers.
Dry-closing can be used in a wholesale situation by using the delayed funds of a second deal to finance and close a first property transaction.
Essentially, both closing will happen almost simultaneously while the first close will be made using the money of the second.
In one room you’ll have the seller (and yourself) with the lawyer and in another the end-buyer. You’ll close on the first transaction with the lawyer and then you’ll move to the next room to close the second deal – hence the double close.
Is dry closing legal? Yes. It only means that there is no transfer of ownership until the money for the closing is received. not all attorneys or title companies will allow a dry-closing because of title insurance – many companies have policies against dry closings.
Also, you should always be transparent about using a dry-closing to your buyer/seller to avoid any misappropriation of funds, which occurs when the money was not used for the intended or agreed upon transaction.
For this to work, you must have an end buyer ready and you must arrange for the transactions to close within minutes or hours of each other.
Following this process, you will not be using your own funds or borrowed monies and you will earn a commission.
Although wholesaling using dry closings are more lucrative, it is unfortunately not always possible.
Here are some instances where transactional funding might be necessary:
- Bank owned property;
- Inability to get both buyer/seller at the same time;
- Using certain title companies
Otherwise, dry-closing is a very useful and legal way to wholesale.
The contents of this article are intended to convey general information only and not provide legal advice or opinions. This is not an offer to represent you, nor is it intended to create an attorney-client relationship.