A Brief Introduction of Wholesale Real Estate Contract
As a real estate investing requires a lot of capital, wholesaling is an inexpensive way to get into real estate investing. In order to start wholesaling, you would need a wholesale real estate contract. However, these are short-term opportunities, and finding buyers is a tough challenge.
A wholesaler is a real estate contract is an intermediary between the buyer and the seller. The wholesaler enters a contract with the seller, finds a potential buyer, and their responsibility ends once the contract is assigned to the buyer. If there are repairs involved, then it is the buyer’s responsibility.
The wholesaler profits from the agreement by negotiating a price below the fair market value with the seller and selling the property for a huge profit. Holding the property for too long could be a problem for the wholesaler as he would have to pay out of pocket to the seller. These contracts have an assignment clause through which the wholesaler can transfer the rights to the buyer.
The contents of such contracts include the names of the parties to the agreement, the physical condition of the property, the purchase price, lead-paint disclosure, a complete description of the property, and state-specific regulations.
Who Takes the Wholesale Real Estate Contract
In wholesale real estate deals, there are three parties to the contract: the seller, buyer, and the wholesaler. The wholesaler finds a seller who is willing to sell the property below market value and then assigns the contract to a buyer. The buyer then deals with the seller of the property.
Purpose of the Wholesale Real Estate Contract
If you are interested in profiting from real estate but do not want to invest in it directly, then wholesaling is the best option. As per the wholesale real estate definition, you don’t need to invest in real estate but need to act as a mediator between the final buyer and seller.
These contracts clearly state the responsibilities of the three parties to the contract: the buyer, the seller, and the wholesaler. As mentioned before, it is the responsibility of the wholesaler to get into a contract with the seller first; else the contract will be illegal. The wholesaler negotiates the price of the property with the seller and then contacts the buyer. The buyer pays the price laid down by the wholesaler, and then the wholesaler connects the buyer to the seller.
Contents of the Wholesale Real Estate Contract
In such contracts, the rights to buy the property are transferred or assigned from the wholesaler to the buyer.
Here is the information that a standard contract should include:
- Parties involved in the contract: The buyer, seller, and the wholesaler
- Type of deed
- Description of the property: The address of the property, the present condition, the type of property
- Contract period: The agreement will specify the deadline within which the wholesaler must find the buyer
- Non-performance clause: The agreement should also state the penalties to be levied, if any, on the wholesaler in the event that a buyer has not been found within the deadline
How to Draft the Wholesale Real Estate Contract
A Wholesale Real Estate Contract pdf can be downloaded and used as a reference in preparing the contract.
The points to be considered while drafting this contract are as under:
- Eligibility of the parties: The buyer, seller, and wholesaler should be over 18, of sound mind and not under the influence of alcohol or drugs
- The consideration payable: The consideration payable by the wholesaler to the seller and the amount paid by the buyer to the wholesaler
- Terms of the contract: The wholesaler is an intermediary between the buyer and the seller of the property. The terms between the three parties should be fair
- Dispute resolution clause: If there are any disputes between the three parties, then the jurisdiction, the use of arbitration or litigation and sharing of legal fees
- Termination clause: If any party wants to exit the contract, they should provide sufficient notice
In the case of a real estate contract, the three parties can negotiate the price of either buying or selling the property. The wholesaler can determine the fair market price for the property and see if the seller is selling below market price or not. The buyer can negotiate with the wholesaler regarding the price offered and try to get it close to the market price.
Benefits and Drawbacks of the Wholesale Real Estate Contract
The benefits of a contract are:
- Protection of interest: The interests of the seller, buyer, and the wholesaler are protected by this contract. It states that the seller and the wholesaler entered the contract first, which makes the contract legal and ensures there are no legal problems later on
- Benefits for all parties: The seller is able to sell the property at an acceptable price, the buyer gets the property they want, and the wholesaler makes a profit on the price differential
The drawbacks of a contract are:
- Legal issues: Since this contract has certain conditions, if the parties enter the transaction without a contract, the transaction might be considered illegal
- No legal remedy: If the buyer, seller or wholesaler do not receive their respective benefits, they cannot claim compensation from the other party without a contract
[ Also Read: Real Estate Joint Venture Agreement ]
What Happens in Case of Violation
In case of violation of the contract by all the parties in a wholesale real estate contract, the contract becomes null and void(1), and all parties have to pay the penalty.
The buyer, seller, and wholesaler can try reaching an amicable settlement. If that does not work, a notice can be served, and finally, the injured party has to take legal action. If the wholesaler gets a buyer first without having a seller, the deal is considered illegal.
If any party fails to make a payment or deliver the title to the property, the other party can demand monetary damages. The contract can be subject to rescission or reformation if fraud is involved.
For a wholesale real estate contract, it is important that the applicable laws be followed to ensure that the contract is legal. The assignment clause is required to transfer the buying rights from the wholesaler to the buyer. The agreement should also contain a clause on dispute resolution(2).