A couple months ago I had a client bring me a deal to fund. He was pursuing a wholesale deal and the precursory buy/sell figures looked great. I started building his file, which I anticipated to be a no money down deal with a fast close in 2 weeks. Then, he sent me the contract. As a standard practice, we always review the contract to make sure there are no “gottcha’s” that might derail a deal, and in reviewing this client’s file, everything looked good, with the exception of the name of the buyer. The wholesaler had prepared the contract using their company name instead of using a “throw-away” LLC (see below). I’ve seen this before, and it typically doesn’t cause any issues if you schedule a double closing; however, before I could advise the client, the wholesaler had received an addendum from the seller adding the client to the contract. The result: both the wholesaler and the end buyer, the client, were listed on the contract! In other words, the client, unbeknownst to him, just landed himself a partner.
As you probably know, the title for the property has to match the Deed of Trust, and both documents match the name(s) of the buyer(s) on the contract. Being as such, we had to scramble to qualify the wholesaler since he’s now the client’s partner, which completely changed the funding strategy. Most importantly, I had to have a heart to heart with the client. Did he want a partner? Was the wholesaler even willing to be partner? Ultimately, the wholesaler agreed to sign on the note and Deed of Trust, but would immediately quit claim the Deed to my client after closing and gracefully bow out of being partnered into the deal. Easy enough, right?
Wait, what about the insurance? The insurance would probably be a simple fix, similar to the Deed, but what about the note? Upon signing, the wholesaler, unbeknownst to himself, was going to be responsible for repayment of the loan without being part of the deal! More red flags. Did I mention we only had 2 weeks to get this closed??? Time was moving fast and nothing was falling into place. After many more emails and plenty of phone calls all around, the deal ended up disintegrating for many reasons, such as the seller not being willing to rewrite the contract, allowing for a proper wholesale and the two new “partners” disagreeing on structuring the deal between them. Worst part, both parties had put down big earnest money checks. Last I heard they were all trying to get their money back.
The moral of the story, before you try to wholesale a deal, make sure you fully understand how to properly structure the transfer. Here are a couple of ways to structure a wholesale:
Assignment. The easiest and best way to structure a wholesale is to do an assignment; simple, clean and easy. Usually a one page assignment of contract will suffice, so long as the contract is assignable, which most private seller offers are.
“Throw-Away” LLC. If you are buying a bank REO and the bank won’t allow assignments, the next best strategy would be to use that “throw-away” LLC I mentioned earlier, or alternatively a trust. Under the “throw-away” LLC method, a wholesaler creates a brand new LLC for the sole purpose of buying and transferring ownership in the property. The wholesaler simply sells his interest in the LLC to the buyer, and from the bank’s standpoint, the buyer remains the same (i.e. the “throw-away” LLC).
Double Closing. An alternative, and less desirable way to wholesale, would be through a double closing. This alternative results in two closings at the same time: the first results in sale of the property from the seller to the wholesaler, and the second results in the sale of the property from the wholesaler to the end-buyer. Like I mentioned before, this method is the least desirable and should be avoided if possible, due to the added costs of an extra closing, as well as the management of all of the moving parts associated with the second closing.
If you have any questions on any of these methods, or if you have a success or horror story of your own you’d like to share, we’d love to hear from you!