Ok. First, we have to clarify that we are writing in regards to wholesaling residential real estate in order to How do I know if I am working with a wholesaler?. Not any other type of wholesaling.
Second, we need to clarify that this article pertains generally to off-market real estate transactions, that is, transactions that take place outside of the traditional MLS system where a realtor lists the house on the seller’s behalf.
Third, we are based out of Michigan and this article, like the others, may apply nationwide, is focused on How do I know if I am working with a wholesaler?.
Ok, so what is this article all about anyway?
Well, if you are looking to sell your house off-market and/or find a cash buyer, you are probably searching online for things like “How do I know if I am working with a wholesaler?”, “cash house buyers”, “sell my house fast cash”, or something along those lines. Or, another possibility is that you have been contacted by someone or a company asking if you are interested in selling your house for cash. There are many ways that wholesalers market to potential customers including direct mail, google advertising, social media advertising, direct mail, cold calling, etc.
In either scenario, it’s possible that you are going to make contact with a wholesaler. Remember, a wholesaler is not your end buyer. A wholesaler is a middle man who agrees to a purchase price and terms with a homeowner and then attempts to match the homeowner with a cash buyer and collect a fee from the end buyer (often $10,000-$30,000) for their service.
So how do you know if it’s a wholesaler that you are working with? Are their clues or questions to ask?
Here are the details:
A wholesaler typically relies upon a technique referred to as ‘assignment of contract’ in order to find a cash buyer and essentially make the cash buyer the ‘buyer’ in the agreement with the homeowner. The How do I know if I am working with a wholesaler? cash buyer signs a separate form with the wholesaler (which the homeowner may not be aware of or ever see) outlining the assignment fee the cash buyer will pay to the wholesaler as well as payment details thereof.
For this technique to work, there are certain elements that will likely be present in the offer or purchase agreement they ask the homeowner to sign. These typically include one or more of the following (or variations thereof):
- The ‘Buyer’ is listed as ______________ AND/OR ASSIGNS
- The ‘and/or assigns’ after the buyer’s name is populated allows the buyer to be replaced with someone else
- Buyer may assign or transfer any of Buyer’s rights, title, and interest in and to this Purchase Agreement to a third party without the Seller’s consent.
- This type of language allows the wholesaler to find a cash buyer and assign the agreement to that new party without the homeowner having to be aware/involved or approve.
- Vesting to be determined prior to closing
- This is basically another way of saying that the Buyer will be finalized before the sale is completed.
There is another technique that is gaining traction among wholesalers to How do I know if I am working with a wholesaler?. This technique is referred to as ‘novation’. The difficulty here is that novation is a technique that can be used by wholesalers but can also be used by seasoned cash house buyers who plan to put money/effort into repairs. Novation is a fancy word that basically means ‘substitution’. To summarize and in our context: a novation deal is one where there is an initial purchase agreement that the homeowner signs with the wholesaler (we’ll refer to it as the A to B agreement). They also sign a novation agreement (and possibly other documents). Then the wholesaler/homeowner lists the house on the MLS with a realtor and receives an offer from a buyer. This new offer received will be referred to as the B to C agreement.
- A = Homeowner, B = wholesaler or investor, C = New End Buyer
When the new end buyer sends their offer, they will also sign the novation agreement which the realtor will likely have uploaded to the MLS for the buyers’ agents to see/access. The novation agreement is a document which basically explains that their offer (B to C) will replace the A to B agreement.
This seems more complicated than wholesaling and, in some ways, it is. However, there is one major difference. With novation, the property can be listed on the MLS and proceed basically like a traditional house sale whereas an assignment of contract cannot be listed on the MLS.
So how do you determine whether or not you are working with a wholesaler if it’s a novation agreement that is involved?
Well, it’s not as straightforward as you would like. The wholesaler doing this will do so for a variety of reasons but primarily:
- They can likely offer the homeowner a somewhat higher price than if they were going to do an assignment of contract
- It opens up their buyer pool significantly (bigger target audience through the MLS)
- The buyers don’t have to be cash buyers – they can use bank loans (mortgages)
One downside that the homeowner should be aware of is that by listing on the MLS, the home sale will be subject to the normal home sale process which can include showings, walkthroughs, and all of the regular inspections plus bank appraisal inspections.
An investor is more likely to use the novation technique in a way in which they will also ‘put skin in the game’ by bringing money and resources to make some repairs/improvements to the house before listing it. This is more like a way to How do I know if I am working with a wholesaler?. A wholesaler doing this simply as an alternative to ‘assignment of contract’ would most likely not be putting any money into the property before listing.
If you don’t know, you should always ask. And if you want help, you can contact an attorney. Or feel free to contact us and we can help.