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Today David Dodge and Michael Slane will teach you the ins and outs of transactions. This episode talks about guides for an efficient transaction and maximum wholesale profit. Types of transactions Pros and Cons explained and the best ways to minimize expenses in closing deals. Check this out if you want to learn more about Real Estate.
Things that will cover in this episode:
- How to close deals with maximum profit
- Title Companies and Closing Attorneys
- Double Closing vs Assignment Closing
- Functions and Purpose
- Pros / Benefits
- Cons / Downsides
- Efficient Contract control
David: Closing deals.
Mike: Closing deals guys, this is the fun part.
David: Take 2.
David: That’s right.
Mike: Oh man, so we were playing around with the settings here and we forgot to start recording, but hey-
David: Yeah, 10-15 minutes later, that’s okay.
Mike: We are- we’re doing the 4K.
David: I think we can do it better now because we kinda bounced around a little bit last run.
Mike: We can, we’ve got all the junk out of our head.
David: Yes, man.
Mike: Alright, so let’s talk about where we’re at if we’re going to be thinking about closing a deal. We’ve gone through the steps of wholesaling guys and that’s what we’re talking about here today.
David: Let’s briefly touch on them. Just marketed to our motivated sellers.
Mike: Step 1, we figured out what wholesaling is. Step 2, we’re marketing to motivated sellers, were trying to find some good deals. What’s next Dave?
Mike: We’re going to figure out what that property’s worth.
David: We’re gonna reverse-engineer an offer.
Mike: We’re going to figure out the maximum amount we can offer. We’re going to then negotiate with that seller, then we’re going to get it under contract, right?
David: Securing the deal, we’re going to use a contract to gain control.
Mike: Send a bunch of offers, one of them finally gets accepted, we’ve negotiated a great price.
David: Next, we go to market the deal and we use a checklist.
Mike: We’ve got a big marketing checklist we like to use.
David: Just sell it.
Mike: We go through a bunch of steps, we get that property sold and then we meet someone, and they say hey Dave, I really want to buy this house from you.
David: Okay, roleplay.
Mike: Let’s do it.
David: Mike, you’re a seller.
Mike: I’m a seller, alright.
David: We just put a property under contract last week over on Virginia for about 42 grand. We decided we want to keep it, we were going to wholesale but it’s going to make for a good project for us. So, let’s say that you had that property listed and marketed, you know marketed out more 59 thousand, okay? That’s a good spread between 42, right? and I’m a buyer. I see the marketing on Facebook or Craigslist, or maybe I get an email cuz I’m on your buyers list Mike, and I say hey this looks good. I go out and I look at it and then I call Mike up, ring ring, Mike says hello and I say hey Mike, I saw the property that you’re marketing for 59, I even went and looked at it already, it looks really good. I would like to make you an offer to buy it, but I can’t pay 59, can I- will you accept 55 if I can close quickly and I don’t have you know, a bunch of contingencies?
Mike: So then as a wholesaler, as a seller, I’m going to talk to Dave, and I want to interview him and find out if he’s legit too. So, I want to know hey Dave okay, you said you can close quick? That’s great. So, are you a cash buyer Dave? That’s what I want to know next. Dave?
David: Yes, I am a cash buyer.
Mike: Oh great.
David: It’s not my cash but I have partners that have cash or a line of credit.
David: Cash buyer, same thing, right?
Mike: Awesome, so you can close on this date and I’m going to align that date with my AB contract guy. So, I got this property under contract and it’s scheduled to close on some date, so I’m gonna say hey Dave, can you close on this day? and you’re going to say-
David: Absolutely I can close on this day. Now-
Mike: Often times, their gonna say something else: I’d love to close sooner.
David: Yeah, I’d love to close sooner.
Mike: Cash buyers always want their property tomorrow.
David: Right, so a cash buyer doesn’t necessarily mean that it’s their cash, but they have the access to the cash. I think- I really want to define that so, you know, the opposite of a cash buyer is somebody that has to go get a loan. So, when we say cash buyer, they may still have a loan from a private lender, a hard money lender, or even a line of credit, right? But it’s quick access and that’s really what we mean. It doesn’t mean that it’s their cash, but they have quick access to cash to close on it.
Mike: That’s a really good point. So, if somebody says: I use this long- this hard money lender here.
David: Great, are you pre-approved? Cool. You’re a cash buyer.
Mike: Yeah. Exactly, and/or do they have to get through the property first? cuz sometimes a hard money lender wants to go see it. Say okay cool, can you get them through without the contract?
Mike: If they can’t, say okay, well, I’m still shopping the deal if it’s right away. If you’re wanting them to get the contract on it, write up the contract and say subject to this person walking through.
David: Okay, we digressed.
Mike: We did.
David: So, you have it under contract- you have a deal, marketed at 59, you bought it at 42. I come in, I say I want it, I’ll pay you 55. Can you do 55 Mike?
Mike: Yes, I can Dave,
David: Okay, deal. Done deal. So, we verbally agreed to get this deal done.
David: Now, I’m a cash buyer, I want to close quick. Let’s say that you have some inspection period still, which you do cuz I know this deal and your close date is 30 days out and were three- or four-days in. So, you got basically a month to close, so I say to you hey, I need to do some inspections, but I don’t need to do a ton, I need to do a sewer scope and I need to get my guys out there, can I have a couple days? Can I have three days?
Mike: So, as a wholesaler, I don’t want to do this but as an investor, I know that sometimes you have to give someone a little bit of leeway. So, I’ve got plenty of time left on my inspection period, so I say Dave-
David: You had I think 20 days?
David: And you’re 3 in, you had 17 left, I’m only asking for 3.
Mike: So, I would say Dave, yes you can do that, I’m going to need you to let me know though after those 3 days right away or if anything comes up during those, just let me know right away because as you know, I’m a wholesaler and I have to get this property sold.
David: If you don’t buy it, I got to find somebody else. Now-
Mike: I’m committed to this seller and I need to get it sold, so I would say yes, Dave I can, I’m going to limit it. Let’s go- Let’s jump back out of this Dave cuz we’re going to start talking about the contracts and I want to talk- before we do that about our title companies and closing attorneys if you don’t mind.
Mike: Before we get in the weeds of contracts.
David: Okay, but just real quick though.
David: So, we’ve agreed. I’m either going to send him a contract or he’s going to send me one and we’re going to have it in writing.
David: That- at that point in time, you should stop marketing it or if you do continue to market it, market it as it’s under contract, but you’re accepting backup offers, right? You can also use this to build your buyers list because people are going to be calling about it and you can say oh, it just sold already, I get a lot of deals though in this area, do you want me to call you when I get the next one? Boom, you’re building your buyers list. So, we’re going to pause from this situation and we’re going to talk about the types.
Mike: What Dave just said though, you could say it just sold but I’ve got- he’s got three days of inspections. If you want to check it out and he backs out-
David: Go look at it.
David: Good point.
Mike: So, this is a great way to build your buyers list like Dave said.
David: Love that.
Mike: Getting back to first things first, so title companies and closing attorneys.
David: They are going to be required to do deals.
Mike: So, yes. Not required, we highly recommend you do it.
David: I would make it a requirement for all of my students and your students, of course you don’t need to use them but it’s going to be dangerous because you’re not protected.
David: That’s the purpose of these two parties: a title company or attorney, is to protect the interest of everybody, not just you.
Mike: Exactly, the seller, the original seller.
Mike: You, the wholesaler.
David: And the buyer.
Mike: The end buyer, your end buyer.
David: And your end buyer’s protection is- or is protected because when he fixes it up or decides to sell it in a day or 10 years, he can do so at that point too.
Mike: And 95% of the time, you’re end buyers going to want to use a title company.
Mike: We highly recommend using a closing attorney.
David: So, not to dive too deep down the rabbit hole of title companies and attorneys, depending on where you live, one or the other maybe more prevalent. I can’t speak to outside of the US cuz I don’t know. Mike and I live in the state of Missouri and title companies are the thing here, attorneys can also close deals in the state of Missouri, I’ve done it with attorneys before.
Mike: And again, I don’t know why. I’m pretty sure it’s some law that just states that attorneys have to close all real estate transactions, I don’t-
David: In some states.
Mike: I don’t know why there’s- and even in Missouri so there’s can be debates on oh, should I use a title company or attorney? Well, it’s just pretty common to use title companies so that’s what we do.
David: That’s what we do, that’s right.
Mike: Again, they specialize in it.
David: So, we’re going to group title companies and attorneys into one category for just a second. Why are they important? Well, we had mentioned that it’s about protecting everyone’s involved interest, right? But in order for a contract to be legal and valid and a property to be under contract you have to do two things. You have to open escrow with an escrow company. Well guess what? Title companies are escrow companies. Attorneys can also be escrow companies or own escrow companies, but you have to open escrow with an escrow company, that’s number one by delivering your contract and number two, you have to deposit your consideration for your agreement, which is called earnest money. So, earnest money goes into an escrow account who is owned by an escrow company and they’re going to facilitate the transaction. They’re going to make sure that all the debts are paid whenever it’s transferred and they’re also going to make sure that the deed is recorded with the county to show the transfer, so the ownership actually changes. So, that’s why the title companies come into play, they guarantee you that you can sell that property later if you buy it through a title company cuz you get what’s called title insurance. Again, I don’t want to dive down this hole too deep, but we highly recommend you use them because it protects not only your interest, but everybody else’s interest involved, okay?
David: So, moving on.
Mike: Okay, so we’ve talked about title companies, now let’s talk a little bit about the types of closes and then Dave let’s circle back to our contracts and maybe our discussion.
Mike: We can try to go into the weeds a little bit more with that one.
David: Got it, got it. Love that idea.
Mike: So, types of closes and why we use the different types of closes. Okay, I think we talked about ABBC but if not, let’s refresh on that one.
David: Sure, sure.
Mike: Okay, so we’re just going to use these little symbols, so A would be your seller, B is you the wholesaler, and C is your end buyer. So, you’re AB transaction is between the seller.
David: And you.
Mike: And you the wholesaler, and your BC is between you the wholesaler and C your end buyer. Okay, so ABBC alright, so just so we’re all on the same page when we start going through some of this stuff. You can do a double closing which is where you as the wholesaler go-
David: It’s- let me help.
Mike: Go for it.
David: It’s separated.
David: That’s the easiest way to look at it. It’s separated because-
Mike: There’s two closings.
David: There’s two closings. You are still going to purchase from the seller, right? But simultaneously or you know, typically on the same day you’re going to then turn around and you’re going to sell it to your buyer. You can’t sell it to your buyer if you don’t buy it first, the cool thing is you don’t need your own money to do this in most areas. If not, you can use a transactional funder to help with this but we in the state of Missouri can do what’s called double closes that are dry funded, meaning we can use our end buyers’ money, but at the end of the day you’re still having an A to B closing and then you’re selling it B to C, it’s two transactions, I just want to make that very apparent.
Mike: What’s also important is you are on the chain of title, so the title company-
David: For a second or a day or a week or whatever.
Mike: Yeah, exactly, one day. Your name is literally going to be recorded on the title of that property, so it’s out there or whatever the name on that contract was that you wrote down is going to be on the chain of title.
David: Recorded, correct.
Mike: So that’s the ABBC or a double fun- double close. So, we called it a dry funded double close means no money of our own, the wholesaler, but the end buyers money flows through pays everybody out. Very cool.
David: Either way though, you have two transactions, you have two sets of costs, right?
David: Now there’s pros and cons, let’s talk about the pros and cons and then we’re going to move to the assignment and talk about those pros and cons, or should we do the assignment first?
Mike: Let’s talk about assignment and then pros and cons.
David: Okay, I like it.
David: So, number one is the double close.
Mike: The second option.
David: The second is the assignment, go ahead.
Mike: So, the assignment- you’ve got your AB contract, we already had that right? But now when Dave and I were talking, we say hey Dave, you know, I’m only making you know $1,000. I’m not making very much money and again, not using our numbers from before but I’m not making very much money, can I just assign this to you? And then, that way you just take over my responsibility in this contract. Dave said sure, I just want to buy the property. So, an assignment of the contract is another piece of paper and you’re going to state on there that Dave is taking over your interest in that AB contract, so what happens is you show Dave that contract, Dave signs the assignment, then you bring the AB contract and the assignment of the contract to the closing company or title company, closing attorney and they then make the transaction happen.
David: They facilitate.
Mike: They facilitate the transaction between party A and party C.
David: Yup, now you saw me texting over here, I apologize, I lost my train of thought. I just want to make sure that we touched on one thing though. When you are assigning a contract, the person that is considered the assignee, meaning the end buyer, right? There is an assignor and assignee. The assignor is the person that actually has the property under contract, and he is assigning his interest to the end buyer via an assignment, so the assignee is who signs it. Now again, I don’t know if you touched on this Mike or not, but this is very important. In order to do an assignment, you have to show them your original contract and they have to agree to all of those terms, not some, all.
Mike: Correct, they’re taking over your contract.
David: They are basically stepping into your shoes to fulfill all of the items in that contract. Now, the assignment agreement will also have a cost. In order for you to step into my shoes to buy this deal, you have to pay me 10 grand. So, let’s say in our scenario, we buy it at 42, we sell it at 52. They’re going to come to closing and they’re going to bring 52 thousand, 42 of it’s going to be directed to the seller and 10 thousand will be directed to the assignor/wholesaler. So, I think the main point I want to make though is that they are stepping in the shoes of you and are then obligated to fulfill all of the obligations in the agreement.
Mike: Great. Alright, let’s discuss the differences, when to use it, stuff like that.
David: Love it. Pros and cons.
Mike: One of the things, just top of my head, every time that we talked about assignments-
David: Dropped it.
Mike: Oops. Every time that we talk about assignments versus double closing is when people talk about the legality of wholesaling and is it legal? Is it not legal to market a property etcetera etcetera. In my opinion, the way that I interpret things, if you are double closing, you are physically buying that property so you can represent that you are physically buying that property to the seller. If you have every intention of assigning and you only assign contracts, I do not believe that you should legally say you’re going to buy that property. That’s just the way that I interpret things.
David: Yeah, you should just say I’m going to find a partner.
Mike: I’m going to find a partner.
David: That’s going to buy it and we are going to buy it, not I.
Mike: Exactly cuz-
David: Great point.
Mike: You have no intention. Again, that goes back to our intention thing. We had a conversation about this a few podcasts back. So again, that’s just something I’d just like to get out there.
David: That’s a really good point Mike. Transparency is the name of the game. You know earlier we were kind of talking about when the buyer doesn’t show up and I think I skipped over that on this one.
Mike: We did.
David: Well, we talked about that.
David: But you want to collect non-refundable earnest money on your B to C agreement, right? And the reason that we like that is because if they don’t show up, we now have something that we can use to give to the seller to buy us more time, or we can make some profit for our time in the meantime, but it also secures their interest if they go open escrow and deposit that earnest money.
Mike: Cool. Let’s get back to the types of closes and the discussion about that cuz we do, we got to get into the weeds on that too Dave.
Mike: So, pros and cons of a double close. Biggest pro: if I’m making 13,15, 20-
David: Let’s go big, let’s say you’re making 35 grand.
Mike: 35 thousand dollars?
David: And let’s say that if I knew that as the buyer, I wouldn’t be okay paying him 35 grand.
Mike: Well, let’s use similar numbers, so say Dave is buying this property for 52 thousand, he agreed to 52 thousand and I’m making 35 thousand dollars as a wholesale fee, so I’ve got locked up for like 15 grand or something like that. I mean if I’m sitting in Dave’s shoes, I’ll be like I might be making a bad decision.
Mike: Like why would I be paying $35,000 more?
David: You can just go find that deal.
Mike: He found- that property’s 15 grand? Maybe I should go next door and offer 25 for the one next door instead of paying 50 grand for this one.
David: So, the pro is that there are- it’s not as transparent, you can hide your purchase price, and that’d be the easiest way to describe that.
Mike: Yeah, you hide your- yes, your purchase price and your fee, you know the money that you’re earning-
David: Great point.
Mike: For the work that you did. You’re hiding your fee.
David: So, that is the pro.
Mike: You’re concealing it. It’s not hidden forever.
David: Yeah, that’s true. After a month or two, it’s going to come out but you’re concealing it now to get the deal done, that’s the pro of double closing.
Mike: Another pro and this is kind of a long-term game here is you are physically taking title to that property and you are physically selling that property.
David: Why is that important?
Mike: That’s what I’m going into.
Mike: So, from an accounting perspective, you are getting- you’re issued what do they call it from the title company or closing attorney, you’re getting a-
David: Settlement statement.
Mike: Right, and at the end of the year you’re going to have to pay taxes on things that you-
David: Profited on.
Mike: That you profited on, exactly. So, your financials are gonna look pretty strong to a bank if you bought and sold 10 million dollars’ worth of real estate in a single year. You bought you know 8 million and sold 10 million dollars and you made 2 million in profits, that’s huge.
Mike: Whereas if you just assign it, it’s just a marketing fee. There’s no real skin in the game there, right? Dave, [inaudible].
David: No, you’re absolutely right man. I love it, that’s exactly right. So, the pros are you can conceal the profits and it’s gonna help you with your financials later because you’re going to show a lot of money going in and out of your business.
David: So, that would be the two pros that we like. Another pro that I think is often missed- overlooked is depending on your buyer, you may have to take title before you can sell it to them. So, there are scenarios sometimes with hedge funds or if we are selling to a buyer who is using hard money. They may not be okay with assigning, they may require you take possession before you sell it to them. Now it doesn’t always happen that way but there are certain scenarios that this happens. You have to take possession in some cases, so the double close is your only option and again, it gets it done.
Mike: What cons in the double close?
David: Let’s jump in. Cons of the double close.
Mike: There’s only one that comes to mind for me.
David: That’s it.
Mike: You are paying the title company to prepare two sets of documents and basically do the work twice. Their researching-
David: Well, they’re providing a title policy twice too. That’s the bulk of the expense. Closing a transaction’s 300 to 800 bucks, no matter what typically, right? It’s the title insurance policy that can be 800, 3800, it could be 5 grand if the house is worth 2 million. 5 thousand bucks. So, the majority of your cost is the insurance policy and when you double close, you gotta get two of them. You gotta get one for the buyer on the A to B, and one for the buyer on the B to C. So, hopefully you’re not paying all those fees but that’s the thing Mike, cost.
Mike: 100% and it adds up guys.
David: It does.
Mike: Even- and on a smaller deal, say you’re only making 2 thousand, 3 thousand dollars, if you don’t think about that, you could be out. You could not make any money on a deal. You could actually have to bring money. There’s been one wholesale I think I brought like 30 bucks to it just cuz I really wanted to do the right thing.
Mike: I don’t know if I ever told you that, it was back in the day. Yeah, I think I- yeah, I don’t know, it was a hundred or- not very much money but yeah, I just wanted to get the deal closed, they had already done everything, I just said screw it, it is what it is. I’ve tied this property up for so long and you know, don’t need to go into it, but yeah, it’s the cost. Double closing costs more money, bottom line. I don’t know, is there anything else?
David: Yeah, no that’s it. It’s that simple guys, don’t overcomplicate it. So, you got pros of concealing your amounts, what were the other things that we talked about with the pros?
Mike: Is you get to add to your bottom line.
David: Add to your bottom line so your financial statements are gonna look a little better. You may have to do it in the event that the buyer requests it. So, those are gonna be the pros, the cons are costs, that’s it. Assignment, moving on.
David: Pros of the assignment.
Mike: It’s cheaper.
David: It’s way cheaper.
Mike: Hahaha, you- there’s zero-
David: There’s zero cost.
Mike: To you as the wholesaler.
David: To you as the wholesaler if you do it right.
David: You know, you can obviously negotiate in that you are gonna cover something, but typically an assignment just means hey you’re gonna step in my shoes to fulfill my agreement for an x amount of price that’s gonna be paid to me. That’s it, it’s that simple, right? So, the pro would be cost. It’s cheap if not free. Now, the con or cons.
Mike: It’s super super full dis-
David: It’s just basically opposite of the first thing.
Mike: It is. Is that your end buyer is going to know that profit. We went through it like Dave would not be comfortable, I mean even us as seasoned investors, man it’s a really big pill to swallow if somebody’s buying a house for 50-
David: 10 grand, and they’re making 30, selling it to you for 40.
Mike: And you’re planning on making 40 after you rehab the whole project.
David: Maybe even 15 or 20.
Mike: So again, it’s a very tough pill to swallow, not saying that may not do it and if you have a great relationship with them, maybe they will, but man that’s a tough pill to swallow for a lot of people so I would-
David: So, the con is- the pro is cost, it’s cheaper if not free. The cons are you can’t conceal anything, you have to a) give them your A to B and have them to agree to all of those terms and agree to the assignment fee in order for an assignment to work, all of it.
Mike: Here’s another con: they’re stepping into your shoes Dave, if they don’t fulfill that part of the contract, the seller has you as the person to hold liable.
David: Correct, and that’s where the non- and we circled back from this earlier, we kinda spun off of it, we’re circling back now. That’s where some of the things in our B to C contract are gonna vary from the A to B. Can we dive into this for a second?
Mike: Let’s do it man, this is where we are headed.
David: I think this is the time.
Mike: This is it.
David: Okay. Number one, remove all of the CYA’s that are open ended and that aren’t defined.
Mike: I just want to restate it just so we’re clear.
Mike: We are going back now to our example at the beginning, so Dave and I were talking about purchase or selling the property.
David: It’s kinda hard not to jump around.
Mike: I know. So, we’re going back to when Dave and I are negotiating on price. Dave says yes, I wanna buy it, so now we’re talking about our BC contracts so we’re talking about what do we do different-
David: So, I’m either going to send one to Mike- we agreed 55 grand, same scenario.
Mike: We’re agreeing now.
David: You have it for 42, you’re marketing it for 55, I went and viewed it and I say hey I like it, but I can only pay 55 or that’s all I’m willing to pay and you say screw it, that’s a great deal for me.
Mike: Let’s do it.
David: I’m at 42 if my math is correct, that’s a 13k spread. Okay?
Mike: Okay, so that’s where we’re at.
David: That’s where we’re at.
Mike: We love it, we’re both happy. Dave’s gonna get a property he like, I’m gonna make a 12 thousand dollar-
Mike: Yeah, exactly.
Mike: 12-thousand-dollar fee.
Mike: The seller’s gonna get to sell the property.
Mike: For the price that you guys agreed was fair. Everybody’s winning which is great. So, the difference between our AB and our BC contract now is what we’re kinda gonna discuss.
David: Two ways this can work: I can send him a contract, or he can send me a contract.
David: Ideally you want to have control.
David: If somebody send you a contract, sorry, it’s what they write. If you send it, you can write it so please take off.
Mike: That was exactly what I was gonna say.
David: Yeah, I didn’t mean to interrupt you I’m sorry, trying not to do as much.
Mike: Most of the time, you want to send the contract because then you’re in control of the language in the contract just like you were when you were selling or when you were buying the property.
David: So, when you’re in control, what do you need to do? A) remove the CYA’s that are open ended, remove the based on partners approval, remove the contingent upon buyer’s opinion of taxes title value. These are open ended CYA’s that are gonna bite you in the butt. So, if they want an inspection period, fine offer them one, keep it short, it is going to have a deadline though, right? Make sure that all of those contingencies that they have are defined whereas your contingencies with your seller may not be as defined.
David: But that’s the purpose is if they aren’t defined as much, you have a lot of ways to get out, you’re protected, but when you’re selling it, you want to limit those ways out, it’s just common sense. So, removing the CYA’s that are open ended, define them, if they are- if they do want some, and they may, they typically are. Me, as a buyer, Mike is a seller, I’m gonna say I need at least 3-5 days, I need sewer scope and I need to do some inspections, but that’s it so if we can agree on 3-5 days and you have at least that on your end, we can get this deal done.
Mike: Okay, so I’ve got the AB and I’ve got plenty of time on it and I say Dave okay, I get that you need to get a sewer scope and I get that you want to have it under contract before you spend money to do that, how about 3 days? Can you do 3 days inspection that way, you know I’m a wholesaler, I’ve got to find a buyer. If you’re gonna back out, I need to know that you know, right away so I can-
Mike: So, I can find another buyer and I don’t burn time on my contract and my inspection period. Dave, what do you say?
David: I say great.
David: Do you want me to send you a contract or do you have one that you want to send to me?
Mike: Dave, ideally I will send you a contract in 15 minutes when I finish typing it out.
David: Right. Love it.
David: So, Mike’s going to remove those CYA’s.
Mike: And I’m going to put in there that Dave has 3 days to perform his inspection.
David: Define it, love it.
Mike: That’s it.
David: That’s it.
Mike: And again, so then send it to Dave, Dave signs it.
David: Okay, now we’re going to add one more thing Mike, we’re going to add the CYA to cover our B.
Mike: This is extremely important, this is extremely-
David: You have your AB and your BC, so what is that and why and how do we add it?
Mike: Always cover your B, right?
David: Always cover your B.
Mike: Always cover your B.
David: That’s right.
Mike: So, we put in our sales contract: this contract is contingent on the sellers’, which is you in this situation, successful acquisition-
David: Of the property.
Mike: Of the property. Why? Why do we do that? Well, because Dave-
David: In the event there’s title work issues or the seller doesn’t show up to sign or has a change of heart, and this happens, it’s rare but it happens, and they don’t show up, we” you’ve promised this property to a buyer and if they don’t buy it, you’re out of contract. You’ve basically written and agreed to a contract that you can’t legally even execute, your control was removed by the seller not signing, so this contingency is nothing more than a legality thing to keep you from getting sued, right? And it basically says this contract, this whole deal is subject to me as the seller in this B to C scenario acquiring it successfully. If I can’t acquire it to sell it to you, then it’s void, right? You can’t sue me for breach of contract because this whole thing is subject or contingent upon me buying it first. So, it’s one sentence, the simplest way to describe it would literally be verbatim: subject to sellers’ successful acquisition of the property, period.
Mike: And it is important like Dave said, just avoid any issues because it happens guys. We’ve spent a lot of time finding the deal, marketing it, getting all the contracts lined up and then something happens, and you can’t freaking close it.
David: Right, and this isn’t a bad thing.
Mike: So disappointing.
David: I love adding this in there because I also want the buyer to know that I’m wholesaling it, and I want to be transparent.
Mike: Good point.
David: And I don’t want them to not be transparent with me and not show up. I’d rather everybody be transparent, hopefully we’re friends and we can make a deal, and everyone can be held accountable for those actions, right? So, that’s where we kinda come in with the B to C contract. So, we talked about title companies and attorneys, and why we use them and why they are to facilitate and provide insurance but also to have a licensed escrow account that we can deposit our earnest money into as well as our contract to get the property under contract they also then facilitate. We talked about the two ways of facilitating, double close which has pros and cons, assignment which has pros and cons, and then we talked about the difference of those contracts. Your A to B is gonna be more wide with lots of outs, your B to C is gonna be more narrowed and defined with very little outs, or they are gonna be defined why there would be an out and when. You have 3 days to get out in the 3-day inspection period but you gotta opt out in those 3 days, if it gets to the fourth day, those are done, you’re in, you’re locked in. What did we miss? non-refundable earnest money, we need to touch on.
David: And that’s probably it, I mean I can’t think of-
Mike: Well, one other thing would be why we always get a BC contract first.
David: Oh, first. So, two things, let’s touch on those, I love it.
David: Let’s start with the earnest money.
Mike: So, earnest money- and this is one that’s a little touchy in my opinion because I don’t like to do it and we buy a lot of houses. I don’t-
David: It depends on who you’re working with too.
David: Go ahead.
Mike: Okay, so you’re talking about non-refundable earnest money and you would put that sometimes in your BC contract, your sale contract.
David: Let’s go big picture. Earnest money is going to be required on your A to B and your B to C.
David: Even with an assignment typically, there’s gonna be some sort of earnest money, right? Typically, not always but typically. In your A to B guys, you wanna make it as low as possible, this is your money you have to put up. We do it for 10 bucks or 100 bucks 80-90% of the time. Maybe on that 5 or 10% chance, we have to go pay 500 or 1000 dollars to appease the seller but typically its 10 dollars, okay? So, we have to deposit that with our contract, we now have control of this property. When we go to sell it, we’re not going to make it as easy for the buyer to just be able to walk away and only have damages of losing their earnest money. Instead, we’re going to say put some skin in the game, we wanna see 1500, 2000, maybe 5000 non-refundable earnest money. That money goes towards the price of purchase at closing but if they decide to back out between now and the closing, that money is gone so it basically holds their feet to the fire. Shit or get off the pot, right? So, we always require or ask for non-refundable, that amount can be whatever you decide and Mike you had mentioned earlier that you know, if it’s a buyer that we’ve worked with 35 times already, we’re not gonna require that, we know they’re gonna close. But if you are new to this business, this is the whole purpose of this podcast, for the people who are new, if you are new to this business and you don’t know that buyer or you don’t trust that buyer, simply ask or require for non-refundable earnest money. Get a receipt when they deposit that money and make it non-refundable either in you double close or you B to C contract or your assignment.
Mike: Yeah, and I would just emphasize though, be reasonable. Don’t ask for 10,000 dollars non-refundable earnest money on a 30,000-dollar property.
David: Yeah, 1-2 grands typically. Love it.
Mike: Make sure you’re getting deals done with that. So, the second thing that I mentioned was why do we always do a BC contract before we do an assignment Dave?
David: Love it.
Mike: So one, it’s simple. We’ve got- in our systems we’ve got built out, it’s very very easy for us to create, generate and then send a BC contract. The second reason is something we’ve kind of already touched on, is that assignment fee can be kinda touchy.
Mike: So, say it’s a borderline deal. You know, we’re only making 4 grand on it, but the total purchase price is only 15. So again, we bought the property for 11, we’re selling it for 15 thousand and the end buyer says you know okay great. Well, same thing in that end buyers mind, that’s 4 thousand dollars towards a property that is only- they’re only paying for 11 thousand? That’s a lot of money I’m paying somebody.
David: Yeah, that’s about a 45%, that’s a rough estimate, mark-up.
David: Now, I personally wouldn’t care about the 4 grand because we know the business, but some people may not like that.
Mike: Yeah, they may not like it at all, so I want to-
David: Then they may kill the deal.
Mike: Right, so you want to get that BC contract, get that money- the earnest money deposited and then-
David: Get them to agree to the number. They don’t need to know all of the numbers, they need to just see value in that number.
David: Love it.
Mike: So then they are locked in, they are committed to purchasing, then a couple days maybe go by and you say hey and you talk to your title company obviously and say hey I’m not making very much money cuz I had to do a double close so this 4-thousand-dollar profit, just wipe a thousand dollars off the table, that’s gonna go to title company
David: Yup, that’s only gonna go 3 grand if I have to do the double close.
Mike: So, now your skinny deal gets even skinnier and you’re only making 3 grand which again, its great payday don’t get me wrong but to try to save some of that money, you could assign it. So, you say hey Dave, mister buyer, would you mind if I assign this contract to you, that way I don’t have to pay the closing cost and you know, it saves me a little bit of money and you know you still get the property. Dave says sure, no problem.
David: Yeah, hey no problem. What do you- I’m curious anyway, what you into for? You into it for 11? Oh, that’s great, you’re gonna make 4 grand? I don’t care, I am still happy at 15, I see value there.
David: But that saves Mike double closing costs and it allows me a lot of transparency as the buyer to see what’s going on. I already, in order to assign, I’m gonna have to know that assignment number but now I’m gonna actually get to view Mike’s contract to see hey what else did you promise? What else was included or excluded from the sale that I may not be aware of. It’s gonna give me insight into the deal.
Mike: Right. So, it’s a little bit of extra paperwork but again, we find value in it. I find value in it, I just think it’s the right way to do assignments as well because otherwise you truly- you have to present the original AB contract at the time you present an assignment contract.
David: You do. It has to be done together, it can’t be-
Mike: You can’t just say here’s an assignment.
David: Well, think of it this way: if you did it that way, you didn’t have them both and you say hey I want to assign my interest in this property to you, but I don’t know when it’s going to close or what inspections you still have left.
Mike: Or what you promised to do.
David: Or what you promised to do-
Mike: Right, you could’ve-
David: And I’m just going to sign and say okay, I’ll do it? No, I need to know all of the details.
Mike: Exactly, the AB contract could say that the seller is removing the HVAC system, like you don’t know that.
David: Yeah, you gotta know that.
Mike: Again, so if I’m taking over that contract, I wanna know what’s in it.
David: Love it.
Mike: So, that’s why we use that. I think that’s pretty much everything we have on closing deals for today Dave, you got anything else you wanted to add?
David: No guys, I mean it’s very very simple.
Mike: This is the fun part.
David: This is the part, I think that we’re- I mean we almost didn’t even talk about this, but this is where you get paid.
Mike: Yeah, this is the fun part.
David: I mean, this is where all of the car- or all of the progress and work that you have done up until this point is actually realized. You actually get a check from a title company or a closing attorney, you know, on the day of closing or maybe the day after depending on the [inaudible] but you get to reap the benefits of your efforts, so getting paid is really what it comes down to. Selling deals, we’ve been talking about it for 35 minutes at this point, the easiest way to sum it up in like let’s say 30 seconds ish is there’s two ways to get about doing it: title companies or attorneys. There’s two different types of contracts: you can double close which is two transactions, or you can assign your interest and your agreement to another party which will end up being one transaction that you just get paid for and that’s it, you get paid, and that’s closing a deal. It’s really not that hard, build a relationship with your local title company or closing attorney because they are gonna be your best friend. They are gonna help you get these deals done. Don’t think that you need to know about title or about liens or about payoffs. Title companies and closing attorneys, they do it all for you and they are basically like our best friends in business Mike, like our company is best friends with a title company, we want to be right? Like, they are our closest person to helping us solve these problems which is basically what we do. We solve problems and we get paid and that my friends is what selling a deal is all about and what it consists of.
David: Thanks guys.
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