Episode 6: Contracts for Wholesaling

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Show Notes

Welcome Back to the Discount Property Investor Podcast Episode 6! Thank you for sharing some time with us today. In this episode we want to break down the use of contracts.  We talk about how important it is to have the right contracts as well as how to put a property under contract especially if you are going to be marketing that property.  We also discuss and explain that you are really marketing that contract when you are wholesaling and not the property.  This is a common misconception and you really need to make it clear when you are marketing a property that you are marketing your contract to purchase the property.

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Welcome to the discount property investor podcast, where we show you how to buy real estate at a discount, so you can create wealth over time and income today. Our mission is to share what we have learned from the experience of others and help you make more money investing like a pro. We want to teach you how to create wealth by investing in real estate the discount investor way.

Thanks for tuning in.

Mike: Welcome back to the discount property investors. Your host Mike Slane and David Dodge here. Thanks for joining us; we are excited to jump into today’s episode about contracts. If you are interested in learning more about wholesaling, we have got a full course on freewholesalecourse.com, there is a link on our main website thediscountpropertyinvestor.com, there you can see all our properties and like I said, find that link to freewholesalecourse.com, you will be able to find all this content available for you.

So today we are talking about contracts. Dave, you want to jump in and kind of give your take on contracts and — how to get started with those?

David: Absolutely. So after you do your marketing and you start sending out tons and tons of offers, somebody is going to accept your offer and you are going to have yourself a deal. At that point in time, you want to either send then a contract or your offer was a contract. Just depends if you are sending letters on [00:01:28.25 – inaudible] or if you are sending out actual contracts. Either way, you are going to send that contract out to them, and they are going to sign that contract, you are going to receive that contract back. The next steps would be to take that contract to your local title company — some States use closing attorneys.

We are going to focus on what we do, we are located in St Louis Missouri and our State uses title companies. So what we will do is that we will take our contract to our title company and we will do what’s called opening [00:02:01.19 – inaudible] so we will give the contract to the title company, and we will also bring in funds that match the earnest money deposit that is stated on the contract.

So on our freewholesalecourse.com, we have a couple of different examples of contracts that we actually use in our day to day business. And — you can go there and you can download those, they are out there for you on the freewholesalecourse.com.

Mike: So quick disclaimer, we are not attorneys, and each State is different so you definitely want to have an attorney or a real estate agent kind of help you through it, make sure the contract makes sense for your area.

David: Very good point.

Mike: Also you are going to want to know if closing companies, title companies do it or if attorneys do it in your State. It’s going to be — it’s going to determine —

David: Maybe talk to a local attorney within your area, your state, your city and — then also, if you are a licensed agent — you will have board-certified contracts that you can use so. I am personally not a licensed agent as of today, Mike is.

Mike: Unfortunately sometimes, a lot of rules for it.

David: But Mike sometimes will use his special sales contract — me personally not being a licensed agent I just use a simple one or two-page contract, very basic stuff. Talking about contracts let’s talk about some of the basis of the contract. The contract is typically going to start out — it is just going to be a purchase and sale or contract to purchase. It is going to have the buyer’s name, address, and info. It is going to have the seller’s name, address, and info. It is going to have the subject property, what is actually being purchased? What is being transacted there? There may or may not be a short little area for legal description. Then from there you just kind of get into a couple of things you get into, you get into the earnest money, the cost of the transaction, you get into acceptance periods and dates. You get into inspection periods and dates, and then you get into close. Missing anything Mike?

Mike: There isn’t a lot to it, so parts of the contract — most important you want to put your name or your LSC’s name or whoever is purchasing the property, the subject property itself, the price, and the close date. Those are really only the four things —

David: So sometimes there is an acceptance period where you will say, hey I am going to send you an offer — but you don’t want that offer to be good for 20 years obviously. You want them to come back in four months and say I need to sell so let’s do this. I usually will give them a week, maybe sometimes two. I have done it in the past where I have given them up to a month if it is a really good deal. It’s like hey take your time, when you are ready to move this is my offer, it’s good for X number of days. So there may be an acceptance period. When you are talking about inspection periods — we typically like to shoot for 15 – 20 days. One great trick that you can use to extend your inspection period is by adding the word ‘business’. So, if you have a ten-day inspection period, that is obviously ten days, however if you put in the word ‘business’ ten days could really be as many as fourteen because you get those extra weekend days, sometimes we will add in the word ‘business’ if we need to buy our self a little bit of extra time.

Mike: So the reason the inspection period is important in wholesaling, so again David gave you a pretty good breakdown of what’s happening. So you did some marketing, you have made some offers and now you have a contract going. So once you have a contract, the reason you want a longer inspection period is that it gives you more time to find that end buyer that is going to come in with the cash and close. So again, if you don’t have the cash to purchase it outright, a longer inspection period helps.

David: You are absolutely right Mike, absolutely. You always want to go out and you want to try and find that end buyer that has the cash to close. But additionally, you’re going to use the inspection period to do your due diligence, you are going to use it to make sure that your repair costs, your estimated repair cost — is in the ballpark. Is it a decent and fair estimate? And also your after repair value that you had estimated by pulling your comps and figuring out — what the like properties in the area, like bed/bath, like square footage in the area is going for. So you can use that inspection period to really determine that your numbers are correct. So for any reason, if you come back and you say — as an example, I thought the repair costs were going to be 15 grand and it turns out they are 25 grand — after maybe I brought in one of my inspectors — or one of my contractors. You can use that inspection period time to either exit the contract or re-negotiate which is I always recommend. You have already spent all that time and effort and money marketing and sending out offers, and you finally get it under contract and the last thing you want to do is exit that deal. Always try to re-negotiate — because usually the seller at that point is really motivated, they are happy they had an offer on the property —

Mike: They have already cashed the cheque.

David: They have already cashed the cheque mentally, very good point.

Mike: Once it’s under contract most people are ready to close so you can kind of use that as a little bit of extra leverage. Again, once they have agreed to say — $100,000 well — if you come back and say I really need to get this at 95 to make this deal work, or even 85. Then — it is not a huge deal to them; they are already ready to be rid of the property. They already made that decision it’s gone, they want to put it behind them — so often again it’s helpful and the inspection — you are not doing anything wrong, you are doing your due diligence like you said. You are getting a contractor through there to find — oh shoot this is — here is your actual repair costs and they are $25,000 instead of 15.  I mean it is what it is.

David: That’s one of the things I struggle with is — estimated my repair costs so — in another episode we will — kind of jump into — into some simple formulas that you can use based on square footage or — maybe just fixed numbers for items like kitchens and bath but — it’s a whole different episode.

Mike: We should do a walkthrough too, a walkthrough of the house.

David: Absolutely, that would be a great episode. So, anyway — back to contracts. So then you are going to have your inspection period. You are usually going to have your close date, which I usually put one week out from the end of my inspection period. So if I can get my inspection period to be two or three weeks — then I will make my close day one week beyond that —

Mike: You can do it wide open. We work together and I didn’t know that’s how he did it. I delay my inspection date for as long as I can, then I almost always write the close day one month from the day of the writing of the contract. So — one month or sooner is typically what I will write. So typically we will try to close sooner.

David: Yeah, that’s a great point.

Mike: — And the reason I do that too, I tell the people –we are dependent on that title company so as quickly as they can get everything processed. Again, if it’s an attorney it’s as quick as they can get everything — the title cleared for us. So you want to give yourself time for that as well. If you can close it in two weeks great. If it’s going to take a month well — we will have to go back and amend the contract.

David: That is a really good point Mike, — I like that. I do want to emphasize honor before — use that wording in that contract — let’s say you tell the seller that you are going to be closing mid-February for example. Then in your contract, you would like to have that stated honor before — February 15. Then that way it is up to the title company — we have used dozens of title companies here in St Louis and some title companies can do a deal in four to six days. Others — it may take them three or four weeks. So — you can always kind of lean on your title company — and or use them as an excuse to say hey I can’t close it for four days because the title company just can’t process these documents and pull title, and clear all these lean in this amount of time. So it is a very, very good point.

Mike: They are going to help you with the contract too. If you get into a property and you have written a contract yourself or made an edit to one of our templates we have out there. They will tell you, hey this doesn’t work here. This is no good. We had them come back to us on — I guess it was an assignment agreement, and they said this doesn’t look right to us — they sent us exactly — your title company will become your best friends and we can do another episode about —

David: Absolutely. But — what’s important with the title companies — or closing attorneys if that’s the state that you’re in, is try and build a relationship with these folks. Because — if you are walking in there and you are requesting documents — they are not just going to hand them over to you most likely. However if you brought them business, and the more and more business that you bring these folks — the more and more likely they are going to be to want to work with you, and help you and make sure you are successful because, if you are successful it means they are getting business and they will be successful so.

Mike: We are digressing; I want to hit one more thing on title companies. So, when you are calling around and trying to figure out who you are going to close with, if you call them and ask them, do you know how to do a double close? Or can you do an assignment or anything like that and they said what? Move onto the next title company.

David: Good point.

Mike: So anyway we are digressing, let’s get back to the contracts. We have talked about purchase and sale, we have talked about different types, and we can also talk about the assignment then.

David: Absolutely. So — your A to B transaction is going to be a purchase and sale contract or purchase and sale agreement. Once you get that locked up, open escrow —

Mike: So your B to C could also be — a purchase and sale.

David: The truth, that’s a good point.

Mike: So that’s a double close. The A to B and then B to C. So the other side of it is the assignment. Which would be you go out and get your A to B contract and then you find your C buyer and you just straight up write a simple assignment agreement saying the C buyer now is responsible for everything in this contract. You guys both sign that and agree to it.

David: So I personally love assignments for multiple reasons. The main reason is that you don’t have to close. You literally take your contract from A to B, and you sell it to a third party who then takes that to the title company and they close the deal. If you have already opened escrow you can transfer the escrow from yourself to them. They can pay you either at closing or outside of closing.

Mike: One thing we forgot to mention was the assignment fee.

David: That’s how you get paid.

Mike: Our assignment contract will also be out there on freewholesalecourse.com. So you put an assignment fee in there, when the C buy comes and closes the transaction — the title company is going to wire you the cheque for the assignment fee.

David: Or you can pick it up and they will have it for ya. So, those are really your two options. You can assign your contract which is great because you just get paid, you don’t even have to go to closing, and you don’t have to put up any money, other than any escrow you may or may not have already opened. That’s it. So if you double close the deal, there are advantages to doing a double close. Let’s start with the disadvantage. It is going to cost you more; you are going to have to pay for closing costs on both sides. Now if you find yourself a good title company that you like doing business with, and you send them a ton of business, they will usually hook you up a little bit on not charging you full cost on both sides. Maybe they will charge you full cost on one side and maybe half cost on the backside. So you can save a little bit of money by doing those double closes. But again, that’s a good relationship type of thing you have to build. But anyway, the advantage of doing a double close is that you are protecting the numbers for the most part. So let’s say that — Mike sells me a property for — 50 grand and I turn around sell it to Ray over here for 80 grand. There is a $30,000 difference, a net profit of 30,000 minus the cost to close. I am protecting the fact that I am making 30,000 by doing a double close because the numbers are sheltered.

With an assignment —

Mike: That means Ray, the buyer doesn’t see —

David: He doesn’t see that I am making the 30,000.

Mike: Even if Ray is getting a good deal on it and Ray is an experienced investor, 30 grand is a big pill for someone to swallow —

David: Even if he is going to make 30 grand on the back end by doing a rehab and selling it.

Mike: Or even 50 grand.

David: That is a lot of work he is then going to have to go do in fixing the property and rehabbing it, as I’m just literally finding it and selling the contract. So — in certain cases, double close is better. We typically do an assignment if it’s less than 5000. If it is more than 5000 we will almost every single time double close it. Just to protect our numbers, not to burn the bridges or give people a bad taste in their mouth due to the fact we may be making more on the deal than they are.

Mike: Honestly I prefer double closing. I am willing to pay a couple of hundred bucks just so people don’t know. Even if it is a skinny deal, I would just rather not have people know if I made — three grand or 30 grand. It’s not really relevant. As long as they are happy with the deal that they are buying — there shouldn’t be an issue with it.

David: I agree.

Mike: But again, I just don’t like people to know.

David: I don’t want to get really deep into this, but really quick let’s talk about costs. Assignments you have no cost, you — it’s a one-page agreement; you can make it more if you like, but keep it simple. One page agreement you say, hey here is my A to B, I am going to assign this to you, here is what I need for the assignment, 2,3,4,5 thousand or more, that’s it you walk away. When you are doing a double close, what can you expect in terms of closing? Again, everyone is going to have a diffident State, if they are using title companies versus attorneys.

Mike: Let’s use an actual example. So say you have a property under contract for $10,000 and you were going to sell it to a C buyer for $20,000. If you assigned it to them for $20,000 there is going to be $10,000 in your pocket. They are going to pay the closing costs, all that stuff comes out of their end, or the buyers and the sellers end of the transaction. If you do a double close, the — you are purchasing the property, you are going to have to pay the closing costs on the purchase side, and you are going to have to sell it and pay closing costs on the sales side. So the end buyer still comes in with the same end of amount, say 20,000. But you have the closing costs on both sides, let’s call it a thousand bucks. That is going to take two grand off of your profits. So your $10,000 profit from a $10,000 purchase to a $20,000 sale just got eaten up with $2000 worth of closing costs so it’s now $8000. So again –

David: A perfect example, however I think those numbers are a little inflated. You can do a double close from anywhere between 6 and 800 give or take, maybe a little more. As the price of the property goes up, the price of the closing goes up because of the title insurance policy that needs to be purchased. So typically just rule of thumb, if you have something that’s under 50,000 you can usually double close for 7-800. Above 50,000 and it’s going to be over 1000.

Mike: We have a good relationship with our title company too. We get pretty good rates.

David: So next topic here, CYA clauses. Cover your ass.

Mike: So my favorite one is — contract subject to partner’s approval. So the reason for that is, who’s my partner?

David: Who is your partner?

Mike: Right.

David: My partner’s my cat.

Mike: My partner is usually my C buyer so —

David: The idea here is that your partner can really be anybody. It’s just one of those things where —

Mike: It’s vague.

David: It’s very vague and vague for a reason. This deal is subject to my partner’s approval. I have to get my partner to agree, and by saying that you’re not — or by writing that into the offer of the contract, you’re not really specifying that I need Mike to agree, you are just saying you need your partner to agree. So you can have anybody be your partner and once you find someone else that will agree to buy the contract, and then boom you have met that need. My partner has agreed that let’s move forward.

Mike: And that’s why I say it is my C buyer. It is always my C buyer as my partner because they are my — funding partner is what I call them. So as long as my funding partner agrees, then we are good to go. But if my funding partner says no, you are asking too much — then it doesn’t work out. So sorry my partner doesn’t approve of this deal. So it’s a — kinda bending I guess the reality if you would, but yeah that’s what I like.

David: Subject to taxes, title, and value. We will usually put both of these in our agreements. Subject to taxes, title and values is another great one. The reason is because the contract is obviously going to be subject to the taxes that are owed. Because of the taxes that are owed on the property are more than what you’re paying then there is no deal, you can’t do it. That is obviously the same as the title. If there are leads of 200 grand and you are offering 80 — well then they are not going to sell you the property because you can satisfy those leans. And then my favorite word in that sentence — so subject to taxes, title and value is value. Because value is one of those things where it is in the eye of the beholder. It’s like — who determines value? Everyone is going to have a different determination of what something is going to be worth.

Mike: It’s vague again.

David: It’s vague, so by paying taxes, title and value, when you read that sentence — it looks very to the point. Like ok, it’s subject to the taxes, title, and value like — we can determine all these things. Value — it’s going to be a lot more difficult to actually determine the value. So second CYA clause we recommend subject to taxes, title and value — next —

Mike: Those are pretty good ones. The last thing I think we want to cover on contracts is — I know we are getting kind of long here is earnest money. So how much earnest money do you want to put down? Our opinion is as little as possible.

David: As little as possible. Unless your seller is going to request you put down a certain number or — more than what you are offering, don’t go any higher than you need to. So — some of my contracts are $10. I try to usually shoot for $10. If I want the seller to know that I am serious, then I will usually put down $100. But it is very, very rare that I will put down more than $100. If I do, I think the most I will put down is 500. If I can get ten, or even 100, that is what I shoot for.

Mike: Right and sometimes if the buyer is coming back and negotiating with you on the earnest money and you know that you got a good deal.

**talk over each other [00:20:50.25]**

Mike: — You got a good deal.

David: Make the deal happen. But if it’s something that you are like meh — let’s see what we can do to help this person or something like that, go for the lowest amount — that’s very possible. In regards to the earnest money Mike — we use different contracts. We are business partners yet we still use different contracts. He is usually using the — special sales contract which is the Missouri board of realtors — contracts.

Mike: I think it’s St Louis board something —

David: I am just using a simple one or two-page contract so, in my contract, it states that — if I for any reason will default, then the buyer can keep my earnest money as liquid damages. That is the only liquid damages that they can keep so. If I for any reason back out of my deal, which I try never to deal but it does happen. Then I lose ten bucks so what. Mike’s contract actually states that the money is refunded to him. Do you want to read that sentence?

Mike: Yeah so I give myself special agreements in our contract, it says that the buyer should have 15 days from acceptance to inspect or view the property. The buyer shall find the inspection satisfactory in buyer’s sole judgment or contract shall be null and avoid and earnest money needs to be returned to the buyer. Simple as that.

David: Simple as that, so — you can kind of go either way, folks. You can decide what works best for you. The thing about contracts is there really is not one — contract that you have to use. You can kind of even come up with your own contract. As long as the title company in your area will accept the verbiage that you are using, you will be good to go — so. At this point, I think we are kind of wrapping up — contracts. Next week we are going to talk about selling those contracts, building your buyers list, and dealing with your C buyers, your cash buyers. So what can you do today? Send more offers, send actual contracts as offers.

Mike: Write some contracts, exactly. Go out there to thediscountpropertyinvestor.com and find freewholesalecourse.com on there. We have got some contracts to look at. Play around, find one that works for you, and write some contracts. Send some contracts.

David: Get them out there, the more contacts you send, the more offers you are sending the more likely you are to get a killer deal and make yourself a good living. Mike, do you want to end this episode with a quote?

Mike: Sure. “In investing, what is comfortable is rarely profitable. Thanks for listening guys.

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