Tuesday, January 20, 2015
What Every Wholesaler or Rehabber Must Know Before Doing Your Next Deal
If you are a wholesaler or rehabber, or a student learning how to do this business, it is critical that you read this.
Many of you are using the real estate investing strategy of wholesaling, which is essentially the practice of putting property under contract and then assigning or reselling the property to another investor. Or, you are buying and rehabbing the property yourself and re-selling to a retail buyer. Although many of you are doing this on your own, there are also several education companies who are teaching investors how to implement these strategies. Several of their students have asked me recently for assistance in reviewing and adapting contract forms that their company has provided. I commend these companies because typically they have instructed their students that their forms are for informational purposes only; they may not be appropriate for all situations; and that their students should NOT use them without consulting a real estate lawyer.
The instruction is given for good reasons, three of which are:
1) California, or whatever state in which you are using these forms, has unique laws that may impose specific requirements for the purchase contract you use for every 1-4 unit property (which is the type of property most commonly purchased by wholesalers and rehabbers). In fact, every state may have one or more cities that has its own even more specific, unique requirements for your purchase contract (San Francisco, for example, has its own unique legal requirements). If your purchase contract does not comply with state and local law, you could suffer severe economic consequences (especially in a city like San Francisco where the median home price is $1,000,000!). You must have a real estate lawyer review your form to make sure you are complying with applicable state and local laws.
2) Every purchase transaction, just like every piece of real estate, is unique. California requires every seller to make certain disclosures about the property. You must carefully review each of those disclosures to evaluate what, if any, additional information, representations and/or warranties you require from the seller. And you must also carefully evaluate what disclosures you must make to your buyer. Performing that evaluation is best done with the assistance not only of a real estate lawyer, but preferably a real estate lawyer with substantial litigation experience who can recognize language that could set you (and/or your future assignee or buyer) up for a future costly dispute.
3) If you are wholesaling in California and are using the standard California Association of Realtors form Purchase Agreement, the recently-revised version of that form now expressly prohibits assignments without having first obtained the separate written consent of the seller to a specified assignee. That means that, if you are using that form as written, you can’t wholesale the property by assigning the contract without the seller’s written consent, and the seller has to approve your wholesale buyer. That could put a serious dent in your wholesaling business.
We have substantial experience in both real estate transactions and litigation. In addition, one of our lawyers is focusing on this specific wholesaling and rehabbing strategy and, therefore, has even greater knowledge and experience in this area. We would be happy to work with any of you to make sure your forms are in compliance with applicable law. We represent investors throughout the United States. For this type of engagement, we are offering flat fee pricing, depending on the specific scope of work you require. If you would like more information or just to discuss this topic, please send an e-mail to firstname.lastname@example.org.