Overview of a Wholesaling Real Estate Purchase Contract
A wholesale real estate contract is the foundation of any transfer of property ownership. It also serves to protect both the buyer and seller during this transaction.
For real estate wholesalers, there are additionial clauses and contingencies you can add into the wholesale contract to mitigate liability and help the process go smoothly. Use this guide to help you better understand what goes into a wholesale real estate contract and develop a wholesale contract template.
Recommended: Read our guide on How to Start a Real Estate Investing Business.
Developing a Wholesale Real Estate Contract
While it is possible to draft a real estate sales contract yourself, we strongly recommend utilizing the services of a real estate attorney to draft your sales contract. This will help ensure your contract has all of the state requirements included as well as any additional clauses that are pertinent to your deal.
Alternatively, the real estate board in your area or county can potentially provide you with a sales contract or template in order to draft your sales contract.
Drafting the Real Estate Sales Contract
When drafting your real estate sales contract, there are a few basic requirements to keep in mind. In order for a document to be considered a legal contract, you must perform the following steps:
Keep in mind that every state has different requirements for legal contracts. To learn more about the requirements in your state, we recommend speaking with your real estate attorney.
Step 1: List the Information of the Buyer and Seller
At the top of your real estate sales contract, you must have the name, phone, and email address of both the seller and buyer.
Additionally, both the seller and buyer need to provide a signature on the real estate sales contract for the document to be valid and the deal to close.
Step 2: Include Property Information
Include the seller’s agreements. This includes the city, township, or village within the state the property is located as well as legal description of the property and the tax ID number.
Tax Identification Number of the Property
The tax identification number for each property is assigned by the county tax assessor to identify and track the property for property tax purposes.
This number can be found on the last tax bill, the deed to the property, a title report, or an appraisal report.
Legal Description of the Property
The legal description identifies the exact location and boundaries of the property. This is not the land records or the street address.
The legal description of the property can be found on file with the country tax assessor or in the most recent deed. In order to be valid, it should be copied exactly as it appears.
Step 3: Include the Start and End Date
The start date is the date the contract is fully executed and in effect. The end date is the last date to execute and/or reform the contract before it is void, essentially the contract must be signed and completed before the end date. Both dates must be disclosed in the sales contract in order for it to be valid.
In addition to this, include when possession of the property will take place, either at closing, a specific number of days after closing, or another date.
Step 4: Disclose the Equitable Interest
Equitable interest of a property is your interest in obtaining the property from the seller before there is a legal title. In this case, your contract acts as the equitable interest. This may give you the legal right to acquire the title.
To understand equitable interest, it’s necessary to first understand what the legal title is and why it is important. The legal title solidifies the ownership of the property and all of the details that go along with it such as maintenance and control of the property.
Therefore, an equitable interest is applicable when there is an interest in the property but the legal title is not in the interested party’s possession. An equitable interest does not solidify ownership of the property.
Step 5: Add Additional Clauses
Once you have the four requirements to create a contract, you will need to include the additional clauses that pertain to the property and deal in question. Additions to your real estate sales contract will vary based on the type of property and investment as well as the location of the property.
Inclusions & Exclusions
In a real estate sales contract, inclusions are the items included with the property upon purchasing. Inclusions can be anything from light fixtures to shelving. Here are a few examples of inclusions that can be listed in a real estate sales contract:
- All lighting and plumbing fixtures
- Garbage disposals
- Ceiling fans
- Window treatments
- Wall-to-wall carpeting
- Attached shelving
- Owned water softeners
- Automatic garage door equipment and remotes
Exclusions are the opposite; these are the items or conditions that will be excluded from the deal. For example, the seller may want to keep hardware or window treatments. Each exclusion should be listed in the real estate sales contract.
Methods of Communication
A clause detailing how communication and conveyance of important documents between the buyer and seller is important to ensure that each party’s timelines are respected and needs are being met.
Form of Conveyance
In the contract, the seller can indicate the form of conveyance by any of the following:
- Warranty Deed
- Trust or Fiduciary Deed
- Land Contract
Establish the manner in which notices, offers, counter offers, or acceptances will be delivered such as by mail, fax, email, or in person. In addition to this, the definition of delivery based on the submission type should be included.
Electronic signatures and initials are binding and seen as equivalent to handwritten signatures.
If you are requesting the seller pay for expenses prior to closing, such as utilities, fees, or taxes, include these in the sales contract. A few examples of fees you may request in your sales contract are:
- Metered water and sewer
If you are requesting the seller pay for metered water and sewer, list the amount of money to cover the cost of the utilities that will be placed in escrow as well as confirmation that the remaining funds, once the final bill is paid, will be returned to the seller.
- Transfer fees
If the sale requires a condominium or cooperative transfer fee, disclose whether you or the seller will be paying the corresponding fee.
- Tax proration
Disclose the method of payment for tax proration based on a 30 day month, 360 day year by selecting buyer or seller. Be sure to include the calendar year of the tax authority based on the county you are buying the property in.
If applicable, include a statement in the offer contract that guarantees your right to walk through the property within 48 hours and at the time you obtain the property.
A property condition clause verifies that all equipment and improvements of the home or property are in working condition. However, if any are not in working condition, they should be listed within the clause as well.
Inspections are necessary for the sale of a property, especially if the buyer has a mortgage or other loan type. Contingencies related to inspections could be any of the following:
- The buyer’s satisfaction with inspections
- The inspections are at the buyer’s expense
- The number of days the buyer has from final acceptance to have the property inspected
- The seller’s reasonable cooperation with scheduling inspections
- The buyer returns the property to its previous condition after inspections are completed
In addition to this, you will need to include details and contingencies about the various inspections that will be performed on the property such as lead-based paint inspections and well and septic inspections.
Lead-Based Paint Inspection
As the buyer, you have a right to conduct lead-based paint inspections if the home in question is built before January 1st, 1978. If this is true for the property you are purchasing, you can either wave your right to a lead-based paint inspection or confirm that you will be doing an inspection prior to closing at your own expense.
Well and Septic Inspection
Determine whether the property is located in a municipality that requires health-department approval of the on-site septic system and/or well water. The seller typically provides the report for the buyer within a precise number of days from the final acceptance date.
A disclosure agreement is provided by the seller and lists any details of the property’s condition that may negatively affect the value of the property. The buyer can either acknowledge receipt of this document or not; regardless, it is still advised (and in some states, required) that the buyer performs adequate inspections in addition to the disclosure agreement.
Contingencies for Wholesaling Real Estate
Contingencies are actions required prior to completion of the property sale. These clauses are meant to protect and benefit both the buyer and seller. It is important that you assess the applicable contingencies for the deal with a real estate attorney prior to drafting a real estate sales contract.
Funds and Terms
Most real estate sales contracts include a disclosure of how the buyer is financing the purchase. Typically either a mortgage, land contract, or cash. To protect yourself and the seller in the event that you are unable to secure a buyer to assign the contract, it is a good idea to ensure the contract is contingent on you securing a buyer within a number of days.
Attorney Approval of Contract
An attorney approval of contract contingency is used to protect either party by making the contract contingent upon either of the party’s attorneys approving the real estate sales contract. Typically, you will need to include the number of days from the final acceptance date that this must be done.
Contract Binding and Assignment
If you are wholesaling real estate this is perhaps the most important contingency to include in your real estate sales contract because it gives you the right to perform the tasks necessary to successfully wholesale the property. The contract binding and assignment clause affirms the following:
- Your right as the buyer and real estate wholesaler to assign the contract to another real estate investor
- Your right to market the property by any means
- Your right to show the property to prospective buyers with adequate notice given to the current homeowner
When you are wholesaling real estate, drafting your real estate sales contract is a crucial step in solidifying your ability to assign the contract to another investor. We recommend that you secure the help of a real estate attorney to help you write a sales contract that fits your real estate wholesaling business’s needs.