One of the most popular myths I hear in real estate is that wholesalers need cash buyers to complete a deal. While I must admit, closing a transaction with all cash is undoubtedly quicker in most cases, the reality is that many super-profitable transactions get ignored simply because the buyer is not using cash.
In most cases, it’s the disclosure of the wholesaler’s fee that brings forth this false belief. When advised of something they don’t understand, Lenders, Realtors, and title companies sometimes stomp on the brakes halting the transaction progress.
The simplest way to avoid the drama of having a deal go sideways over your fee is begin with a stable relationship with your buyer. When you invest time getting to know them and understand their needs, transactions will go much smoother for you. Buyers work with wholesalers to simplify the acquisition process, saving them considerable amounts of time and marketing costs. Therefore, when you build a mutually beneficial relationship with them, everyone wins.
In my previous episode, I discussed the practice of finding houses for buyers, not the other way around. With this arrangement, your fee is covered by the buyer, not the seller. Such a format removes the seller’s opportunity to object to your compensation since they are not responsible for paying it.
Traditionally wholesalers tend to be paid at closing, which means their fee is on the closing disclosure. Having the wholesale fee on the closing statement can be a red flag for title insurance issuers and lenders; instead, draft a separate agreement between you and the buyer, which breaks down the amount of your compensation and how it will be paid to you.
You can still be paid at closing by the buyer, and such an arrangement does not need to involve the closing agent. Additionally, you can collect a portion of your fee (or all of it) when you sign the assignment agreement and the buyer.
Another solution (and my favorite one) is to accept monthly payments over time with interest added. I offer this to my buyers because it means much less cash out of pocket when buying the property. Such an arrangement means they have more capital available to renovate the home to prepare for resale or rental. Its good practice to draft a note and mortgage outlining the terms and conditions agreed upon with the buyer. Once the paperwork is signed, the mortgage should be recorded against the deed so that the loan is collateralized.
By accepting payments; you create a stream of income for yourself while earning interest on the unpaid principal balance.
The truth is that many buyers who are considered “cash buyers” use loans such as home equity or cash-out refinances against other properties they own to borrow the cash they need to buy the wholesale deal in the first place. How many more transactions could you close if the buyer could use a bank loan to buy the property? Could more deals get done if you remove all of the roadblocks?
Fact: Wholesalers who learn how to employ creative acquisition options earn far more money than those who only limit themselves to dealing with cash buyers only.