If you’ve ever had a wholesale deal blow up on you when a seller learned that you were assigning the contract to someone else, you should watch this video! You can avoid this problem if you utilize appropriate legal entities (LLCs, Corporations, and/or land trusts). Find out how in this video!
Sometimes sellers get upset that a wholesaler is making a profit on the deal, while someone else buys the property. This issue usually does not usually come in a double-close wholesale. But, it does come up in an assignment of contract, which is the more popular method used by investors to wholesale real estate.
When the seller and the buyer are represented by attorneys, there is usually a statement of sale that is prepared and it lists all of the distributions of funds in the transaction, including the assignment fee that goes to the wholesaler. Additionally, it is pretty obvious to any semi-competent attorney representing the seller that an assignment is occurring when the party who signed the contract with the seller is not the party taking title to the property. The seller’s attorney has an obligation to explain to the seller what is happening and it would not be unusual for the seller to feel seller’s remorse, especially when the assignment fee is substantial.
So, is there anything that a wholesaler can do to limit the possibility of a deal going south once the seller finds out that it is an assignment?
Well, one way is to be fully transparent with the seller from the beginning. If the seller is fine with you making a profit from the deal, that may be all you need to do. However, this is not always easy to pull off.
Another way would be to use a legal entity structure to your benefit. Instead of signing the contract with the seller in your personal name, you can use an LLC or a land trust to act as the “purchaser” in your contract with the seller. When you find a buyer who is interested in buying the property, instead of assigning the purchase contract to them, you would sell either the membership interest (if you are using an LLC) or assign the beneficial interest in the trust to that buyer. So, the “purchaser” — the entity that agreed to buy the property from the seller never changes. Only the entity’s ownership changes, which does not have any impact on the seller or who will take title to the property. For this reason, the side agreement between the wholesaler and the buyer does not need to be disclosed on the closing statement and the seller never has a chance to get upset about the profit the wholesaler is making.
An additional level to this structure may involve using a C Corporation (instead of yourself individually) to hold the membership interest in the LLC or the beneficiary interest in the trust if you decide to use the trust. In that case, the sale of the LLC membership interest or the assignment of the beneficiary interest in the trust would be between the corporation and the buyer rather than between you and the buyer. This provides an additional layer of limitation on your personal liability. Should the buyer for some reason decide to sue, they would only be able to go after your corporation and not you individually.