Lock em Up with Contracts this week! To invest in real estate you need to get comfortable writing contracts and using them to secure properties. Once you have a property under contract you control the deal. Today David and Mike discuss using contracts in Wholesale Real Estate.
Mike: Alright guys, welcome back. Thanks for tuning in. This is Mike Slane, we’ve got David Dodge remote today. Dave where are you, man? Fill us in.
David: Hey Mike, good morning, man, I am in Park City, Utah with the wise.
David: We just-- we’re actually heading here back shortly, back to the St Louis area, but we came out for a short little trip, and we’ve been having a lot of fun. So I’m happy to hop on this call, but all in all, yeah, we are having a lot of fun, Park City.
Mike: Great, man, great. No we’re glad you are able to give a sneak little vacation in, and happy to have you coming back here pretty soon. You know, the office isn’t the same without the old ‘Dodgrin’ in here, so we’re looking forward to having you back. Pretty soon
David: That’s right, I am excited to get back, get to wholesaling, okay.
Mike: Yeah, well maybe won’t be so cold when you come back we’ll see. Do you know?
David: Yeah, exactly it’s pretty cold here in Park City, it’s actually snowing right now, so hopefully we will get some warmer weather.
Mike: Well right on, man. So today we’re gonna talk about contracts, or at least that was the plan, unless you have something else you really want to cover, Dave?
David: No, no, contracts is a great topic, Mike, it’s one of my favorite topics, so jump right in, man, let's a great topic
Mike: Yeah, we talk about making offers I believe-- and doing some marketing. So let’s talk a little bit, recapping what is wholesaling? Well first off I guess, let’s welcome our newest partner, trainee academy member, we’ve got-- we won’t put the last name on there, but thank you so much for joining, we look forward to working with you. And if you guys--.
David: Yeah, Jim, I’ve just emailed Jim. Did u see that?
Mike:I did, I did, actually my email failed and I just got an error response, so I’m just glad you jumped in and did that.
David: No problem.
Mike: So the training academy, if you’re not familiar with it guys, is where we do all our training for our students and again, Jim just signed up, so we’re really lucky to have him in it, and hopefully we will able to accelerate his investing career real quickly.
Mike: What is wholesaling real quick, a quick summary for you guys. Wholesaling is buying a property at a great price, and by buying we really mean putting it under contract, you may or may not close on it. You’re more than likely are going to assign that contract, that interest to someone else for a quick price, and end buyer, and you’re gonna make a spread in-between. So wholesaling essentially is buying properties, and then reselling them, buying properties, assigning them to an end buyer to make a spread. So essentially your business is marketing, your product is a house, and that is your inventory as well, so you gotta look at your houses as your inventory and you need to have something in your inventory to sell to make a profit. So how do you get inventory? You use a contract. In real estate, you have to put-- in the US anyway, you have to have a written-- I believe you have to have a written agreement to purchase a property. Dave, you know I’m 99% sure it has to be in the writing to be a formal--.
David: Yeah I mean if you re trying to purchase it through a title company, absolutely.
Mike: Yea, I think--.
David: I would just go yeah, every time.
Mike: Yeah I’m pretty sure to be a valid contract it has to be in writing, signed by both parties, and you have to have something of value stated or held for, so basically you have enough money. So that’s kinda the three elements to make a contract valid, I believe, don’t quote me, again I’m not an attorney, but those are really the three things about a contract. Now if you follow us in the past, you know we always push everyone to go check out our free wholesale course and in that, Dave, we’ve got a simple one-page contract, that we had used to when we put the course together, and we still use a very very similar one, the thing about the contracts is-- especially when you’re writing it, is you download it from our free course, you can download it there and you can edit it. We give you the word.doc version and we’ve done the same, so it evolves over time with your business. We--Dave you just recently had another little interesting thing to throw into our listed properties contract.
David: That’s right
Mike: So it’s constantly evolving and it’s not something that is ever going to be perfect, if you wanted to do your own due diligence, have an attorney review, you can do that. But again, it’s usually-- it doesn’t really matter that much. I mean long story short, you just need to get something in writing that states you’re wanting to purchase a property at this address, you’re willing to pay this many dollars, and go from there, right? I mean what are your views on it, Dave? I mean it’s-- we know-- we’ve used these special sales in the past, extensively on some of our listed property offers, and we still do to this day. But when you are out there on the field, it doesn’t always make sense to use one of the board forms with them, right?
David: Yup, exactly exactly
Mike: Yeah, so, and why? So the board forms, and I refer to board forms meaning the St Louis-- here in St Louis-- so the St Louis Association of realtors has their forms I’m a member, I have a realtor license, so again, we can use those forms but they are long, they are somewhat confusing sometimes. So just the special sales contract alone is six pages long, so we don’t always use that contract, we just use a one-page contract. So again, that’s kind of what we like to do, it’s just-- it really depends, depends on the situation so-- let’s talk about how do you get stuff under contract, Dave? What’s your--.
David: Before you can go there Michael, let’s back up for just a second.
David: I wanna talk a little bit about-- can you hear me okay first and foremost? I’ve got my headphones in.
Mike: I can hear you just fine, can you hear me?
David: I can hear you great, okay, so controlling properties via contract, there are a couple of basic items that I wanna touch on with the contract, and then we can jump into what you’re saying, like how we use our contracts, and then last but not least I want to talk about CYA clauses.
Mike: Love it.
David: But there’s really only a couple basic items that you need to actually have a contract, for it to be a legal contract. So as Mike mention, in the beginning, it needs to be writing, it needs to be written, okay? But other than that there’s only I’d say, one, two, three, four, five, six, seven, eight-- probably eight or nine things that need to be in the contract. So the first thing is you need to have the date, you need to have today’s date. The second thing is you want to have the buyer's name and address. Now some contracts will have the property address only, which is totally fine, sometimes they will have the mailing address as well, but the mailing address isn’t necessarily required it’s just the actual property address. Last-- next will be the seller’s name and address, with the first part being the buyer’s name and address, then the seller’s name and address. The property address which is being purchased, we covered that before, and then the amount that you are going to be paying for the property. So this is actually the purchase price or also known as the sales price of the property. And then you would wanna have-- consideration for the agreement, this is also known as the earnest money. In order for a contract to be legal, and or better word would be enforceable, you have to have what is called the cause of consideration again, it is also known as earnest money. You need to have those written in the contract. An acceptance period for the contract is highly recommended, I don’t know if that is actually a requirement to make the contract legal, but we always add an acceptance period into our contract
And then the last two things would be the inspection period, which is basically just the amount of time you want to inspect or do what we would call due diligence on the property. And then last but not least would be the closing date and location. Again, these are the things that are needed for a contract to be not only legal but enforceable, so let's review real quick. You wanna have the date, you are filling out the contracts, you want to have today’s date, you wanna have the buyer’s name and address and the seller’s name and address, property address that is being purchased, and that will be known as the property address, whereas the seller’s name and address may be their mailing address, they may not live there The amount you’re paying for the property, consideration which is also known as earnest money, an acceptance period, they might not necessarily required but highly recommend, and then the inspection period. There is a difference between the inspection period and the acceptance period. The acceptance period basically means that I’m going to send somebody a contract, I want them to either accept that contract, counter that contract, or decline that contract within a certain amount of time. Typically, Mike, when you send out a contract, it can be anywhere from a week to acceptance, up to maybe two or three months for acceptance. But again, we really want to have that acceptance period in there, because if we don’t, that contract, in theory, could be valid for-- forever, so we really want to make sure the acceptance period in there. Next is the inspection period. This is just the amount of time that you are going to use to inspect the property, show the property if you are wholesaling it. But officially what you’re doing with an inspection here, is you are doing your due diligence. We’ve done a whole call on due diligence in the past, but due diligence is basically making sure everything-- and you are agreeing to-- makes sense to you.
Last but not least, closing date and [00:11:21.14 - inaudible]. You want to make it clear-- when you plan to close this property and where. Are you going to be using an attorney? Are you going to be using a title company? We will typically pick the title company that we want to use for the seller or buyer, depending on which type of deal we’re doing. We can easily amend that or change it. But ideally, you want to make it easy for the other party. So you want to put, hey, we’re going to close at this time and at this date, at this location.
So those are really the main principles, or I guess key points that you want to have in your contract. A, to make the contract legal and enforceable, but B, just kind of clarify and identify all the things that are important. So those are the main things, Mike, did I miss anything?
Mike: No, that’s great. I’m glad you went through that, and some of the things I’ll just touch on. David mentioned sometimes you’ll put up the address or the home address or mailing address of the buyer, and the reason you wanna do that and the reason you do include it, it makes it easier for the title company, because they’re gonna need that information to mail the deed and other documents. So all this stuff there’s a reason for each piece of it in the contract as David mentioned, and it all makes sense. The other thing I wanna touch on that you mentioned was the acceptance period, the importance of that. So you wanna do that on your buy-side and your sell-side for a couple of reasons. One, if you buy, if you’re making an offer to purchase a property like Dave said, your contract could be good forever, and quite frankly if you got-- let’s just say realistically, you’ve got $250,000 and you make an offer for a $200,000 house, well if your offer is good forever, you may spend that money on another house, you may not want to buy that one, there has to be an end period on that.
David: That’s a really good point, Mike, that’s a really good point, absolutely. So then let's jump into some of the contingency clauses that we actually use in our own contracts. So the contingency clauses that I like the best, there’s really probably two that are my absolute favorites, but there are tons of them that we can use, and you know that we instruct our students to use. My absolute favorite is subject-to partners approval, and this is one that I actually learned from a coach that I hire three or four years ago, and he loved this one, and I also love this one because who’s to say who your partner is, and he used to always joke that his partner was a cat. So like how getting approval from your cat might be pretty difficult, but at the same time you can always say, hey partner approved you. So basically it gives you a back door or an exit to not have to perform on that contract. So subject-to my partner’s approval, or just subject-to partner approval. Again, it’s just kinda like a really vague statement that just says, I need to make sure that my partner, and as a wholesaler that can be your cash buyer, it can be a JB partner, it can be anybody really. But ideally, it would be your cash buyer if they are going to approve this deal. So again, it kinda gives you an exit. So contingency clauses are what we are talking about, CYA, means cover your ass, and we always have multiple of these contingency clauses in our agreements. Again, if we can’t perform for any reason, we want to prevent our self getting sued or having to litigate on these particular contracts. So again, subject-to partner’s approval is probably one of my favorites. Another one that I really, really like is the subject-to evaluation of the buyer. This one is actually very similar to another one that we use, which is subject-to verifying taxes, title, and value, okay? Those kinds of go hand in hand, okay? Subject-to verifying taxes, title, and value, or subject-to evaluation of the buyer. So why is this a good one? Why do I like it so much? Well, evaluation is kind of an opinion, it's something that doesn't necessarily-- it's not black and white. Me as the buyer in a wholesale transaction, it's subject-to evaluation of the buyer, or subject-to verifying taxes, title, and value. Well, guess what? Verifying taxes is very easy. You can go to your local online county website, and you can see what those taxes are, if they have been paid. Same thing with the title. Send the information to the title company, and they are going to verify with you if the title is clean or not, okay? So those two things are very black and white. However, value is not. Value is kind of like in the eye of the beholder, it's something that everybody is going to have a little bit of a different opinion on. It is basically an opinion, okay? So by verifying taxes, title and value, and or subject-to evaluation of the buyer, at anytime I can say, you know what? I think this property is worth less than I have offered, therefore the value of the evaluation of it is not in line, and I am going to exit the deal. Again, it is totally legal to do so, but you want to make sure you have the CYA clauses in your agreement. So therefore if something were to turn back or go sour or for whatever reason. You are on the hook to purchase that property. Always want to have some of these CYA clauses, another way to describe them would be your contingency clauses, okay? A couple more would be subject to acceptable appraisal if they are going to go that route. You could also do a subject-to final walkthrough on the day of closing, or a day or two prior to closing. It could be subject-to financing, it could be subject-to appraisal; I think I said that one. It could be subject to the partner's approval which we talked about. Then-- but really it could be anything that you want. Subject-to blank, you fill in, okay? But ideally, you want to make that blank that you are adding in there, something vague word, and or a word that demonstrates opinion not fact. If it's fact, you may be stuck. Whereas an opinion, like partner's approval or value, those two things-- it's truly impossible for me to say this is the value of it, and you to agree every single time, 100% of the time. People are always going to have a little bit of a different idea of what a value is, okay?
Mike: We really liked that one, and Dave, I am going to kind of interject here.
Mike: So the CYA’s or whatever it’s not a big deal, and it’s kinda-- it’s similar to how a typical residential real estate transaction takes-- happens as well. So when you’re buying a primer house, or a regular person is buying a primer residence, they write a contract, but there are all sorts of contingencies in those contracts built-in, most common one is subject-to the financing. There is a financing contingency that says, if I can’t get this loan at this rate, I’m not gonna buy it.
David: I’m not gonna buy it, or appraisal, you are absolutely right, Mike.
Mike: Subject-to appraisal the property has to appraise at a certain price, and the appraisal just like Dave was talking about, is one person’s opinion of value. Now again, they’re an expert in the field, and they’ve done a lot of research, but again, it’s an opinion of the value of that appraiser for that bank or independently of that bank rather.
Mike: And then there’s other special agreement, even in the special sales contract we use here in Missouri, there’s a space where you add on an inspection writer., and in that inspection writer you kind of state exactly what you are gonna do. Your plan is to inspect that property. So this is all very common in real estate. This is nothing that is outside of the norm when you are writing up a contract, this is very standard stuff to have contingencies in there to help to CYA essentially.
Mike: Dave, have you have anything else to add otherwise I would jump into--.
David: Yeah, I have a couple here, Mike. One thing that I harp on, and Mike. you are gonna agree on this immediately, I always try to use business days when I am doing an inspection. Here is why.
Mike: When you are right you are right.
David: Why would I wanna use business days over days, well here it is precisely why: whenever I’m saying that I want to put an inspection period into a contract, which almost every contract we write has an inspection period in it, and if I ask the seller for ten days and they say, yes no problem, well what I am gonna do is when I send them a contract, I am going send them a contract that says I need ten business days. Business days are Monday through Friday and do not include Saturday and Sunday. So if I state that I need ten business days, I really have 14 days, so by adding that one-word business I am actually increasing my inspection period by 40%. That is a huge huge percent, 40% okay? So if I just said ten days, well that’s just going to be ten calendar days. If I add in that one word, business, I am gonna buy myself an extra four days, because I am not counting those weekend days. So I essentially go from ten days to 14 by adding in that one simple word business. That is something you want to definitely be aware of, and sometimes people will add that word into a contract when they are buying a property from me, and I am the master, so I know, I see it and depending on if I like the person or if I don’t care the time frame, is too short or too long, I will let it go. But other times somebody might ask for 20 business days and that’s a big difference between 20 days. I mean you are talking about eight or nine more days added to that inspection period, so I may or may not allow them, remember I am the one receiving the contract, I am the one sending the contract always, almost 100% of the time, 99% of the time we add business in there because again it buy you a few more days.
Mike: Yeah that’s great--.
David: Mike let’s talk a little bit about the sales side, CYA clause, subject-to-seller successful acquisition. You wanna dive into that real quick?
Mike: Oh excellent one, excellent one! Yes since we are wholesaling, we are buying a property, and then we are re-selling it, oftentimes before we actually close on it. You are agreeing on your sale side to sell a property that you don’t necessarily own yet. So you can kind of get yourself in trouble. If someone really wanted to be-- you know, a stickler with you, I mean that kind of opinion, they could take you to court for failure to perform. If they put up earnest money, and have money invested in this deal, or at least they think they do, they can-- again, they could sue you for failure to perform so you--.
David: They could--.
Mike: Exactly. So you want to make sure-- or at least we do, to put in all of our BC side contracts, all of our sales contracts, I will say one more time is, subject-to sellers successful acquisition. So it means, this whole contract is contingent on the fact that we are able to buy the property that we’ve named in the contract.
Mike: Letting our end buyer know that we are buying this property and that we may not be able to buy it. We are trying to buy it obviously, and we want to sell it to you or agreeing to sell it to you, but if we cannot buy it, we cannot sell it to you. So that’s the-- so again it is very important, at least we’ve deemed very important to put that in the contract.
David: Absolutely, absolutely. So why is that so important? I kind of just want to talk about it for a couple more minutes here-- so why is it so important? Well, Mike and I, we run a wholesaling business, we also do a lot of rehabs, we also buy a lot of rentals. But when we are wholesaling a deal, most of the time-- sometimes we will have to close on that property and that particular CYA clause is irrelevant, but if we are wholesaling a deal and we double close it, okay? So we have signed the contract it doesn’t really matter because the person that is the signee, meaning the guy that step in and take over, they basically become the new buyer on the contact. So if that AD contract, or that original contract falls apart, well they can’t perform, so there is really no reason for them to have any problem with us. However, if we are double closing this contract, this deal let’s say, and we go out and we get a property under contract at a great price, and then we find our self a cash buyer who is willing to pay us a good price-- that’s the difference between a wholesale. Buy great, sell good, okay? And we then draft up an additional agreement or a contract with the new buyer. They are expecting us to perform, so for whatever reason if something were to happen on the AD side with us and the seller, Mike kind of mentioned this, the buyer may not know what’s going on. So we always slip into the BC contract, which is between us and the buyer, subject-to successful acquisition. Therefore anything happens between us and our seller, for any reason, we don’t have to perform on that second contract because again, subject-to us successfully acquiring first. You never re-do a wholesale that is a double close versus an assignment. We actually are acquiring that property before we sell it. It’s just sometimes at the title company, we are only really the owner of it for a couple of minutes, okay? So again on the BC side, subject to successful acquisition, and it’s a great one to be aware of, and again it’s just kind of protects you from any type of lawsuits or litigation in the event of something would have happened with the original contract with your seller. God, I love that one, that’s a good one as well. Mike, I had to switch to you over a couple of things recently let’s touch on them real quick.
David: But these are a little bit more to do with listed properties, or if you are dealing with an actual brokerage. But it doesn’t mean you can’t use them in your wholesale agreement. So one of them that [00:27:16.18 - inaudible] that we do occasionally, but we are going to start doing it on every agreement, well I’d like to, is buyer to verify everything. it’s four words guys buyer to verify everything. This is if you are the listing agent, or in the event that you are doing that type of thing, or if you are just selling it, it could be a double close situation where you are wholesaling it, right? Buyer to verify everything, or another way to word that is, buyer to do own due diligence, and then verify those things, right? Why is it important? I’m gonna tell you. If you sell somebody a property and you screw up the square footage of that property, or if you don’t disclose something that you may not even be aware of, okay? Well in the event of the buyer that buys that property has a big issue down the road, or finds out something that was not disclosed, or maybe you were incorrect on the agreement, they have some ground to stand on to come sue you for damages, okay? So if you slip into the contract, you know, buyer to verify everything or buyer to do their own due diligence and verify those items in the agreement, therefore if you make a mistake, and again most of the time these are mistakes, they are not something that happen technically on purpose, and that would be bad. But if you screw up, let’ say you are typing in a square foot and you type 2120 when it really is 2220, you are a hundred square feet off and that might have been just a typo, right? But if you put buyer to verify everything, and then they then later see that they see there was a mistake, again most of these mistakes are by accident, but it kinds of covers your butt from them coming after you because you slip in buyer to do their own due diligence or buyer to verify everything. That’s a good one to put in there, and in the event that you are selling the deal to a cash buyer. The other one that I really like, and this is one that actually like-- it really hits close to home right now, because me and my wife are rehabbing a property in the St Louis area where we live, and we are selling the home at a contract price of $208,000 thousand, okay? The buyer has an agent, so this is a retail deal, we bought this property off-market, yeah wholesale marketing, but we did not wholesale this one, we actually cherry-picked it, and that is what we really highly encourage every wholesaler to do, is to cherry-pick the best deal. You know if you were looking to build yourself a rental portfolio, or if you were looking to find a rehab, maybe you are not, maybe you are not interested in those things, but if you are, the best deals are going to be the ones that you are gonna get off-market, some of your wholesale marketing efforts. You can just cherry-pick those. Instead of going out and selling the deal, you just find somebody to help finance it, whether it be hard money lenders, could be a bank, could be your own money, whatever, and you cherry-pick those deals, okay? So back to the CYA. CYA is absolutely going to be described like this, seller not to pay commission on any of the seller concessions. So you might not understand what that means and that's okay, I am going to explain it to you. I am going to say it again now, seller not to pay commission on any seller concessions. Here's what that means. This is the perfect example, as I said, it hits close to home because we are actually dealing with that exact scenario right now, okay? Here is the scenario, we bought a house and we got a great deal on it, wholesale marketing, and we decided we wanted to rehab this home, so we cherry-picked it, okay? We brought it great, but a bunch of money into it, and it's a beautiful home, and now we are selling it. So we listed it with an agent, and a buyer's agent came in with the buyer, and wants a contract on the property. The contract has a couple of terms in it. It says they are willing to pay 208, which is what we were asking, they were willing to pay the full asking price. However, they wanted us to give them $5000 towards their closing costs and credit. This is actually very common in dealing with retail buyers because they are typically going to a bank and getting a loan. If they are getting an FHA loan, or a VA loan, or something along those lines, they may not be required to put down any money at all, or very very little. So we credit them 5k of the 208 they are willing to pay us towards closing costs and credit, that might be what they have to bring to the table. So a good buyer's agent can help their buyers essentially buy homes with no money out of pocket. Not all the time, but often.
So what that does for me though, it keeps my contract price at 208, but sometimes giving them 5,000 in closing costs and or credit, the amount of money I receive will now become 203, okay? That's only half of the process. Then they go out and get inspections done, and they [00:32:41.04 - inaudible] big 50/60/60 page report of all these little knick-knack items, and they want the seller, they want two things; they either want you to fix all that stuff, or reduce the cost of the home by X amount of dollars. That way they can go fix that stuff on their own, okay? It doesn't really matter which way you go, because even if you come out of pocket [00:33:04.10 - inaudible] repair that stuff, I would say that's less you are going to get at closing, right? Because you have spent that money. But the other scenario is you just reduce the amount of sale price by that amount, and my scenario, mine and my wife's scenario, it was about five grand. They had to do termite mediation, had to do some mud jacking, we had to do a bunch of little knick-knack stuff. So long story short, not only did we credit them 5k at closing, right? But we are also having to spend $5000 additional to get it to close. So we are essentially out ten grand. Another way to look at it is the price I am going to receive is no longer 208, it is 198. We have had to reduce the total amount by 10 thousand bucks, okay? However, I wasn't aware of this CYA clause until yesterday or the day before. Seller not to pay commission on any seller concessions. So what that means when you put that CYA clause in, is that I am willing to pay the 6% commission on the 198, that's the net I am going to receive at closing. It's close to that, not exactly. Some costs and taxes and all these other things. But that is essentially the sale price, 198. It is no longer 208, okay? But in this scenario, I am paying a 6% commission on the 208 figure. However I am never going to be receiving 208, I am going to receive 198. In this scenario, I am only going to spend an extra $600, guys? But if you do 100 transactions a year, and you save $600, that's 60 grand at the end of the year. So this is a great [00:34:55.08 - inaudible] to add into an agreement. It doesn't even have to be a retail agreement. It could be a wholesale agreement. Your buyer on the day of closing or a couple of days prior, they say, hey I just found out there are termites in the home, or that this and that is wrong. They may try to negotiate you down a little bit. But ideally, you want to pay your commission, your marketing fee, or whatever that is based on the net number, not the gross number. does that make sense, Mike? Did I do a good job of explaining that?
Mike: Yeah, man, you always do. I love it, and it is a very kind of high level--.
David: That one is a little more advanced.
Mike: Yeah but it's really important, it really is. If you rehab houses, that's a huge, huge tip right there. It can be a lot of money. Again, if you do a bigger house, 500,000, and there is a 50,000 swing in the price versus the final actual payout to you, that is a ton of commission money too.
David: 450,000 times .03 is-- 13,500. If you are trying to talk about a difference of 50,000 times .03, we are talking 1500 you are saving yourself that you would be paying in commission to the buyer's agent that you are no longer having to do, because you have had to come down on your price. Very high level like you said, Mike, but also a great little gold nugget in there, it is, it's a good one.
Mike: Yeah I like it, man. So let's swing back around to wholesale real quick and touch on contracts a little bit more. We have covered the CYA clauses pretty good I believe. I want to talk about the difference between-- when you want to double close, and when you want to assign a deal, and what is the right strategy for someone. So I will start, I will say double closing-- and we have talked about this, so let's just describe it first I guess. Double closing is actually when you go and you have an AB agreement, we call it the AB side of the contract. So you have purchased the property from your seller, and you actually close on that property and you take title to it. Most likely the same day you have got your BC, your sale side contract lined up, and you actually close on that as well. So you are going to go to the title company, you are going to sign paperwork to buy it, you are going to sign the paperwork to sell it. So there is a double closing happening, there is one AB side with your seller, and one BC side closing with your end buyer. So that is a double close. So when would you want to do that? We like to do it-- it's kind of our default around here. We use kind of a benchmark of about $5000 when the spread is less-- or more than $5000, we usually want to do a double close. People in other markets will kind of laugh at that because it seems pretty low to them. They say, oh ten thousand is kind of the threshold.
David: [00:38:06.15 - inaudible] but again, it kind of varies.
Mike: It really depends on the property. Here in St Louis, if we are talking about a property that we are buying for 15,000 or 20,000, or 50,000. Five, ten, fifteen thousand dollar assignment fee on top of a 50,000 house. That's a huge percentage of it, and your buyer might kind of balk at that. So again, that is why we do double closes at smaller numbers. It really just depends on the deal and the comfort level is my opinion with your end buyer.
So assignment, let's talk real quick about an assignment, I will describe that. The assignment, very similar to the AB side. You go out, you find that property, you put a contract under your AB contract, you are buying that property from the seller. But then what happens on your sales side, instead of signing a sales contract, you would sign and assignment agreement. So you are taking your interest in your AB contract, and you are signing it over to the buyer. So you are actually stepping out as the buyer, and someone is replacing you as the buyer in that contract. You say, why would you do that? Well because they are going to pay you for that assignment, for that right. They are basically going to pay you that assignment fee. When would you want to do that? Again, we say if it's under a certain dollar amount, around 5000 or so around here. Or if you are very comfortable with the buyer. If they say, if they have been buying properties from you multiple times, and they really just don't care, they just want the property and they don't really care. They say that price is great, we don't care how much you're making, then you can assign it to them. So what are the benefits of doing that assignment versus the double close? You don't actually have to pay for all the closing costs. So if you are selling a property-- let's say you bought it for 100,000, and you assign or sell it for 110. Well if you do the double closing, you are going to have to pay closing costs on both sides of that, and that's going to eat into your profits. So from that 110,000 sale side, you have to pay the closing, you have to pay the buy-side closing. You make walk away with only 9,000, 8,000, depending on how much your title charges cost. If you just did an assignment, where I have my $100,000 house and I just assign it to my end buyer for $10,000. They are bringing $110,000 to the table still, they are happy, the same deal they had before. But you are walking with $10,000 instead of $9,000. Because again, they are just paying you the $10,000 right off the top. There is no closing that you have to pay. So again, it is really up to you when and how you use those in your business. We can kind of give you guidelines on what we do. Dave, do you want to add anything on double close?
David: No, Mike, I think you absolutely nailed it. I would say one other thing to add to that though, there are advantages to both. So-- if you were trying to make your business bankable, okay? There is an advantage to doing a double close. The reason is, you can then account for the income of the total sale price towards your actual financials. Again, [00:41:31.22 - inaudible], but if you are trying to build your business and become bankable, double closing may be a better option for you. If you are also in a good relationship with your buyer, and your buyer doesn't care that you are making 20 or 30 grand off a wholesale deal. In that case, give yourself a little extra $100 or a couple of thousand bucks [00:42:03.06 - inaudible]. Again, there are multiple reasons why you want to do one or the other. But both of them will get deals though, and that's what's important. [00:42:14.26 - inaudible] the other, [00:42:20.01 - inaudible] because they will both get the job done, that's what matters. You want to make sure you get paid, you can [00:42:32.23 - inaudible] the seller.
Mike: Dave I love it. You are starting to cut out, so I am going to go ahead and wrap up the call here. Alright, thanks, Dave, your phone was cutting out there, so we are going to go ahead and wrap up the podcast for this week. Again to recap what Dave was saying, the assignment and the double close-- so if you couldn't hear his audio, there are advantages to both, but it really doesn't matter. Get out there and start doing the business, get the properties under contract so you can start marketing and selling those properties. It really does not matter if you are going to try to do the BC or the assignment. The most important thing is to go out there and find a good deal, get it under contract, and go make some money. Alright guys, thanks for listening to the Discount Property Investor Podcast, we will talk to you guys next week.