«How to Control Houses Without Owning Them Now that you know how to connect yourself to motivated sellers, you know how to handle voicemail scripts ...»
How to Control Houses Without Owning Them
Now that you know how to connect yourself to motivated sellers, you know how to
handle voicemail scripts and calling them back, determining value and repairs, I’m going
to talk to you about how to handle the documentation side.
When I first started wholesaling, nobody taught me how to handle the documentation
side, and I got confused. Without some coaching and without some help, it took me a
long time to get it down really good.
The key to the whole documentation thing is you have to think of yourself as a wholesaler who’s going to control equity and properties without formally owning them.
That’s really a wholesaler’s dream come true. That’s why I’m excited to bring you this segment of training on how to control houses without owning them.
Now, there are two ways to do it, and I have two very simple contracts for you. Ooh, did I say contracts? That makes some of you cringe, and I know that’s true. So if you’re someone who cringes under the word contract, just raise your hand and smile.
It’s okay. I’ve been there, myself. But I’m going to make it very simple because my option contract is one page and my buyer with a parachute contract is only a page and a half. I’ve simplified it, made it super easy for you to understand and present to a motivated seller.
Control without ownership is like putting two pieces of a puzzle together. You have a motivated seller on the right that has a house. Look at the graphic. You’re the wholesaler on the left. You have the ability to solve his problem.
We’re going to pull these two pieces together and form some documentation that’s very simple and very easy, so that the two of you can work together, so that your pieces of the puzzle interlock, just like the ones in the graphic.
When I use the word option contract, a lot of people get nervous, like the girl here with the clipboard. She’s a little nervous because she said, “What the heck is an option contract? All I know how to do is buy a house or maybe sell a house. But I don’t know how an option relates to real estate.” An option gives you the contractual and legal right to buy a house but not the obligation to buy the house. Isn’t that a cool thing? So You have a right to buy, but you’re legally not obligated to buy unless you exercise your right. That is the whole key to wholesaling.
There are some other neat things about option contracts, and I’m going to go through my one-page contract with you in a minute. One is the strike price. The strike price is just the price that you and the owner of the house agree that you can buy the house for.
Finally the option consideration is like an earnest money deposit. It’s cheap, and it gives you the equitable interest in that house. So think of option consideration as a small amount of money from you to the seller and will give you a ratified contract.
I said that the option contract gives you control without ownership--that’s really the best of both worlds. It will give you an equitable interest legally in that property. That legal equitable interest in the house, gives you the right to market the property without being a licensed real estate agent.
Anybody in America can buy and sell a house without an agent if it’s your own house.
The first house my wife and I bought, we sold on our own without a Realtor. I was able to sell it because I owned it. I didn’t use a Realtor at all. I just sold it on my own. And that is a beautiful thing.
The question is, how can you do that as a wholesaler? You need the right to market it.
And the way that you have the right to market it is that you gain equitable interest in the house. An option contract is one of the two ways that I’m going to show you how to do that.
Once you have the option contract, you can market it, you can sell it, you can assign it, and you can make money on the deal. That’s the bottom line. You can make your $5,000 to $50,000.
The really nice thing about an option contract is that it’s truly 100% risk free. The only thing you have to potentially lose is your option consideration. Your option consideration is like your deposit on the contract. I would encourage you to give the seller between $10 to $50 for doing that. And that’s your only loss--that and some time.
You have the legal interest in the property with this option contract, so it’s completely risk free and it’s the way to go. When you do find your buyer, you have some ways to resell the property. You can just write up a standard purchase contract. You can also do an assignment, or you could sell your option. You have three ways to work with your end buyer.
I want to go through some of the terminology in the option contract, so people don’t get confused. These legal terms, I don’t know why they make them so hard for beginning wholesalers, but everybody gets confused here, so pay attention.
The optionor. See how it ends in “or”? “Or” indicates that is the person who is giving something away. So in this case, the optionor is the motivated seller who’s going to give his equitable interest away.
The optionee is the person receiving something. So if you see something that ends in “ee,” that means that person is receiving something. That person in this case is you because you’re the wholesaler.
So the optionor is the motivate seller. He’s giving away the equitable interest in his house. And the optionee is you as the wholesaler because you’re receiving that equitable interest.
Here’s the simple contract right here. I’m going to go through this in pretty good detail with you. There are only ten paragraphs, and it fits on one page. It’s downloadable, so it’s very easy. Just to refresh your memory on who the optionor and who the optionee are.
The optionor, number one there, is the owner of the property. I wrote that right in there, so you don’t have to really even remember it, to try to make it easy for you. That’s the motivated seller.
The optionee is the person who holds the option to buy the property. That’s you as the wholesaler. Number one, you would write the name of the seller in the blank line. So, motivated seller goes there. Number two, Jim the wholesaler, referred to as optionee, holds the option to buy the property.
“The following terms are applicable to this agreement.” This says the optionor agrees to grant an option to purchase to the optionee, the property located at – so this defines the address and the legal description of the property. The optionor, again, is the owner of the property. He is granting an option to purchase the property to you as the wholesaler.
Now I’m going to skip down to number three, but let me handle number two really quick.
It says the optionor agrees that he shall not attempt to enter into any other negotiations for the sale of this property.
You don’t want to create an option contract and then the owner of the property goes out and sells the house to somebody else. Number two takes care of that concern, okay? He can’t legally do that with the terminology I put in number two. So that constrains the owner of the property to deal only with you during this option period.
Number three. Upon agreement, this option would begin on the date of and end on the date of – now, that’s pretty self-explanatory, isn’t it?
So if it’s February 1st, then beginning date is February 1st. What’s the end date? Well, the end date is whatever you and the seller agree to, but I would encourage you to get at least 45 days if you can, and 30 days is the minimum.
Let’s say the end date will be March 15th. Your beginning date is today. Say it’s February 1st and the end date is March 15th. That gives you six weeks to go out and find an end buyer for that property, wholesale it to them, and get it closed.
Now I’ve got a nice little clause in here that will help you out a little bit. If you’re nearing the end of that 30 or 45 days, I’ve got an extension built into this option contract for you.
It says, “This option to purchase agreement will automatically extend for ____ days.” Write in there as many days as you can work out with the seller of the property--at least 15, maybe 30, whatever you can get. That will give you between six weeks on the initial and then another two to four weeks at the end and give you a little additional time to find an end buyer in case you’re struggling with that.
Now the purchase price will be blank. You handwrite out whatever the price is. Say it’s $35,000. You write out all the words, thirty-five thousand dollars and then where there’s a dollar sign, you write $35,000.
It’s payable by wire or certified check upon settlement. That makes your motivated seller feel confident. That’s important terminology, and you need to go over that with them and say, “Mr. Motivated Seller, when we close on this property at the end of the option period, you will receive all your money by check, certified check, or a wire.” And you maybe want to say, “Which would you prefer?” because that gets them thinking about this is really happening, I’m really going to collect this money in this amount of time working with Jim, the wholesaler.” It’s important to set expectations and make them feel comfortable and confident when you go through this contract with them.
Now the optionor grants the optionee access to the above property. Why is that important? Well, you need to be able to get your end buyers into that house, and this is the clause that does it.
So it says, “The optionor grants the optionee access to the above property for showing to prospective partners, buyers, contractors and appraisers, along with the right to put signage in the yard advertising the property for sale.” That’s pretty upfront, isn’t it?
That’s an important clause to have in there. You have to be able to get people into and out of the house. I recommend you bring a lock box with you. You can pick them up Lowe’s or Home Depot. You know, the little ones with the combination.
Create an easy to remember combination, put the lockbox on the front door with the key in it. Tell the owner of the house the combo, so he feels good about it. Let him know that nobody’s going to go into the house without you present anyway, but you have to be able to bring your partners and contractors and people like that into the property.
As a reminder to the owner, number six says, “The owner of the house needs to maintain his insurance. If the optionee purchases the property, the Option E will pay up to ______ closing cost for the optionor.” Here I would recommend that you tell him, “Hey, I’ll pay for half of your closing costs.” That will make them feel good as well.
Now the optionor grants this option for the legal consideration of $25. You can handwrite in there any number you want, just make sure you bring that much money in your wallet.
Give it to the seller and let him know that’s his. He can go buy some pizza or whatever he wants with it.
If after the option expiration date, the optionee does not exercise the option to buy the property, the optionor will release the optionee of all rights and responsibilities in this agreement.
That means if you get to the end of the date that you had written in number three, and you get to the end of the extension, and you have not resold the property and gone to closing with it, you’re not going to exercise your option to buy the property.
The optionor, the seller, will release you, the optionee, of all your rights and responsibilities. That is super critical because that gets you out of this contract, just like your parachute?
We want to do wholesale deals that are risk free. This option contract and specifically this number nine makes it risk-free for you. Make sure that the optionor, the owner of the house signs below number ten there. And you as Jim, the wholesaler, signs as the optionee. Date it and you’re good to go.
Now, was that hard? I hope not. Now, the other way you can do it, if you’re really not comfortable with an option contract – option contract is the best – I’m going to give you a second one.
I call this buying houses with a parachute because, in this case, you have a dollar sign handcuffed to your leg, and you’re so close to getting it, but you have to get the owner under contract, and this might be easier way for you to do it.