Here at Finance , we've worked with hundreds of wholesalers in the last 17 years; very often, these have been people who wanted to go out there and build their initial investment foundation through wholesaling real estate. If you're not already familiar with this it, here is what wholesaling is in a nutshell.
When you're performing a wholesaling transaction, remember that first, you’re not buying the property yourself. Instead, what you’re doing is tying the property up and giving yourself the right to close on it, but you aren’t going to close. You're going to instead transfer that contract over to a different investor who moves in and assume your spot.
Let’s say you spend a ton of time and energy looking for properties and potential deals that you can tie up using this method. Naturally, somewhere along the line, you’re going to want to see some compensation for those efforts. This opportunity arrives when transferring over a contract to another interested investor. There’s no point in giving it away for free; instead, you will charge for it. A typical wholesaling transaction then will look like this - first, you find a house at a steep discount and tie it up under contract. Next, you find an investor who is interested in the property because you have already tied it up, and would like to close on it him or herself.
Because you’ve tied this property up under contract, that agreement gives you the exclusive right to close on it. Instead of doing that, though, you will transfer that contract over to the investor in question. In exchange for that transfer, said investor will pay you a specific fee for your time and efforts. That’s your primary wholesale deal. You aren’t buying a property yourself; you’re securing the right to close on one and then transferring that right to close to another party for payment. Plenty of real estate investors enter into the business through wholesaling as a means to get their foot in the door and begin accruing capital. However, many of them make mistakes when approaching the process.
Often these mistakes happen because first-time wholesalers attend seminars or talk to friends who’ve also done it and receive advice that’s, usually, only partially accurate. Most of the time, they collect information that’s not pertinent to what their actual goals are and don’t anticipate potential problems from using these incorrect strategies. For example, say you structure a wholesale deal incorrectly and can be held personally liable as a result. It can and does happen.
One of the first things you have to do when entering real estate wholesaling is grasp how to structure a deal such that you don’t invite any personal liability. For example, did you know that when you enter into a contract with someone, they may, in turn, prohibit you from assigning it later? If that happens, then you are stopped cold in setting up the wholesaling transaction, the overall deal falls through, and you lose out on making money because the seller refused the assignment. These kinds of problems are unfortunately common in wholesaling property because people aren’t aware of them until they’re already involved in a potential transaction. It falls apart for whatever reason, and they are educated at a significant cost of money.
That’s why we want to show you a way to devise a wholesale deal, such that you protect yourself from liability in case the seller tries to sue you individually, and you can complete the transaction to another investor without anyone else blocking it. The way you complete this process is through structuring. Here at Finance , much of our work is done specifically with real estate investors. We share with them cutting-edge strategies to use, after developing and testing them ourselves to ensure they work well for the real estate investing world as a whole.
The first reason why we know our strategies work is because we are real estate investors ourselves. Our knowledge has been gained not only through personal investment but also through working with thousands of clients over the past 17 years. Second, it’s important that when operating in this particular field, you surround yourself with knowledgeable professionals who can help you succeed.
That means working with people who are both legally and financially minded like attorneys, CPAs, and financial planners. What differentiates us from everyone else is bringing all these people under one company, a team of attorneys, CPAs, and financial planners that, working together, can focus on clients synergistically to maximize their potential benefits and ensure that they end the day with more money than before.
At the end of the day, that’s the biggest goal we help clients accomplish - building a better financial future for themselves. What does that mean? We have more freedom to do exactly what we want and can leave our children financially secure. The biggest roadblocks you can hit along the way when doing real estate wholesaling is not having either the proper structures in place or following the wrong advice. All too often, these blocks lead to liability exposure.
For example, this predicament happened to one of our clients. This client had entered into a transaction to buy six pieces of property from a seller. Now to take the deal down, she needed to find a gap funder because she didn't have all of the necessary funding. She needed $70,000 from a gap funder to buy those six properties from the seller because that's how much she was missing.
This client then entered into an agreement with another party who agreed to loan her the $70,000. Unfortunately, less than a week away from closing, the gap funder backs out. He says, "I can't lend you the money. It’s all tied up. I didn't get out of this deal right now, so I can't come through for you." Unfortunately, this investor here was on contract with her seller to buy these six properties. Now you might be wondering, well, then the investor is going to lose their earnest money for the seller.
No, there's more to it than that because the investor stood to lose even more because of the agreement itself. This client sent in her copy of the purchase and sale agreement, which we reviewed for her. If you're not familiar with what Finance offers, we have this tremendous platinum service where we can speak to our clients for a very low cost of $35 a month. You can call us at any time and talk to professionals at the firm. You can get tax questions answered without being charged an hourly rate.
Our client took advantage of this service and we, in turn, reviewed the documentation for this particular deal. Unfortunately for her, there wasn't a way out of this situation because the seller was going to sue her for damages under the contracts, because of the back out. So damages were to be provided if our client didn’t close. Now, what damages might the seller have if this happened? Well, this is where liability understanding comes into play. Most newcomers don't realize it because either they haven't been around the real estate industry long enough, dealt with investors directly, or put together enough of their deals to discover how liability can spring up out of nowhere.
Well, our client’s case, her seller had agreed with his bank to short sell these six properties. In turn, the bank held off on foreclosure on condition that he could close that deal. He needed to sell that property next week to keep the bank off him. The problem now though was our client backing out because of her gap funder situation. The seller was understandably upset because he was going to suffer damages as a result of her breach of that agreement. In turn, he told her straight up, "I'm going to sue you for damages because you can’t close." What happened here that put our client in a position where they now become personally liable? Simple - it's because she put the agreement together under her name.
Never put a contract together in your own name. You always want to have an entity that stands between you and the property seller. So what’s the best entity to use in this situation? What you should do is create a C corporation to cover you. There are many tax reasons why you want to have a C corporation as a wholesaler, which we won’t get into at this time. We dive in-depth on those topics at our various live events we host throughout the year, teaching attendees different strategies on how to reduce their taxes.
One of the primary entities that we focus on is C corporations because of how beneficial they can be for you. In contrast, many CPAs downplay the importance and the benefits of C corporations because frankly, they don't understand them and the benefits that they can provide. Let’s say you enter into a similar agreement as mentioned before. However, instead of signing in your name, you sign on behalf of your corporation. Now, this contract is between your C corporation and the seller. If things go bad, the only person the seller can hold liable and sue is the corporation.
They can sue the corporation, but they can't sue you personally. By just using a C corporation and not signing agreements under your name, you’ve already limited your liability. Now, the second issue you have in this transaction here is how do we set it up if we're planning to wholesale properties to assign the contract to someone else? Now, what you'll find in many situations is that when you enter into this type of an agreement where you're planning to assign the agreement over to a different investor so that your corporation can get paid, you could run into a problem. You could run into a seller who, seeing a rise in said property’s value, doesn’t want to honor the assignment.
One way they can do this is inserting language into the agreement that states the contract itself is not assignable. In such a case, if you don’t close on the deal, they get to keep your earnest money and then can sell the property to a different buyer perhaps at a better price so that they can profit off of the sale and your earnest money. That’s one normal circumstance you can potentially face. Another one is if you're dealing with HUD to find potential properties. HUD generally will not allow you to assign your contracts. Let’s say then that you find great deals via HUD and you tie them up to assign them to somebody else to close in your place. Unfortunately, that won't happen.
Another issue you can face is dealing with bank-owned REOs. We’ve had wholesaler clients run into trouble with them. Let’s say you find the property with the bank, tie it up under contract, and then want to assign it to the real investor who is interested in taking and closing it. However, the bank will not allow it because they will only close in the name of the person or the entity in which they initially entered into the agreement. These are additional problems you may face when putting together deals as a novice wholesaler.
Now, if you still want to structure a deal even though you may face those potential problems, then the only solution often is to do a “double close.” A double close means that you go ahead and buy the property. After closing it, the intended investor will then come right in and purchase the property from you. Now, what is a double close mean? It means more costs and fees involved in the overall transaction process. Guess what more costs and fees does to your profit margin? It drops it. You will likely lose more money than make money as a result because the deal wasn't set up to be both tax and income efficient.
This issue brings us to another important point. You want to have efficient deals. You want to have strategies that are relevant to your investment goals so that you can build and reach that financial freedom sooner. So what are some of those common ways that wholesalers use to accomplish that strategy or that transaction and not worry about someone stopping them from wholesaling out or preventing the assignment? Here’s a method people often use. A wholesaler puts together an LLC then has that LLC owned by their corp. The LLC will enter into the contract with the seller and then there's the investor who wants to acquire the deal.
Once the wholesaler has entered into the contract through the LLC, he or she sells the LLC itself to the investor and then the investor pays the corporation. Sounds simple, right? You create an LLC; the LLC owns the right to close, whoever then owns the LLC owns the right to close on that particular deal and becomes the investor. We’ve seen many people use this tactic in their businesses. They create tons of LLCs, put these deals together, and then assign the deal’s LLC over to the investor and think all their problems are solved.
Unfortunately, often they’ve done nothing but create problems instead of solving them. Why? Because they don’t do things correctly. They don't understand, for instance, how to set up a proper LLC. Or, for that matter, how to correctly assign the LLC to the investor to close on it. They will screw up the EIN number, and they also don't notify the IRS of the transfer of ownership. How does this happen? Let’s break down where things can go wrong. First, if you want to form an LLC to do this, first, you need to file articles of organization with the state. That formation involves both paperwork and a cost. You have to have a registered agent. That is either going to be you, which has its set of requirements you must follow for corporate compliance, or hire someone else. If you hire someone else to handle that for you, that’s more money out of pocket.
Next, you have to obtain an EIN number. You need to draft an operating agreement. At this point, you've invested a lot of time, money, and legal work in creating an entity that will enable you to buy this property. Before you’ve even put together the deal in question or seen any potential money from it, you’re already dealing with costs that have to be recouped out of profit, if you even have any. On top of that, once you’ve then sold this deal LLC to the new owner, you then have to go back into the filing process to finish the transfer correctly. You have to update the Secretary of State who the new LLC owner is, you also have to update the state with the owner as a registered agent. By the way, there are more fees attached to doing all of these new filings you have to pay.
After all that time and money spent, you’re not even through with the process. Next, you have to update the IRS on who the new company owner. You have to prepare the proper assignments to transfer the LLC over to the new member. You have to assign membership interest over as well, and so on. You have to do all of these different steps just to move this entity to this new person, and you can’t screw up any single one of them because if you do, then you could kill the transaction and maybe the new owner won't even get title insurance on the property because titles are going to ask for copies of the documents. Once they see some deficiencies in them along the way, they refuse to close or issue title on that property.
We are opposed to using LLCs for these kinds of wholesaler transactions for the very reasons just stated. We understood though that for many years there was not a better option available to many people, so this was the route they took regardless. Around four years ago, our team sat down and worked to design a better strategy for wholesalers; a strategy that would allow them to minimize costs and conduct seamless investor transfers without ringing alarms to anyone that a transfer of rights to close had been done.
After thinking about it long and hard, the solution we came up with is similar to a land trust. If you’ve never worked with one before, understand first that a land trust is set up to own real estate.
Let's assume that you have set up a land trust, and it owns real estate. The beautiful thing about having a land trust is that if you own property inside of it, then wherever the trust goes, so goes the property within. So it could go from one person to another person to an entirely separate entity, etc. If you transfer this trust to a new person, what does that require? An assignment, just one piece of paper. Something along the lines of, “ I hereby sign 100% of my beneficial interest in this trust to this person...”
However, from a public records point of view, if anybody is looking at the title to this property, all they can see is that the property is titled in this particular land trust. What they can’t see though is who actually who owns the trust or who's involved with it because that information is kept private. All they know is that the property is held in a box and where that box goes, so goes the property. All other information is hidden from public view. With that basic premise about land trusts in mind, we gathered together and thought, "How do we take this land trust strategy which already works so well for investors with residential real estate and apply it to a wholesale transaction so that those investors can reap the same benefits?"
We began to dissect the land trust structure itself, figuring out what we couldn’t allow in there, what we needed to have in there, what we could have in there, and finally what we were missing. After analyzing, debating, and restructuring, we finally arrived at a specific kind of trust that we refer to as our ‘wholesale trust’. It's our wholesale trust agreement. It has some similar characteristics to a land trust, and that is that the wholesale trust is not designed to own property itself. What the wholesale trust is designed to do instead is own the rights to a contract like this and gives you the ability to take that trust and transfer it over to a different investor. But when doing so, you do not alert the seller to the fact that you've transferred this particular trust.
The only information the seller can see is that the rights to close on this property is in the name of the trust. Beyond that, all other information is private; for instance, they have no ideas who owns the trust. All they know is that the trust is the party that's going to close on the property. Here is our process then for using a wholesale trust. First, we set up the trust itself. Next, we make the client’s corporation the trust beneficiary. Our client then is selected as the trustee of their trust, and then they go and contract with the seller under the name of the trust to buy the seller’s property. Those steps all comprise stage one.
Next, we tie the property up under contract under the name of the trust; you can come up with any name you want for this purpose. Once the property has been tied up under the trust, the next step is to find the investor then and sell them the trust. At this point, it’s the corporation that will sell them the trust and then receive the investor’s fee for that transfer. The investor then becomes both the trust owner and trustee, so he or she can then close with the seller in the trust’s name.
Since devising it, we've utilized this type of transaction very successfully to ensure that our clients can tie up properties by wholesaling them in wholesale deals and then be able to transfer the rights to close to an investor without the seller interfering at all. Banks won't balk at it, and neither will HUD. For those sellers that find people that are willing to pay more and try to back out of the agreement, they're stuck. They can't find a way out because they agreed to sell to the trust, not to a particular person, and whoever owns that trust has the right to close.
It took us several months to put this trust together. Now, here's another benefit to using our wholesale trust. What we often tell people is, "Carry a stack of them around with you. Don't just take one out. Take a whole stack of them. Have them all preprinted. Preprint them with your name as the trustee and your corporation as the trust beneficiary."
The only information we don't fill out on them is the date, the trust’s actual name, and the seller contract information. All of that information is left out until you find a deal. That way, if you go out there and find a deal that you want to put under contract, then all that’s left for you to do is pull up a new trust, fill out a name (calling it anything you want, it doesn’t matter), fill out the date, put the information in that's required for the contract and sign it; that’s it.
You've just now tied up property under a wholesale trust. Find another property that same day, just pull out another trust, and fill it out just like we described. Now, you've got another one. Let’s say you're out driving around for six hours, and during that time you've put four properties under contract, all under different trust names. All you need to do now is find investors and then transfer those trusts over to those investors so they can close on those properties. Understand that this legal instrument is something we designed from the standpoint that when you're a wholesaler, you want to make it as easy as possible to handle a potential deal.
Again, you don’t want all the unnecessary costs, laborious steps, and increased paperwork that creating all those LLCs will bring upon you. Your goals are to make sure that the seller can’t prevent the deal from occurring and ensure your investor transfer is as smooth as possible. So from a wholesaler perspective, a wholesale trust is a valuable tool to use, especially if you are just starting out and eager to start taking deals down. This process is the best way to do it today. We've tested and perfected this trust to a point where it is now the premier tool for wholesale investors.
Now, after everything you have read here about wholesaling real estate, common problems to avoid, and how to fix them, if you want more information about wholesale trusts and how they could benefit you, then all you need to do contact us here and request a free strategy session with one of our professionals. Our team then will walk you through the benefits of using the wholesale trust, tell you how you can put it together in your business now.
We will help ensure that you're taking maximum advantage of this tool when putting your wholesale deals together. Remember, as we discussed earlier, it's important to bring together the legal side, the tax side, and the financial aspect when approaching your business. We make it not only accurate, but we make it relevant so that your business and trust is set up to achieve your goals and help build a prosperous financial future for yourself and your family.
Be sure then to contact us for a free strategy session to learn more and get the process started. If you also have the time, then perhaps look at one of our upcoming live events and sign up. Again, at these seminars, we dive in-depth into these topics and have team members available for one-on-one consultations to answer all of your pressing questions and help start setting up a wholesale trust immediately.
Finance Advisor
Finance & Trading Writer
19 min read
Here at Finance , we’ve worked with hundreds of wholesalers in the last 17 years; very often, these have been people who wanted to go out there and build their initial investment foundation through wholesaling real estate. If you’re not already familiar with this it, here is what wholesaling is in a nutshell.
When you’re performing a wholesaling transaction, remember that first, you’re not buying the property yourself. Instead, what you’re doing is tying the property up and giving yourself the right to close on it, but you aren’t going to close. You’re going to instead transfer that contract over to a different investor who moves in and assume your spot.
Let’s say you spend a ton of time and energy looking for properties and potential deals that you can tie up using this method. Naturally, somewhere along the line, you’re going to want to see some compensation for those efforts. This opportunity arrives when transferring over a contract to another interested investor. There’s no point in giving it away for free; instead, you will charge for it. A typical wholesaling transaction then will look like this – first, you find a house at a steep discount and tie it up under contract. Next, you find an investor who is interested in the property because you have already tied it up, and would like to close on it him or herself.
Because you’ve tied this property up under contract, that agreement gives you the exclusive right to close on it. Instead of doing that, though, you will transfer that contract over to the investor in question. In exchange for that transfer, said investor will pay you a specific fee for your time and efforts. That’s your primary wholesale deal. You aren’t buying a property yourself; you’re securing the right to close on one and then transferring that right to close to another party for payment. Plenty of real estate investors enter into the business through wholesaling as a means to get their foot in the door and begin accruing capital. However, many of them make mistakes when approaching the process.
Often these mistakes happen because first-time wholesalers attend seminars or talk to friends who’ve also done it and receive advice that’s, usually, only partially accurate. Most of the time, they collect information that’s not pertinent to what their actual goals are and don’t anticipate potential problems from using these incorrect strategies. For example, say you structure a wholesale deal incorrectly and can be held personally liable as a result. It can and does happen.
One of the first things you have to do when entering real estate wholesaling is grasp how to structure a deal such that you don’t invite any personal liability. For example, did you know that when you enter into a contract with someone, they may, in turn, prohibit you from assigning it later? If that happens, then you are stopped cold in setting up the wholesaling transaction, the overall deal falls through, and you lose out on making money because the seller refused the assignment. These kinds of problems are unfortunately common in wholesaling property because people aren’t aware of them until they’re already involved in a potential transaction. It falls apart for whatever reason, and they are educated at a significant cost of money.
That’s why we want to show you a way to devise a wholesale deal, such that you protect yourself from liability in case the seller tries to sue you individually, and you can complete the transaction to another investor without anyone else blocking it. The way you complete this process is through structuring. Here at Finance , much of our work is done specifically with real estate investors. We share with them cutting-edge strategies to use, after developing and testing them ourselves to ensure they work well for the real estate investing world as a whole.
The first reason why we know our strategies work is because we are real estate investors ourselves. Our knowledge has been gained not only through personal investment but also through working with thousands of clients over the past 17 years. Second, it’s important that when operating in this particular field, you surround yourself with knowledgeable professionals who can help you succeed.
That means working with people who are both legally and financially minded like attorneys, CPAs, and financial planners. What differentiates us from everyone else is bringing all these people under one company, a team of attorneys, CPAs, and financial planners that, working together, can focus on clients synergistically to maximize their potential benefits and ensure that they end the day with more money than before.
At the end of the day, that’s the biggest goal we help clients accomplish – building a better financial future for themselves. What does that mean? We have more freedom to do exactly what we want and can leave our children financially secure. The biggest roadblocks you can hit along the way when doing real estate wholesaling is not having either the proper structures in place or following the wrong advice. All too often, these blocks lead to liability exposure.
For example, this predicament happened to one of our clients. This client had entered into a transaction to buy six pieces of property from a seller. Now to take the deal down, she needed to find a gap funder because she didn’t have all of the necessary funding. She needed $70,000 from a gap funder to buy those six properties from the seller because that’s how much she was missing.
This client then entered into an agreement with another party who agreed to loan her the $70,000. Unfortunately, less than a week away from closing, the gap funder backs out. He says, “I can’t lend you the money. It’s all tied up. I didn’t get out of this deal right now, so I can’t come through for you.” Unfortunately, this investor here was on contract with her seller to buy these six properties. Now you might be wondering, well, then the investor is going to lose their earnest money for the seller.
No, there’s more to it than that because the investor stood to lose even more because of the agreement itself. This client sent in her copy of the purchase and sale agreement, which we reviewed for her. If you’re not familiar with what Finance offers, we have this tremendous platinum service where we can speak to our clients for a very low cost of $35 a month. You can call us at any time and talk to professionals at the firm. You can get tax questions answered without being charged an hourly rate.
Our client took advantage of this service and we, in turn, reviewed the documentation for this particular deal. Unfortunately for her, there wasn’t a way out of this situation because the seller was going to sue her for damages under the contracts, because of the back out. So damages were to be provided if our client didn’t close. Now, what damages might the seller have if this happened? Well, this is where liability understanding comes into play. Most newcomers don’t realize it because either they haven’t been around the real estate industry long enough, dealt with investors directly, or put together enough of their deals to discover how liability can spring up out of nowhere.
Well, our client’s case, her seller had agreed with his bank to short sell these six properties. In turn, the bank held off on foreclosure on condition that he could close that deal. He needed to sell that property next week to keep the bank off him. The problem now though was our client backing out because of her gap funder situation. The seller was understandably upset because he was going to suffer damages as a result of her breach of that agreement. In turn, he told her straight up, “I’m going to sue you for damages because you can’t close.” What happened here that put our client in a position where they now become personally liable? Simple – it’s because she put the agreement together under her name.
Never put a contract together in your own name. You always want to have an entity that stands between you and the property seller. So what’s the best entity to use in this situation? What you should do is create a C corporation to cover you. There are many tax reasons why you want to have a C corporation as a wholesaler, which we won’t get into at this time. We dive in-depth on those topics at our various live events we host throughout the year, teaching attendees different strategies on how to reduce their taxes.
One of the primary entities that we focus on is C corporations because of how beneficial they can be for you. In contrast, many CPAs downplay the importance and the benefits of C corporations because frankly, they don’t understand them and the benefits that they can provide. Let’s say you enter into a similar agreement as mentioned before. However, instead of signing in your name, you sign on behalf of your corporation. Now, this contract is between your C corporation and the seller. If things go bad, the only person the seller can hold liable and sue is the corporation.
They can sue the corporation, but they can’t sue you personally. By just using a C corporation and not signing agreements under your name, you’ve already limited your liability. Now, the second issue you have in this transaction here is how do we set it up if we’re planning to wholesale properties to assign the contract to someone else? Now, what you’ll find in many situations is that when you enter into this type of an agreement where you’re planning to assign the agreement over to a different investor so that your corporation can get paid, you could run into a problem. You could run into a seller who, seeing a rise in said property’s value, doesn’t want to honor the assignment.
One way they can do this is inserting language into the agreement that states the contract itself is not assignable. In such a case, if you don’t close on the deal, they get to keep your earnest money and then can sell the property to a different buyer perhaps at a better price so that they can profit off of the sale and your earnest money. That’s one normal circumstance you can potentially face. Another one is if you’re dealing with HUD to find potential properties. HUD generally will not allow you to assign your contracts. Let’s say then that you find great deals via HUD and you tie them up to assign them to somebody else to close in your place. Unfortunately, that won’t happen.
Another issue you can face is dealing with bank-owned REOs. We’ve had wholesaler clients run into trouble with them. Let’s say you find the property with the bank, tie it up under contract, and then want to assign it to the real investor who is interested in taking and closing it. However, the bank will not allow it because they will only close in the name of the person or the entity in which they initially entered into the agreement. These are additional problems you may face when putting together deals as a novice wholesaler.
Now, if you still want to structure a deal even though you may face those potential problems, then the only solution often is to do a “double close.” A double close means that you go ahead and buy the property. After closing it, the intended investor will then come right in and purchase the property from you. Now, what is a double close mean? It means more costs and fees involved in the overall transaction process. Guess what more costs and fees does to your profit margin? It drops it. You will likely lose more money than make money as a result because the deal wasn’t set up to be both tax and income efficient.
This issue brings us to another important point. You want to have efficient deals. You want to have strategies that are relevant to your investment goals so that you can build and reach that financial freedom sooner. So what are some of those common ways that wholesalers use to accomplish that strategy or that transaction and not worry about someone stopping them from wholesaling out or preventing the assignment? Here’s a method people often use. A wholesaler puts together an LLC then has that LLC owned by their corp. The LLC will enter into the contract with the seller and then there’s the investor who wants to acquire the deal.
Once the wholesaler has entered into the contract through the LLC, he or she sells the LLC itself to the investor and then the investor pays the corporation. Sounds simple, right? You create an LLC; the LLC owns the right to close, whoever then owns the LLC owns the right to close on that particular deal and becomes the investor. We’ve seen many people use this tactic in their businesses. They create tons of LLCs, put these deals together, and then assign the deal’s LLC over to the investor and think all their problems are solved.
Unfortunately, often they’ve done nothing but create problems instead of solving them. Why? Because they don’t do things correctly. They don’t understand, for instance, how to set up a proper LLC. Or, for that matter, how to correctly assign the LLC to the investor to close on it. They will screw up the EIN number, and they also don’t notify the IRS of the transfer of ownership. How does this happen? Let’s break down where things can go wrong. First, if you want to form an LLC to do this, first, you need to file articles of organization with the state. That formation involves both paperwork and a cost. You have to have a registered agent. That is either going to be you, which has its set of requirements you must follow for corporate compliance, or hire someone else. If you hire someone else to handle that for you, that’s more money out of pocket.
Next, you have to obtain an EIN number. You need to draft an operating agreement. At this point, you’ve invested a lot of time, money, and legal work in creating an entity that will enable you to buy this property. Before you’ve even put together the deal in question or seen any potential money from it, you’re already dealing with costs that have to be recouped out of profit, if you even have any. On top of that, once you’ve then sold this deal LLC to the new owner, you then have to go back into the filing process to finish the transfer correctly. You have to update the Secretary of State who the new LLC owner is, you also have to update the state with the owner as a registered agent. By the way, there are more fees attached to doing all of these new filings you have to pay.
After all that time and money spent, you’re not even through with the process. Next, you have to update the IRS on who the new company owner. You have to prepare the proper assignments to transfer the LLC over to the new member. You have to assign membership interest over as well, and so on. You have to do all of these different steps just to move this entity to this new person, and you can’t screw up any single one of them because if you do, then you could kill the transaction and maybe the new owner won’t even get title insurance on the property because titles are going to ask for copies of the documents. Once they see some deficiencies in them along the way, they refuse to close or issue title on that property.
We are opposed to using LLCs for these kinds of wholesaler transactions for the very reasons just stated. We understood though that for many years there was not a better option available to many people, so this was the route they took regardless. Around four years ago, our team sat down and worked to design a better strategy for wholesalers; a strategy that would allow them to minimize costs and conduct seamless investor transfers without ringing alarms to anyone that a transfer of rights to close had been done.
After thinking about it long and hard, the solution we came up with is similar to a land trust. If you’ve never worked with one before, understand first that a land trust is set up to own real estate.
Let’s assume that you have set up a land trust, and it owns real estate. The beautiful thing about having a land trust is that if you own property inside of it, then wherever the trust goes, so goes the property within. So it could go from one person to another person to an entirely separate entity, etc. If you transfer this trust to a new person, what does that require? An assignment, just one piece of paper. Something along the lines of, “ I hereby sign 100% of my beneficial interest in this trust to this person…”
However, from a public records point of view, if anybody is looking at the title to this property, all they can see is that the property is titled in this particular land trust. What they can’t see though is who actually who owns the trust or who’s involved with it because that information is kept private. All they know is that the property is held in a box and where that box goes, so goes the property. All other information is hidden from public view. With that basic premise about land trusts in mind, we gathered together and thought, “How do we take this land trust strategy which already works so well for investors with residential real estate and apply it to a wholesale transaction so that those investors can reap the same benefits?”
We began to dissect the land trust structure itself, figuring out what we couldn’t allow in there, what we needed to have in there, what we could have in there, and finally what we were missing. After analyzing, debating, and restructuring, we finally arrived at a specific kind of trust that we refer to as our ‘wholesale trust’. It’s our wholesale trust agreement. It has some similar characteristics to a land trust, and that is that the wholesale trust is not designed to own property itself. What the wholesale trust is designed to do instead is own the rights to a contract like this and gives you the ability to take that trust and transfer it over to a different investor. But when doing so, you do not alert the seller to the fact that you’ve transferred this particular trust.
The only information the seller can see is that the rights to close on this property is in the name of the trust. Beyond that, all other information is private; for instance, they have no ideas who owns the trust. All they know is that the trust is the party that’s going to close on the property. Here is our process then for using a wholesale trust. First, we set up the trust itself. Next, we make the client’s corporation the trust beneficiary. Our client then is selected as the trustee of their trust, and then they go and contract with the seller under the name of the trust to buy the seller’s property. Those steps all comprise stage one.
Next, we tie the property up under contract under the name of the trust; you can come up with any name you want for this purpose. Once the property has been tied up under the trust, the next step is to find the investor then and sell them the trust. At this point, it’s the corporation that will sell them the trust and then receive the investor’s fee for that transfer. The investor then becomes both the trust owner and trustee, so he or she can then close with the seller in the trust’s name.
Since devising it, we’ve utilized this type of transaction very successfully to ensure that our clients can tie up properties by wholesaling them in wholesale deals and then be able to transfer the rights to close to an investor without the seller interfering at all. Banks won’t balk at it, and neither will HUD. For those sellers that find people that are willing to pay more and try to back out of the agreement, they’re stuck. They can’t find a way out because they agreed to sell to the trust, not to a particular person, and whoever owns that trust has the right to close.
It took us several months to put this trust together. Now, here’s another benefit to using our wholesale trust. What we often tell people is, “Carry a stack of them around with you. Don’t just take one out. Take a whole stack of them. Have them all preprinted. Preprint them with your name as the trustee and your corporation as the trust beneficiary.”
The only information we don’t fill out on them is the date, the trust’s actual name, and the seller contract information. All of that information is left out until you find a deal. That way, if you go out there and find a deal that you want to put under contract, then all that’s left for you to do is pull up a new trust, fill out a name (calling it anything you want, it doesn’t matter), fill out the date, put the information in that’s required for the contract and sign it; that’s it.
You’ve just now tied up property under a wholesale trust. Find another property that same day, just pull out another trust, and fill it out just like we described. Now, you’ve got another one. Let’s say you’re out driving around for six hours, and during that time you’ve put four properties under contract, all under different trust names. All you need to do now is find investors and then transfer those trusts over to those investors so they can close on those properties. Understand that this legal instrument is something we designed from the standpoint that when you’re a wholesaler, you want to make it as easy as possible to handle a potential deal.
Again, you don’t want all the unnecessary costs, laborious steps, and increased paperwork that creating all those LLCs will bring upon you. Your goals are to make sure that the seller can’t prevent the deal from occurring and ensure your investor transfer is as smooth as possible. So from a wholesaler perspective, a wholesale trust is a valuable tool to use, especially if you are just starting out and eager to start taking deals down. This process is the best way to do it today. We’ve tested and perfected this trust to a point where it is now the premier tool for wholesale investors.
Now, after everything you have read here about wholesaling real estate, common problems to avoid, and how to fix them, if you want more information about wholesale trusts and how they could benefit you, then all you need to do contact us here and request a free strategy session with one of our professionals. Our team then will walk you through the benefits of using the wholesale trust, tell you how you can put it together in your business now.
We will help ensure that you’re taking maximum advantage of this tool when putting your wholesale deals together. Remember, as we discussed earlier, it’s important to bring together the legal side, the tax side, and the financial aspect when approaching your business. We make it not only accurate, but we make it relevant so that your business and trust is set up to achieve your goals and help build a prosperous financial future for yourself and your family.
Be sure then to contact us for a free strategy session to learn more and get the process started. If you also have the time, then perhaps look at one of our upcoming live events and sign up. Again, at these seminars, we dive in-depth into these topics and have team members available for one-on-one consultations to answer all of your pressing questions and help start setting up a wholesale trust immediately.
