Now that you’ve read the first two blogs on Beginning Wholesaling, you know what it is and some of the licensing issues. But if you want to become a wholesaler, you will need to understand the core transaction. In the simplest of terms, wholesaling is about “assigning” contracts.

Yes, you will need to learn how to market for properties, run number to determine the deal, negotiate with sellers and sign a purchase agreement. But that is something that all investors do and applies to just about any type of investment transaction. What wholesaling does is extend that one more step: assigning that purchase agreement to another buyer. You will then also need a list of potential buyers who will take the deal.

So, the process starts with you (or preferably, your wholesaling LLC) signing a real estate purchase contact (REPC) with the seller where your LLC is the named buyer. Your LLC will then “assign” that REPC to another buyer. This assignment is done for a fee. This fee is your compensation for finding and contracting the deal. In a common transaction, you will use an assignment addendum that transfers all the rights under the REPC from you to another buyer. Simply, this just swaps out the buyer so the new one can close and buy the house. It’s that easy, but let’s take a closer look.

First, can you assign all contracts? The answer is that all contracts are assignable unless they state that they are not. Many state-approved forms (including Utah!) are NOT assignable. So, if you are an agent using the Utah REPC, you will first need to make it assignable by way of an addendum that the seller signs approving your right to assign it. Do NOT just use “and/or assigns” on the buyer line. This is not sufficient. Use an addendum that clearly states the buyer has the right to assign the REPC without further approval from the seller. This way, you are free to assign the contract whenever you want. If you are using a simple contract, it should have clear language that it’s assignable already in the form.

NOTE: The Utah “assignment addendum” is used after you’ve found a buyer, and the seller agrees to that substitution. This does mean your seller will see the new buyer and the assignment fee—something most wholesalers do not want. So, most will not use the state-approved assignment addendum. But when the seller knows and agrees to your new buyer, this is actually called a “novation,” not an assignment!

So, what’s the difference between an assignment and a novation? With a novation, the seller knows and agrees to the new buyer. The seller is giving their stamp of approval to the new buyer. Therefore, a novation completely relieves the original buyer (wholesaler) from any liability under the contact. If your buyer doesn’t perform, then the seller can only sue your buyer. This offers great protection for the wholesaler.

In an assignment, the seller does not know or accept the new buyer. While your new buyer is obligated and liable under the contract, the assignor (wholesaler) remains “secondarily” liable on it. That means if your buyer doesn’t perform, the seller can sue BOTH of you.

Why don’t wholesalers always get a novation instead of an assignment? Privacy of the wholesaling fee! We mentioned that above. Also, they don’t want to worry about the seller possibly rejecting the transfer. It also saves time going back to the seller. You’ll find that experienced wholesalers will get the rights to assign the REPC from the seller at the time the REPC is signed. Then, they will oversee the transaction to make sure their buyer performs, or step in and complete the transaction themselves if their buyer can’t.

Now that you know the difference between an assignment and a novation, you can decide which is the best way for you to pass on the contract to your buyer.

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180