Wholesaling Property in New York

As a real estate investor in New York, you may have heard the term “wholesaling” or “wholesale real estate”. This is essentially the practice of turning a profit by obtaining a property and then quickly selling it to another purchaser at a higher price than you acquired it for. This is distinguishable from “flipping” in that in the wholesaling scenario the investor is not making any repairs/changes to the property but rather selling it “as is”.

While this type of transaction sounds like a good way to make a quick buck, its execution needs to be carefully timed and calculated, the legalities weighed, and the outcomes diligently predicted and anticipated. An attorney familiar with the structures of a wholesale transaction is instrumental in making sure that the transaction goes smoothly.

The assignment method

The first method to wholesaling, is the assignment of contract. This is where the investor has signed a contract with a seller of property for the purchase of property at the price of X. The investor then finds an ultimate buyer of the property to whom he assigns the right to purchase under the contract for a higher price then X.  Below we discuss some considerations of this method.

For the assignment of a contract, the first step is to have an assignability clause, which is in itself a pretty difficult task. Most standard contracts (or riders added by diligent seller’s attorneys) in New York, prohibit the assignment of a contract without the explicit and written permission of the seller. This is designed to prevent the quick and savvy investor from simply buying at a low price and selling it to someone higher behind the seller’s back. Though there are methods to structure the deal which may allow some wiggle room in this area, most of transactions will likely have this prohibition. Therefore, the first step is to negotiate the assignability clause within the contract itself.

A second consideration is that of financing. Though technically possible, having financing on either the initial contract or the ultimate buyer contract, will likely throw a monkey wrench into an already difficult process. Therefore, it is probably best for the investor to structure the deal as a cash transaction and sell to an all-cash ultimate-buyer. The rule of thumb is not to enter into a contract that you cannot close yourself and hope that your ultimate buyer comes through. In the event the ultimate buyer’s financing falls through, the investor would remain liable to the seller for closing the transaction and risk his contract down payment if he does not perform. The only remedy the investor has is to go after the non-performing ultimate buyer, which can drag on and be unfruitful therefore causing a loss for the investor.

There is one benefit, to the assignment process, as viewed from the investors perspective, in that the investor does not pay RPT NYC transfer tax on the assignment (for 5 boroughs only).

The double closing

The second method is that of the double closing. This is where the investor purchases the property and closes on it (the A-B contract) , while also having been in contract to sell same (the B-C contract). Typically, on the same day as the closing of the A-B contract, the investor will close the B-C contract and sell the property to the ultimate buyer. Some special timing issues and considerations must be carefully weighed when considering the double closing as an option.

First, doing a double closing forces the real estate investor to actually having to close on the A-B transaction and therefore paying whatever closing costs are associated with it (title, survey, mansion tax [if over $1 Million], etc.). Secondly, the timing of closing must be handled with care as the investor will most likely need transitional or hard money financing to complete the A-B transaction and therefore  will need to quickly close on the B-C transaction to avoid paying any unnecessary interest on their transitional or hard money loan. Therefore, the savvy investor must monitor the bot the A-B transaction and the B-C transaction carefully to ensure all title issues are taken care of and that each transaction can close on the same day, or very shortly thereafter.

The possible benefit to a double closing over an assignment, is that in an assignment the investor may not be able to hide the “bump-up” in price or the profit he makes by assigning the contract, whereas in a double closing he may be able to do so with ease.

For either type of transaction, it behooves the savvy investor to consult with an attorney experienced in wholesaling transactions so that he can ensure that the deal gets done quickly, carefully and properly. Here at Annunziata & Asllani, we pride ourselves in providing superb legal services to real estate purchasers, sellers, investors and developers on numerous residential and commercial transactions including those that may have an assignment or double closing feature.