Wholesaling Tips For Backing Out of a Contract
If there is one thing which holds real estate investors back from making more purchase offers on homes and prevents them from doing more business it’s fear of not being able to back out of a contract once signed, and perhaps more importantly being able to get their deposit money back.
There is an ethical side to this. You certainly don’t want to develop a name and bad reputation for constantly dropping contracts. This will certainly deter sellers and real estate agents from wanting to work with you. Plus, consider how you would want to be treated when you are the seller.
On the other hand this is a business and there are justifiable and sometimes unavoidable reasons for backing out of real estate contracts. It is better to exit gracefully early than to get stuck with a property that will financially ruin you. Just be courteous, give as much advanced notice as possible and recognize that sometimes it just isn’t your fault.
Wholesaling Tips for Protecting Yourself with Contingencies
Savvy real estate wholesalers give themselves plenty of outs and exit opportunities by using contingencies in their purchase contracts.
Common contract contingencies include those for:
- Appraisals
- Financing approval
- Inspections
- Amount of repairs
- Changes to property condition before closing
- Due diligence to support seller claims (rents, zoning, etc.)
- Partner approval or inspection
- HOA rules and approval
Backing out of any contract is generally very easy and straightforward, even for no reason at all. Perhaps your cash flow was interrupted; you couldn’t flip the contract in time or find an end buyer as expected. It is rare that you will be sued for non-performance.
However, the above contingencies are key for helping real estate investors to exit and be eligible to have their deposits returned. Still it is important to note that as the housing market heats up sellers and their agents will push back against these more, demand higher deposits and try to make earnest money deposits non-refundable.
Wholesaling Tips for Getting Your Deposit Money Back
Obviously getting your deposit money back is the tricky part. Even if you are justified in backing out you can expect the other side to go after your deposit or at least any Realtors involved to try and take their commission cut out of it.
So don’t deposit money with anyone but your own attorney or title company. If you don’t stick to this rule or can’t on a given deal, expect any money put up can be lost. Even if they should return it, it can be tied up for so long in the court system that the legal fees far exceed what you have to gain and is often better just to let it go.
Consider these occasions collateral damage or the cost of doing business. So instead of putting all of your money down as the deposit on one property consider the wisdom of finding several properties which demand less deposit.
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