5 Important Legal Issues in Wholesaling Real Estate Contracts

Wholesaling is becoming a more and more popular way that investors do deals. Wholesaling, like any real estate investment, has positives and negatives aspects. As a lawyer who has handled a fair amount of wholesale deals, I made a list of five legal issues that every investor should be aware of before getting involved in a wholesale transaction.

  1. Make Sure The Contract Is Assignable – Not every contract is assignable, which is the mechanism that wholesalers use to sell their interest in the contract for a fee.  Every county in Connecticut has a slightly different purchase and sale agreement, and many have also been tinkered by real estate agents and attorneys. Moreover, I see more investors using forms they have downloaded from various websites. If you are going to wholesale a contract, you need to make sure the contract is clear that you, as the Buyer, have the right to assign the contract to anyone in your sole discretion. If there is no such clause, arguably you may have to perform and you cannot sell the contract. Make sure the contact has a clear provision that you have the right to assign your interest.
  2. LLC – Any real estate transaction has risks. Wholesaling a deal is no different. Therefore, it benefits you and mitigates risk if you enter into the contract with a limited liability company instead of as an individual. In the event that something goes south and there is litigation, it is much better if your LLC is a party and not you, and hopefully your LLC does not own many assets.
  3. Due Diligence Items – Due diligence items in the contract are essential even in a wholesale deal where you ultimately will not close. You should include the same due diligence items in the contract as if you were planning on purchasing the property. These due diligence items at a minimum are an inspection contingency clause and a mortgage contingency clause. I always advise clients wholesaling that they should push the contingency dates out as far as possible to allow you time to find a new buyer and give the new buyer enough time to do an inspection and/or apply for a mortgage. Keep in mind that the new buyer who you wholesale to will essentially step into your shoes and will have the same due diligence rights as when you signed the contract, so think carefully about them with the help of an attorney.
  4. You May Have To Perform – If you cannot find a new buyer by the closing date, you may have to close on the property depending on how you draft the contract. If the Seller will not allow an exit provision if you cannot wholesale the contract, you will have to close or breach. If this is unacceptable, make sure there is a contingency clause that addresses this.
  5. If you are the Seller, Make Sure Buyer #1 on the hook if Buyer #2 does not perform –The Seller may allow you to assign the contract to a new buyer but insist that if that new buyer does not close, you are then required to close. When I represent sellers in wholesaling deals, I insist on this provision to protect the seller. Be prepared for this type of negotiation. Putting more money down may make the Seller more comfortable and not insist on such a provision (then you can seek reimbursement for the deposit from your new buyer).

What Must Be Included In A Home Improvement Contract?

I have had a number of clients who are both homeowners and contractors ask me to review a contract for home improvements (addition, pool, deck, etc.) and request that I review the contract to make sure it contains all of the necessary information. They are surprised to learn that their contract is woefully deficient and in fact, may not be enforceable unless certain provisions are added. It is particularly important as a contractor to make sure your contract is enforceable by a court of law if you get stiffed for the final bill.

Under the Connecticut Home Improvement Act, all home improvement contracts must comply with nine (9) requirements in order to be enforceable. Court cases have ruled that failure to include some of the lesser important provisions will not render a home improvement contract unenforceable, but it is still a good idea to include all of these provisions. 

The first statutory requirement is that the home improvement contract must be in writing and include the scope of services. Therefore, if you are a contractor, it is a good idea to take the time and have a standard written contract to use with clients and have it executed before you start work (although the scope of work will change). If you do not, it may be very difficult to enforce your agreement.

The contract must also be signed by the both the contractor and homeowner to be enforceable. This is a little bit different than standard contract law which only requires the signature of the party you are trying to enforce the contract against. The contract must also contain the company name of the contractor and registration number. The registration number ensures that the contractor is registered.

The contract must also contain a start date and completion date. Some contracts only include start dates and fail to include completion dates. This is a mistake. As a contractor, you want to include an estimated completion date. If you do not, and you do not get paid, the home owner may argue that it is not enforceable because the contract does not comply with law. On a related note, the contract must also contain the date of the transaction.

The law also requires certain provisions in the contract, including a notice of cancellation. The contract must also include a provision providing information about other ownership interests in other home improvement companies. These disclosures are important and failure to include them allows an argument that the contract is unenforceable.

In short, if you are a contractor doing any type of home improvement work, you should be aware that there are statutory requirements that must be included in each contract or you expose the company to an argument that the contract is unenforceable. The last thing you want is to make a demand for the final payment and to give the home owner an argument that they do not have to pay you because you failed to comply with the statutory requirements.

Conversely, if you are a homeowner in dispute with a contractor, you may have leverage if they don’t have the right contract.