What Is a Daisy Chain in Real Estate?
How a Daisy Chain Works
The principle of wholesaling underpins why and how a real estate daisy chain works. When a seller has an assignable contract with a wholesaler, and that wholesaler then assigns the contract to another wholesaler, who does the same to the next, and so on, a daisy chain happens.
Here is a visual example:
A daisy chain is not always as straightforward as the example above, because in some cases, a wholesaler’s partners, real estate brokers, agents, and others can potentially be involved. These entities might show up in a deal that would otherwise be simple, adding confusion to the chain. For these reasons, many experienced buyers tend to walk away from daisy chains as soon as they pick up on what is happening.
What Is Real Estate Wholesaling?
In real estate, it takes time and a considerable amount of money to buy and sell properties. However, there are other ways to start making money in real estate, and one of them is real estate wholesaling.
A real estate wholesaler is in the business of finding under-priced real estate deals (often distressed properties), getting the property under contract by signing a purchase agreement with a seller, then assigning that contract to a buyer with a tacked-on “assignment fee” or “finder’s fee.” The wholesaler does not actually buy the property but finds another party interested in buying it. The wholesaler makes a profit when a buyer purchases the property at the contract price plus the assignment fee; the contract price goes to the original seller, while the assignment fee goes to the wholesaler.
Real estate wholesalers do not need to take a course or pass an exam, nor do they need to earn a real estate license. However, earning a license can be beneficial, as it gives wholesalers access to the Multiple Listing Service, or the MLS.
While the ultimate goal is to sell the property to a buyer who will pay cash directly for the property, in some cases, a wholesaler only needs to find another interested party, who may simply assign the contract again to another interested party. This is the situation that creates a daisy chain.
Why Do Wholesalers Daisy-Chain Properties?
Wholesaling, co-wholesaling, brokering, direct-selling, flipping, and other real estate investments have one goal: to make a profit. When a wholesaler decides to daisy-chain a property or a list of properties, their sole intention is also to make money. By posting a property or a list of properties on their buyers list, a wholesaler or a broker believes they can make money faster.
However, the complicated nature of a daisy chain can create a lot more pitfalls. If a potential buyer spots a property for sale by more than one wholesaler, that buyer is likely to contact the party with the lowest asking price. If that party proceeds with closing the sale (assuming they have a contract on the property) and fails to inform the rest of the chain, which happens often, other interested buyers may continue trying to purchase a property that has already been sold.
Dealing With a Daisy Chain
People who are interested in buying properties through daisy chains should remember that daisy chains often do not close. Even so, it is possible to make money off a daisy chain by doing it ethically, such as starting with the appropriate party and doing proper due diligence to verify each party involved in the daisy chain.
A wholesaler can do this by setting up a meeting or a conference call with the party from whom they have heard about the deal, along with the owner of record. The wholesaler can ask relevant questions to verify what each party’s role is in the daisy chain (if a daisy chain exists at all).
If the parties do not wish to answer questions, an investor’s safest course of action may be to simply walk away from the deal.
A daisy chain may lead to a good payday for a wholesaler, but without the proper communication and research to verify the numbers of the deal and the parties involved, it could just as well lead to a failed transaction and a tarnished reputation in the real estate community.
A real estate daisy chain occurs when a wholesaler signs a purchase agreement with a property seller and assigns the contract to another wholesaler, who then does the same to another, and so on. All of these parties will tack on an additional assignment fee over the seller’s original asking price, so if the property is sold, the wholesalers in the daisy chain will keep their share of the difference.
There can be many parties making up one daisy chain, which often causes confusion and fragmented lines of communication. While it is possible for all parties to make a profit in a daisy chain, its risks can easily outweigh its benefits.
- Martinez, A. (2019.) < Real Estate Skills. Retrieved from <https://www.realestateskills.com/blog/wholesale
- Merrill, T. (n.d.) <. FortuneBuilders. Retrieved from <https://www.fortunebuilders.com/how-to-get-started-in-wholesaling/
- Wilmot, J. (n.d.) Why “Co-Wholesaling” Can Get You Stuck (& What I Do Instead). Awesome REI. Retrieved from https://awesomerei.com/cowholesaling-houses/