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STOP Wholesaling - Until You Learn How to Use a Novation Agreement - YouTube
Channel: Clint Coons Esq. | Real Estate Asset Protection
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Hey, what's
up, guys. It's Clint Coons here.
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And in this video
we're going to talk about wholesaling
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and how you can use
a novation agreement
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versus an assignment of contract
Okay, let's get started.
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Okay. So here's the deal.
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When it comes to wholesaling,
what are we doing?
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If you're a real estate investor here,
you're basically entering
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into a purchase and sale agreement
with a seller to buy a piece of property.
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So you're essentially tying
that property up under contract.
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Now, a wholesaler then wants to take
that contract to purchase this house
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and find an investor
and sell them the contract for a fee.
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So then to convert the investor
now over here
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can work with the seller
to buy the property.
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Now, the mechanics of how this works
is it really comes down
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to what type of agreements are
we putting in place between ourselves
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if we're a wholesaler and the seller,
and then the agreement between myself
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and the investor
who ultimately wants to buy the property
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Now, I've done this both ways.
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So my real estate portfolio
that my partner and I owned together,
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we started working with wholesalers
when we went into certain markets
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and that's how we built up our initial
portfolios was through wholesalers.
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And so essentially worked like this.
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They would the wholesaler found the deal.
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They would come to us and say, Hey,
do you want to buy this property?
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You can step into our shoes,
pay some money, and then it's your deal
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from there.
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Now what's important
is how you structure this.
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So a lot of wholesalers,
what they'll use is an assignment, okay?
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Now, an assignment means this,
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that when you entered into the agreement
with the seller,
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you made sure in your purchase
and sale agreement
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that you could have signed the contract
to another party.
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Meaning I can step out of this agreement
and I can give it to the investor.
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And now the seller is bound
to sell the property to the investor or
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if the investor
wants to enforce that agreement.
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So the way we typically do
that is we would write in our contract,
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you know, if I was buying the property
under my corporation, A, B, C, Inc
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and or a designated entity
would be the way we would write the offer.
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Now, you're not always going to do that.
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It depends on the market.
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I mean, one of the things
that I've experienced before
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is that when I come into a situation
with the seller and I throw on there
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in the name of my limited liability
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company, for instance, and I put
and or a designated entity on there,
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they can get the impression that I am
maybe someone who's just
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looking to flip the property.
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And so some sellers
will shy away from that
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when they see the offer
come in in that particular way.
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So maybe what you do then
is you put together your purchase and sale
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agreement that you write up that allows
for the assignment of that contract.
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And so you put a clause in there that this
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this agreement
may be assigned over to a third party.
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So that's another way to do it.
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So you don't have to specify in the offer
that that's for certain language,
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ABC Inc and or designated entity,
which gives you the ability
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to transfer it or what a lot of people
have used in the past and or assign.
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So you just got to get a feel for it.
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What works based upon
the seller that you're approaching.
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And the reason I bring this up is
I actually lost a deal
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because the seller assumed
that I was coming in to
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maybe wholesale the deal or mark it up
or do something, make more money on it,
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that there was too much meat on the bone.
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And so they refused to
to do business with me.
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And the reality was
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I was planning to keep the property,
but I realized I'd made a mistake there.
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So so it changed my thinking on how
I approach this.
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So anyways,
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so let's assume that you put
the assignment language in there
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and you want to use that.
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So what you'll do then is your signed
the contract over here to the investor.
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So now the investor can step in
and acquire this property.
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The problem with the assignment
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is that when I assign the contract
to this person, remember,
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I'm the one originally that entered
into the agreement with the seller.
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It does not relieve me from any claims.
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The seller could have against me
if this deal goes south.
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What are you talking about, Clint?
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Well, let's assume that I transfer this
contract to this investor here for $5,000
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and there's and I put down
two k earnest money on this deal
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and now the property is tied up
between these two.
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This guy is supposed to close
on this property here.
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This investor decides
I don't want to do the deal.
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And he walks.
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Now, the seller on this deal right here,
not happy.
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He thought he had his property sold.
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And in point of fact, maybe this property,
now that when we tied it up
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under contract, we tied it up for 100 K.
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Turns out that the market dropped during
the process why this property is held
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and now it's only worth
$85,000 in that particular area.
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So the seller could turn around
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and sue me over here for damages
that literally
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so many investors think that your damages
are capped at your earnest money.
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And that's not the case.
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You can actually be sued
for the decrease in value
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that occurs
if you fail to close on the property.
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So that could be an issue right here.
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So whatever
contract claims that are in there
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that the seller may have recourse
against you for failing to close.
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I know you're thinking, wait a minute,
Clint, I'm not the one closing.
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It was this investor over here
that was supposed to close.
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Yeah,
but he didn't say with an assignment,
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you're still liable under the contract.
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You just give the ability for someone else
to purchase it on your behalf.
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But the seller doesn't have to say, well,
my claims only run to the society.
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No, they can still go back to you
because you're on the agreement.
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So this is why I know
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vation agreement may be preferable.
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In fact, maybe it should be preferable.
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That should be the one that you use
when you're wholesaling real estate.
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So the difference between these two is
that when you put together an innovation
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agreement, you're going to basically do
the same thing here
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where you're going to enter
into a purchase and sale agreement
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with a seller to buy a piece of property.
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But the difference is, is that
in this purchase and sale agreement,
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you're going to have a clause in there
that states, the seller agrees
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that you can
no bait this agreement to a third party
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and they agree that they will accept that
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and they will basically sign off on it
and enter into an agreement
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under the same terms
with this third party.
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And they can't object.
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So you put that clause in there.
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And so what that means
is that when you find your investor
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and you're ready to sign your agreement,
because you will assign
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it, you're going to sign that contract
over to this investor.
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What will occur is that
you'll tell the seller, Hey,
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I found an investor to step into my shoes.
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I'm a signing this agreement over.
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It's going to be no bated over to them.
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Seller, you're obligated per
the purchase and sale agreement now
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to enter into a new purchase
and sale agreement with this investor here
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under the same terms as this.
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So the seller, they're not injured here
because they're stuck
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by now agreeing to sell to this party.
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But here's what you've done.
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You've taken yourself
out of this agreement.
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In fact, the way you do this, this is
called a no vation agreement between you.
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And so it's basically a three way
agreement here, which it states
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that the seller releases.
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You agrees to only do business
basically with the investor.
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So you no longer have liability under this
initial purchase and sale agreement.
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Because it's now canceled and it's
been substituted by the new agreement.
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So when you're
if you're wholesaling property
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or if you're just flipping property,
you want to leave yourself open
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so that you could possibly
kick it off to an investor.
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And if you decide
you didn't want to close on it,
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you may want to consider using
this new version language in your purchase
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and sale putting the innovation clause
into the purchase and sale agreement,
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and then creating a separate no base
purchase and sale agreement that these two
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are going to enter into that relieves
you of a liability under that contract.
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Okay. Now, here's the thing.
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Before you hit me up and say, Well,
where the hell do I get that language?
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Don't worry about it.
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If you look in the show notes,
I've actually included for you
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some sample language that you can use
in your purchase and sale agreement
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and you can use over here for this
subsequent purchase and sale agreement,
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replace it purchase and sale agreement
that relieves you of any liability there.
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Now you can get even more creative
with this.
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I have one client
that actually puts in here
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on his purchase and sale agreement
that the seller gives him
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a power of attorney
just to close on this on his behalf.
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So when my client finds this individual
right here,
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he can enter into this secondary purchase
and sale agreement
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on behalf of the seller
as a as his power of attorney.
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Now, that works for him.
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I'm not going to give you a language
to do that
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because I think this should be sufficient
for you right here, because the language
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that I've included ensures
that the seller is obligated
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and bound to enter into this new agreement
within a certain period of time.
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And you can fill that in three, five days,
whatever you want there.
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So anyways, check out the language below.
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That's the difference
between assignment innovation.
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If you're wholesaling property,
if you're making offers
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and you think you want to leave that open,
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definitely consider this as an option
for your next real estate deal.
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Hey, guys, you like the video?
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Hit the like button
and be sure to subscribe to the channel.
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Thank you and take care.
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