Wholesaling real estate is commonly described as the strategy of putting a piece of property under contract with the intent to assign the contract to another buyer. This type of real estate purchase approach is generally used with distressed properties where the real estate entrepreneur doesn’t plan or fixing up or rehabbing the property.
In order to profit from this stratagem, you will need to put the property under contract at a lower price than the potential market value. In doing so, you allow the final buyer to make a profit when the property is upgraded or renovated. The key to effective and profitable wholesaling is your ability to find properties that can be purchased at below market value. We call properties in this condition distressed properties.
In almost all cases, the sellers of these properties are extremely motivated, and as such, will likely be willing to dispose of the property for a substantially reduced price. Many, if not most, of these properties require cosmetic repairs, remodeling, or substantial cleaning in order to bring the property up to full market value. Someone will have to do the upgrading or repairs, but that person is not the wholesaler.
The wholesaler finds the deal, evaluates the repairs, secures a ready buyer who is willing and capable of doing the repairs, and then sells or assigns his or her position to the end buyer. In doing so, the wholesaler can make an immediate profit from the transaction. There are no guarantees that you can make a profit when buying and selling real estate and wholesaling is no different. However, if you, as a real estate entrepreneur, follow a proven strategy, do the proper due diligence, and get the proper education, wholesaling can make a lot of sense. Let’s review six important reasons why this is true.
Reason #1 – Great Way to Learn and Start Real Estate Investing
Wholesaling real estate is certainly one way to profit from real estate and in order for it to work, it is essential that you are committed to real estate as an investment vehicle. It is assumed that you will incorporate the proper mindset, have a positive attitude, and be willing to learn from the experiences of others. You may be new to real estate or you may be a seasoned investor, but regardless of your personal situation, you can gain a great deal of additional knowledge about investing in real estate, negotiating with sellers, and understanding the local real estate market, when you follow the principles of wholesaling.
Real estate in every geographical area has unique characteristics. As a real estate wholesaler, you will become extremely familiar with the local market. In order to evaluate deals as to whether they make economic sense, you will need to become competent in determining market values, understanding basic repair and renovation expenses, and adapt at communicating one-on-one with sellers, brokers, and professional title companies. This may seem like daunting undertakings, but it will happen as you learn and actually start doing something.
Wholesalers also need to learn basic direct marketing techniques as they apply to real estate. These techniques include everything from drafting flyers, designing signs, and writing letters to home owners. Successful wholesaling entrepreneurs also learn to use the Internet and how to effectively use websites. All of this becomes much easier when you follow step-by-step guidance from successful mentors.
Part of your education and learning experience will come from learning how to locate the motivated sellers and distressed properties. Some real estate wholesalers start by focusing on foreclosure and pre-foreclosure properties. You can also work with existing multiple listing properties (MLS Properties) once you learn how to distinguish potential motivated sellers. Remember that you are looking for properties that can be brought under contract at under market value. There are MLS properties than can be purchased for substantial discounts, but you must learn to understand why individual owners might be extremely motivated to sell. One caveat, all of these properties are visible to everyone, which makes it more difficult to negotiate the best deals.
Don’t be discouraged if you don’t find the ideal property listed on MLS. There are lots of other ways to find and locate the distressed properties. You can start by actually driving around and looking at properties in your locality. If there are vacant houses, homes with untended yards, and properties in need of repair, these are potential wholesale properties. This market familiarization process is all part of learning about your local real estate market.
For Sale by Owner properties are also wholesale opportunities. These sellers may be willing to discount the property in order not to pay a real estate commission. Real Estate auctions are also possibilities, but you will need to secure cash in advance as almost all auctions require immediate cash payments.
Finally, you will need to take a pro-active role in finding motivated sellers. You may begin by placing signs (bandit signs), distributing flyers or using direct mail to advertise that you buy houses for cash. Part of the wholesaling strategy is to secure the property by contract and then to assign this contract to a cash buyer who will act immediately in order to purchase at below market value.
SEE ARTICLE: Building Your Credibility as a Wholesaler
It is highly recommended that you get as much education and training on wholesaling as possible. Make sure that your training is provided by reputable and experienced trainers.
Reason #2 – Eliminates Need for Credit and Large Personal Capital Investment
Every seller will require that the property is paid for. Motivated sellers will still need a buyer that can solve their problem with cash or financing. We can’t ignore the fact that cash will be required to purchase the property. However, you won’t need a large amount of cash to put the property under contract. Rather, you will need an earnest money deposit. The actual cash to close the sale will come from your “buyer.” This “buyer” will be the one who will actually complete the closing. You, as the wholesaler, will provide the earnest money deposit.
In addition to the fact that you won’t need a large capital investment in order to complete your end of the transaction, you won’t need to rely on your credit to secure financing. Your “buyer” will complete the transaction WITHOUT USING YOUR CREDIT.
Be aware that you must ensure that your contract to purchase the property must be assignable. Generally, all contracts can be assigned unless specified otherwise. However, you should explicitly state that your contract is assignable. Be upfront with the seller and let the seller know that you may be using a partner or other investor as part of the purchase agreement. Rather than hide the fact that you may have a partner or other investor, let the seller know that you may not be the person who actually takes title. It’s important that the seller understands that the property is being sold, not that you may not be the final name on the deed.
Greed will kill a great deal. You must allow for the seller to solve their problems, allow the “buyer” to make a profit, and earn a profit yourself. A part of something is much better than a lot of nothing. This simply means that you need to find sellers who are motivated to sell at below market value for any number of reasons, and then find a “buyer” who will step in and close the deal in order to make a profit. When you receive your wholesale training from a trained expert, pay special attention to establishing values.
Before we go further, you must learn to construct good deals that allow for realistic profits. Buyers from your buyers list will not act unless they firmly believe that they will be able to earn a profit. They need to rely upon actual numbers as to what the property will be worth after repairs and renovation, and they must have a reliable estimate as to what those repairs will cost. If you have actual numbers, you will be in a position to make a deal that works for you, the “buyer”, and the seller.
How do you find buyers who will step in and provide the cash to close the deal? You must develop a good organized buyers list. These are people who have the cash or credit to immediately act on a good deal. Great training from qualified experts can provide valuable resources. You can start with advertising for buyers with a website or craigslist. You will need to develop a professional plan. Many wholesalers join real estate investment clubs and network with other real estate entrepreneurs as a way of meeting “buyers”. Don’t forget about friends and family as potential “buyers.”
Reason #3 – Teaches Negotiation Techniques
Wholesaling is a person-to-person business and you will need to learn proven negotiation tactics and techniques. The more training you can receive on dealing with negotiation, the better your success will be in real estate wholesaling. In every real estate negotiation, the seller wants one thing and the buyer wants something else. Your goal as a negotiator is to find the common ground that will structure a great deal.
Each time you meet with a seller or property owner you are in the process of learning how to negotiate. Everything starts with learning why the seller is selling, or if the property is not actually for sale yet, why would the owner consider selling. Is the property in foreclosure or does the seller have some immediate cash requirement? There may be any number of reasons why the property is available, but you need to know the most important ones. The more you know, the more money you might make.
As you gain experience talking to sellers, to “buyers”, and to other investors, you will gain confidence – both in what to say and what not to say. It’s important to allow all parties in a real estate negotiation to come out ahead. The moment you become to self-centered or greedy, the deal will vanish. J. Paul Getty once said, “You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.” As you learn to follow this advice, your personal confidence will naturally improve.
The negotiation process is all part of understanding why the seller is selling. Once you know what the seller’s true objectives are – the sooner you can find a way to solve them. As you learn to become a problem solver, you will quickly become a better negotiator.
Reason #4 – Entrepreneur Can Build a Powerful Success Team
Every successful real estate wholesaler learns that success comes with having a powerful support team. This team may help in determining renovation costs, establishing true market values, providing legal advice, structuring proper and successful closings, and building a list of “buyers.” You may want to do all of this yourself, but it just won’t work. You will need the help of others, and wholesaling will help you build a powerful support and success team.
A success team will communicate with each other and provide accurate information. Each member of your team will support and contribute towards an eventual success. Because every deal relies heavily on establishing a final market value of the property, you will want to find an appraiser who is credible and experienced. The appraiser can assist you in not only establishing a present value, but an after-repair value as well.
It’s critical to be upfront with the title company when completing any wholesale transaction. You will need to work with a title company that understands what you are doing, how you are structuring the deal, and how the assignment of contract (or double closing) will work. The title officer must know what to say when setting up the closing and working with all the parties – seller, “buyer”, and yourself.
You will also need to work with contractors and cleaners. You may not actually do the contracting work, but you must know actual costs to finish the work. In most cases, you may need to do some cleaning and initial work to present the deal to your buyer. Actual realistic estimates and bids will help tremendously in your negotiations with your “buyer.”
Finally, you will need to establish a great buyers list. This will be your stable of money people who will be anxious to step in and make a profit from your work in structuring the deal. If you learn to structure win/win deals where both you and the “buyer” make money, you can soon have a list of people waiting to work deals with you.
Reason #5 – Can Reduce Risks
It’s already been established that we don’t have to have a large cash investment in order to effectively do real estate wholesaling. When you eliminate the need for a substantial cash investment, you automatically reduce your risk of personal financial problems. When you have to generate a huge cash investment, you oftentimes borrow excessively or create other financial problems. Wholesaling can eliminate this problem and risk.
Another risk we eliminate by wholesaling is the risk of damaging your credit. Your credit rating is valuable and every time you take on additional debt by borrowing, you are raising your risk. A major benefit of wholesaling is the ability to structure a deal without borrowing money.
If you were to rehab the property yourself, you are susceptible to the risk associated with cost overruns and excess expenses. Because you have assigned the contract to another party (the buyer), this risk is also eliminated.
Reason #6 – Can Create an Immediate Positive Cash Flow
We all want a positive cash flow, and most of us want that cash flow to start immediately. When you learn to wholesale real estate and have an organized list of buyers ready to step in and complete a win/win deal, cash flow can start right away. You are assigning the right and obligation to purchase the property, and this automatically allows you to make a profit when the assignment takes place.
The property owner or seller also can benefit from a quick closing of the property itself, which generally solves the problem the seller had with the property.
Real Estate wholesaling is a proven strategy that can benefit the seller by providing immediate cash for the property from the “buyer.” It is also a great way to make a profit when you structure a win/win deal. There are motivated sellers with distressed properties who actually need your help, there are “buyers” looking to make a profit, and you can succeed by structuring great deals. The best way to make all this happen is to find a credible and qualified mentor or trainer who will guide you step-by-step in making real estate wholesaling a viable strategy.