Real estate wholesaling is definitely one of the best and most popular strategies for budding investors to get involved with mainly because it can be done with limited experience and funds.
In real estate industry, wholesaling is a term used to describe the process of finding promising deal and getting paid for bringing them to real estate investors. It’s a sort of “finder’s fee,” but comes with some added paperwork thrown in to make it more acceptable and legal.’
Wholesaling can be bit confusing, so we’re illustrating this concept with an example on how it’s done.
John is a wholesaler who’ve active in market for incredible real estate deals, but is actually not interested in buying them. One day, John gets a phone from Maria. Maria wants to sell her house, but is not interested in using a real estate agent. She tells him that her house is in bad shape, and she just wants to get out before she let it go to the lender in a foreclosure.
John meets Maria at home and offers her $60,000 for the house. Maria agrees to the price and immediately signs a contract (purchase and sales document). This document states that John will buy the house for $60,000 within next 20 days.
John then goes and talks with his friend Marvin, an active house flipper. He shows all vital numbers to Marvin, and Marvin decides this deal would be a good flip. Marvin agrees to pay $65,000 for the property and knows he can easily make good profit even at that price.
John and Marvin then sign an “agreement contract” where John gives Marvin the right to purchase the house from Maria. John gives all important paperwork to local Title company to process. So in the end, Maria gets her $60,000 price she asked for. Marvin (the flipper) pays $65,000 for the house, and John, the wholesaler keeps the $5000 difference as his wholesale fee.
John never owned the house, but still made $5,000 profit for bringing together Marvin and Maria. Keep in mind, this is just one way to stitch the deal, and there are still many other ways to structure the deal.
The Right Way to Wholesale
The right way to wholesale without breaking the law is possible. We are proving you few tips that can be of help. You should also talk to an attorney who can advise you on laws depending upon your state.
No. You Dont Need A License To Wholesale Real Estate
Nobody would accuse of brokering without a license if you have one. Though it might cost you a couple of grand, but it’s much better than getting penalized for breaking the law!
Buy Some Property and Then Sell It
Though you can operate the way John and Maria did, but it would be better if you simply buy the property, take the title, and then re-sell it (even if you own it for just few minutes, through a “double close”. It’s a much better option than “assigning” the contract.
- In order to succeed with real estate wholesaling, you need to be good at:
- Knowing the math behind good rental
- Knowing the math behind a good flip
- Talking positively with highly motivated people in distressed situations
- Negotiating with them without taking advantage of their situation
- Answering the phone
- Marketing for leads that may cost you less than marketing
- Finding great deals
- Estimating rehab costs
- Estimating after repair value
- Estimating potential rents
See what we’re getting at? Sure, you can always outsource some of these tasks, but as a business owners you still need to be one in charge and need to understand how all this works. Therefore, in order to be a good wholesaler, you need to be proficient in a lot of stuff.
Furthermore, a wholesaler needs to work hard to find great deals and he or she is also competing with other investors who don’t need to make any wholesale fee and therefore are in a position to pay lot more than you. For instance, if Marvin could have found Maria, Marvin could pay $65,000 to clinch the deal, but John would need to pay $60,000. Who do you think Maria is going to go with? Marvin, of course!
And of course, a good real estate wholesaler don’t’ do just one deal, they do a lot and once can make lot of money.
How To Find The Deals
A wholesaler without good deals is like a butcher without a meat. It’s useless. Therefore, as real estate wholesaler you need to be effective and proficient in building a pipeline of highly promising real estate deals. This pipeline consists of taking the phone calls, finding the leads, building trust with seller, doing the math, doing due diligence, preparing inspections and bids, and getting the deal signed at closing. At any given point, it’s important that you have 20-30 different deals in your pipeline, each at different phase of the deal, and you should try to consistently move them all forward towards profitability.
Now let’s have a close look at ways in which you can get deals into this pipeline. Hopefully, these techniques will give you a good place to start.
* Driving for Dollars
In this method you need to drive around the city to find potential deals. Typically you would be interested in finding “distressed” properties. This is indicated by tarps on the roof, long grass, boarded up windows, legal notices pasted on windows or anything else that might make a house appear to be someone’s problem.
* The MLS
It is a collection of deals that currently being sold by city’s real estate agents. Although there is intense competition here, it’s still possible to find a good deal. Here you can still use a real estate agent to make the deal.
* Direct Mail
In this method, you need to send targeted pieces of mail to motivated sellers. You can buy list of potential leads from many online companies for pennies per name and then send them postcards, typed letters, yellow letters, etc. Here you would want certain percentage of people to call you and get some of them to sell you their house.
There are many other methods of find promising deals, such as Craiglist, online marketing, billboards, networking, SEO, co-wholesaling, and more. At this point, you should be able to start finding good deals.
Making Your Offer
Once you’ve found a deal, it’s time to do negotiations and make an offer and sign the contract. In some states, you can use the state-approved sale and purchase document, in others you need to pick a local Title company.
Finding Cash Buyers
A cash buyer is one who can pay cash for the property. However, it’s doesn’t have to be their cash, as they can use hard money or private money as well. The point here is that cash buyer doesn’t need any loan for buying the house. They can simply buy it from you, guaranteed.
Cash buyers are rental property investors, but they might also be house flippers. You can find them on Craiglist or by placing an ad in a newspaper. Another way to find cash buyers is by asking real estate agent to provide you list of all “cash sales” within a 20 miles radius. You can also search public records and then give them a call or send a letter.
Again, cash buyers are interested in deals, and if you can convince them that you’re a serious real estate wholesaler who can help them make money, it can be world’s easiest sell!
It’s time to get paid?
This is actually pretty easy because here there’s not much for you to do. You just need to find a tile company and provide them all the information (the assignment contact, original sale and purchase agreement.) and then sit back and let them do the magic. If your state uses attorneys, then you need to find a good closing attorney.
In the end, the seller will get the cash they were promised. The cash buyer will get a profitable deal and you�re going to little richer!
You can recycle some of this money as an investment into your marketing budget to keep your pipeline full. Just one deal won’t change your life, but by creating a wholesaling pipeline that consistently brings you great deals will.