How To Wholesale Real Estate
Investing in real estate is usually thought of as the capital-hungry option. But is it?
Undeniably, depending on the avenue chosen it can be one of the most expensive sectors for investment. It can certainly be more intimidating than taking $500 and placing it into stocks or bonds. However, there are a few alternative solutions for those not wishing to stake it all.
Are you an excellent networker with a very low tolerance for risk? Wholesale real estate investing might be exactly what you’ve been searching for.
What is wholesale real estate investing?
Wholesaling allows investors to profit from real estate purchases rather than the property itself. The wholesaler acts as a middleman between buyer and seller, with the goal of profiting from each transaction.
The process is best explained with an example.
- A wholesaler searches for an undervalued property – perhaps it is distressed and in need of some TLC. It may not yet be listed on a public marketplace.
- The wholesaler approaches the seller to place the house under a right to buy contract (or purchase and sale agreement). This contract outlines the basis of the right to buy including the predefined purchase price. To encourage the seller, these are often all-cash offers alongside the promise of a quick transaction time. For this example, let’s say the price offered is $200,000.
- Once a right to buy contract is signed, the wholesaler then markets the property to an investor’s network at a slightly inflated price (say 5-10%).
- In our example, if the wholesaler can find an investor willing to pay $210,000, they will be able to keep $10,000 as profit – minus any marketing costs.
As the properties are often not publicly listed, wholesale deals allow other real estate investors to compete with one another without future homeowners driving up prices.
The method is excellent for making quick profits, but the difficult part is finding the ‘right’ property. You need a property discounted in comparison to market rates, that offers enough upside potential to entice another investor, and is accompanied by a seller willing to sell wholesale.
The process usually takes two forms. These include assignment and double closing. While both are very similar there is one key difference – ownership.
- Assignment. This is the most common method as it involves no money coming out of the wholesaler’s pocket. After placing a property under a right to buy agreement, a wholesaler will arrange for another buyer to take on the terms of that agreement. The contract is effectively sold to the new investor without the wholesaler ever becoming the owner of the property. The wholesaler charges a finders fee to the buyer or deducts the payment from the buyer’s offer.
- Double closing. In comparison to assignment, a double close requires the wholesaler to purchase and acquire the property. If done correctly, this should be very brief.
A double close is when the end buyer’s money is used to pay the original seller. However, that money comes through the wholesaler, at which point the wholesaler takes ownership – for as little time as possible. Rather than one joined process, there are two separate chains. The seller sells to the wholesaler. The wholesaler sells to the buyer. For wholesale ownership to be brief, it should be the aim of the wholesaler to have every transaction take place on the same day.
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Pros vs cons
While offering a way to potentially make quick returns for very little risk, the process is by no means a walk in the park. Which is why it is always a good idea to take a look at the pros and cons.
- Profits. Wholesale deals can be completed in an extremely short timeframe, often for decent returns – a huge draw for many investors. However, competing with experienced wholesalers requires masses of homework and a sharp eye.
- Knowledge. Wholesaling can be ideal for those new to the real estate market. Yes, a lot of homework is required, but the process will place you at the forefront of real estate market knowledge.
- Limited upfront investment. The process lends itself extremely well to those with little upfront capital to throw at real estate. Wholesale assignment deals can be completed with little funds and even poor credit. It is the end buyer that will have to complete credit checks and produce the capital.
- Intermittent profits. Wholesaling can provide a lucrative income, but that income can come intermittently. There is no guarantee that any one deal will work.
- Reliance on buyers. The idea is never to own a property. You want to keep capital as fluid as possible. If a buyer pulls out of a double-closing deal this leaves a wholesaler’s funds extremely vulnerable.
- Buyer’s network. The best wholesalers have a high-quality circle of investors ready to take advantage of deals. Lining an investor up before agreeing to a right-to-buy contract is ideal, but not always achievable.
As mentioned previously, wholesale investing is just one of a number of options for investing in real estate. It is not an appropriate investment model for everyone. But for those with the right investment network and interest in finding real estate gems, it can be an extremely lucrative business.
Wholesaling vs House Flipping
Some investors confuse the process of wholesale investing with flipping houses. It is an easy mistake to make. Both methods profit from the sale of property to future investors or homeowners. However, that is where the similarities end.
The process of wholesaling is intended to be quick. The idea is to find a property that requires some, or a lot, of work – see the potential beneath the dust – and offer it to a budding developer or renovator. A wholesaler completes no work on the property. It is a low capital and low-risk opportunity. The key ingredients required from a wholesaler are time and effort.
Meanwhile, house flipping requires a lot more capital and a lot more risk. House-flipping still requires an investor to see the potential in a property but then the investor takes on the renovation work themselves. In doing so, they hope to add enough value to the property to make a profit. The higher capital and increased risk mean house-flipping often comes with greater returns.
Comparisons are often made between these two real estate investment options but the two are intended for two different types of investors. You need to ask yourself which strategy is best for you to reach your investment goals.
How to get started
So we’ve described what wholesale real estate investing is, and it’s understandable if the process feels like an intimidating one. Juggling contracts left and right would certainly put a lot of investors off. But don’t let the thought of contracts or jargon scare you. Follow our simple steps and you will be wheeling and dealing properties in no time.
1. Find a property
Finding a suitable property (or preferably properties) is job number one. As mentioned previously, ideal properties for wholesale are those that are distressed and in need of some TLC. These TLC-seeking properties may have stood empty for long periods or may be up for foreclosure by a bank.
Alternatively, look for properties that have been on the market for a long time. Time puts a lot of pressure on a seller, which means they may become more desperate to make a deal. Zillow and Redfin are excellent websites for finding properties that have been on the market the longest.
2. Get comfortable with the numbers
You cannot afford to take shortcuts here. Profits are made in the numbers.
Once a property has been found, begin evaluating what the contract could be sold for. Make sure to take into account costs in the process such as title fees, building surveyor fees if the property needs checking structurally, and appraisal fees if you need a valuation.
Remember, the main goal is to sell the right-to-buy contract for more than what you agreed with the seller. Is the level of profit worth your time?
3. Find the owner
Next, you need to put your detective hat on. You need to make contact with the owner so that you can inform them of the exceptional deal you are willing to offer. However, if the owner does not live at the property in question this can sometimes be tricky.
You might get lucky and find the owner’s details in the listings. If not, try knocking on neighbor’s doors – often they may have a phone or email address you can use. Failing that, Google becomes your best friend (as always). A quick Google search of the address can sometimes offer a lead that you can start to run with. Failing that, there are plenty of local government offices which can help with your query. Try the county clerks & tax assessor’s office for a start, local libraries often contain an abundance of information, whether that be in formal documented form or simply local knowledge.
The final costly option is to hire your own detective to track down the person you’re looking for. A professional will have many more tools at their disposal.
4. Negotiate the contract
The harder you negotiate the better the deal will be. However, go in too strong and you will lose your relationship with the seller.
When negotiating, always have a profit margin in the back of your mind. You should already be going in armed with suitable figures that you would be happy with – remember how we mentioned those numbers? They come in handy at this stage.
Motivators for a seller include the opportunity of selling with no upfront costs, the management of all contracts by the wholesaler, and the promise that all other fees will be covered in the contract. By offering a range of these options, you tilt the odds in your favor, especially for someone desperate to sell a property.
When drafting a contract, be clear that it will be a third party ultimately purchasing the property, not yourself. Give yourself enough time to find a buyer. Also, try to include escape clauses at every stage. You might face a hiccup at any time – title issues, unexpected valuations, unknown structural issues – so if there becomes too much risk it is good to have an option to walk away.
5. Find a the buyer
As soon as you sign a contract with a seller the clock is ticking to find a buyer. This is why having a dedicated buyer’s network is extremely useful. So, here are a few suggestions to help you find that perfect cash buyer:
- Networking. This is a very general suggestion but this is what it all comes down to. The more people you can put yourself in front of, the more deals you are likely to close. Do you have any real estate investment clubs nearby? – join them.
- Wholesale buyer’s list. Every town or city usually has a few buyers lists where other wholesalers network. The list usually highlights what properties were sold during the previous month. Use the list to contact those that purchased properties the next time you have a deal going.
- Craigslist. This handy advertisement website can be extremely useful for wholesalers. Search under the housing section, both for sale and for rent, and find owners or landlords that might be interested in wholesale deals.
- Website leads. Set up a dedicated website to capture future leads. Advertise and lead people to a webpage where potential investors can enter contact details.
- Auction houses. Many properties are sold via auctions, and usually for cash. Get to an auction house early and start mingling with avid investors.
- Hard money lenders. Not everyone interested in wholesale deals will have enough cash to cover the total cost of a property. This is where hard money lenders can offer their services. It also means they have a list of contacts that are potentially interested in wholesale deals.
6. Assign the contract
Once a potential buyer is found you now have to assign the contract to them.
Make sure you both agree on the purchase price and the deposit amount. Is the purchase price high enough that you will be collecting a sizeable wholesaler fee?
It is at this stage that the buyer is accepting to purchase the property.
7. Close & collect
This is the final stage of the process. Closing the deal is usually handled by a title company. This is a company that researches the chain of title and makes sure no other individuals or entities have a claim to the property in question. If everything checks out, the title will eventually be transferred from the seller to the buyer.
At this stage, it is the wholesaler’s job to make sure everything runs as smoothly as possible. Once the title deed has been transferred, you will be able to collect your wholesaler fee.
The Bottom line
Wholesaling offers a unique route into the world of real estate investing. It can be a useful platform for beginners to gather knowledge, and with low upfront costs, it can be a great way to build long-term capital.
Not to be confused with house-flipping, this business method is all about passing an undervalued property from seller to buyer as quickly as possible. Success requires superb organization, fierce negotiating skills, and a friendly networking style.
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