Remember Carlton Sheets—that real estate guy who was always on TV in the late 1980s?
He was a legend in the industry, and one of the key influencers who popularized real estate wholesaling. He had a course on wholesaling that customers took through a toll-free phone number, where his iconic line encouraged people, “You can get started in real estate with no money!”
Sheets isn’t as famous nowadays, but the excitement he created for wholesaling is still alive and well. He inspired many people then and now to get involved in real estate wholesaling even if they didn’t have any background in it.
While the process can differ from case to case, the typical wholesaling procedure goes like so:
People get into wholesaling because it sounds so simple, but they don’t realize how difficult it is. While all beginners will face common pitfalls and inevitable challenges, our goal is to equip you with the knowledge to tackle them, head-on.
Read on to learn the seven things beginner wholesalers should know before getting started!
Most people read about real estate wholesaling and think it’s easy, as there’s little capital involved in the investment. However, research shows that most real estate agents fail in their first year because they can’t find enough good deals or buyers.
The reality is that generating wholesaling leads is difficult. And, like new real estate agents, most new wholesalers don’t have a network and don’t spend enough time building one.
Beginner wholesalers will typically call all their friends and family, get a deal or two, and immediately exhaust their options. Relying on friends and relatives isn’t a scalable strategy, so many wholesalers get through their first year and quickly fizzle out.
That’s why the most important thing to know as a new wholesaler is how to generate deals and build a pipeline that provides a consistent flow of deals.
Here are six of the ways you can generate wholesaling deals:
- Make offers on the Multiple Listing Service (MLS)
- Make offers on the United States Department of Housing and Urban Development (HUD)
- Make offers at auctions, both offline and online
- Make networking a priority
- Make time to drive by neighborhoods and find distressed properties
- Make your own website or Facebook page to get inbound deals
We’ve gone over the details of these methods in our article about finding wholesaling deals if you want to know more about the specifics of each one.
Once you get some momentum going, you can also hire an assistant to help you make offers, find listings, and close deals.
With your deal generation system set up, the next step is to learn how to analyze the deals properly, because…
Wholesalers need to position themselves as expert deal finders who make buyers’ lives easier. Your goal is to build a good reputation for yourself and establish your business towards growth and expansion.
To do so, you’d need to learn how to properly analyze wholesaling deals and become a master in creating value for buyers and investors.
Here’s how to accurately analyze your deals:
- Determine the After Repair Value (ARV): Run comparables (comps) in the area using websites such as Zillow or Redfin to see how a property will be worth AFTER it’s been fully renovated (AKA the “after repair value”). Comps are the properties within ¼ – ½ a mile of your property that are of similar size, type, beds/baths, and age, and have sold within the last 6 months.
Here’s the formula for determining your ARV:
- Evaluate the Estimated Repair Costs (ERC): As properties for wholesaling are often distressed, you need to understand the rehabilitation costs to know whether or not a particular property is really a good deal or not.
Here are some quick tips for estimating the repair costs accurately:
- Finalize the Ideal Purchase Price (The 65% Rule): After determining your ARV and ERC, you’ll now calculate the ideal purchase price for your investment property. You can use The 65% Rule to compute this, where the formula is as such:
The 65% Rule is the wholesaler’s adaptation of the flipper’s 70% Rule—a rule of thumb that tells the flipper to purchase properties at a maximum price of 70% of its ARV. As a wholesaler, you can have a 5% difference that enables you and the buyer to make a profit—especially when you’re selling to flippers. Investors are likely to steer clear from a price that is more than 65% of the ARV (minus the ERC).
Keep in mind that the opposite is true: if you don’t know how to analyze properties and offer great deals, you will struggle with building your reputation and growing your network of buyers and investors.
Wholesaling is basically buying and selling contracts, so getting this part right is pretty important! However, a LOT of new wholesalers don’t even have the appropriate paperwork in place before getting started, and that can lead to them getting burned.
You need to have the right paperwork with a contract that is assignable:
Let’s take a look at the key factors a wholesale contract needs to have:
- The Wholesale Real Estate Assignment Contract: This is the legal document that makes it possible to transfer the right to purchase a property from the wholesaler to an end buyer. Once you and the seller enter an equitable conversion (making the eventual buyer the owner of the property once they sign the contract), you need to draft an Assignment of Real Estate Purchase and Sale Agreement:
- The Assignment of Real Estate Purchase should have a copy of the original purchase and sale agreement between you and the seller, informing the end buyer of all the terms, contingencies, conditions, and payment terms involved in the deal.
- The Sale Agreement should say that the buyer will purchase the home from the seller and assume property ownership—effectively absolving you from all responsibility.
- The Wholesale Real Estate Purchase Agreement: There are many components in this agreement. The Wholesalers Toolbox have shared their templates to get you started on your contracts and agreements. There are also other sources you can find on the internet, just make sure that include the parts highlighted in this sample:
Make sure you have all of this in place before finding your first deal so you don’t waste time or end up scrambling to pull the documents together when an opportunity comes along.
The double closing technique in wholesaling is a popular strategy, because it allows you to keep your wholesaler fee private. In other words, it lets you hide your profit margin. You won’t have to explain to potential buyers about the price differences between your contract and the seller’s, thus saving you the headache of being cut out of the transaction.
This method contrasts with contract assigning because you won’t have to purchase the property—you only facilitate the transferring of contracts. In a nutshell, the technique is closing two independent deals that happen almost simultaneously, sometimes within a few hours or weeks. One of them is with the property’s original seller, and another is with the end buyer.
As the wholesaler in both these transactions, you need to treat them as individual deals with their settlement statements:
- Statements with the seller are referred to as HUD-1, and outlines the purchase price you have negotiated and settled on. HUD-1 includes any prepaid interest charges, homeowners’ insurance fees, title insurance, property taxes, and closing agent fees.
- Statements with the buyer identify the final purchase price you have agreed to sell the property. This deal is contingent on the first closing with the original property owner.
For more information on this technique, you can visit here. But simply put, the process goes like so:
It’s not rocket science, but it does take a lot of leg work. There is also the stress of indecisive parties, people backing out suddenly, and aligning the schedules of everybody involved in the deal.
The double closing technique is a good alternative to contract assigning, especially when used as an exit strategy. Of course, you would need to put “more skin in the game” by taking legal possession of the property for all of five seconds, but if contract assigning doesn’t work, double closing can increase the chances of a deal transpiring.
Now, how do you handle “imperfect deals” or deals that seem tough to profit from?
The good thing about real estate investing is that there are many ways in which you can still make a profit. As long as the seller is motivated, you can find a way to make money off the property.
For example, if the seller owes more than the house is worth (i.e., upside down in the mortgage), you could find a lender that will agree to wholesaling the property as a short sale. These deals are rare but entirely possible.
Here are two nontraditional ways to wholesale a short sale property:
- Buy in a Land Trust: This agreement is where a Trustee agrees to hold the property title for the benefit of other parties, known as the Beneficiaries. The name you’ll put in the purchase contract is the Trustee (the primary buyer). The buyer will then submit copies of the trust documents to the bank, as lenders will require the buyer’s LLC documentation to be submitted along with the offer. Once you get to closing, the beneficial interest of the trust gets assigned to the end buyer for a wholesaling, assignment fee.
- Create an LLC: You can also create an LLC with the end buyer (typically costing anywhere from $100 to $500), buy the property as an LLC, and sell it to the end buyer. The LLC’s name on the short sale approval letter will not change when the buyers change hands, and you’ll still charge a wholesaling fee.
Alternatively (and, if you ask me, the better way to earn money from real estate long-term), you can take ownership of the property and turn it into a cash flow generating rental. Thus, you’ll extend yourself into becoming a rental property investor—and still make money off the property.
Just like any other business, you need to stay updated with market shifts that affect your business. Real estate is a dynamic industry that requires you to spot market trends early, collect relevant insights, and adjust the way you conduct your wholesaling business constantly.
Take the recent pandemic, for example, that changed the industry for years to come. We noticed four trends for wholesalers to keep watch of to stay successful in 2021 onwards:
- Work-from-home Becoming Mainstream: Many office workers move out of dense cities and into residential areas with more freedom and space. Wholesalers, therefore, need to pay more attention to the rural areas where buyers are now increasingly interested in.
- People Upgrading Their Current Homes: With the pandemic forcing people to stay indoors, people are now willing to invest in comfortable homes with larger rooms, backyards, bigger patios, and more. Wholesalers need to pay attention to the evolving preferences of homeowners and their heightened attraction to certain home features.
- More People Purchasing Homes: Interest rates hit an all-time low in 2020, and the forecast for 2021 reflects similarly. With these low mortgage and interest rates for properties, people want to own homes more than before. While wholesalers will have a harder time finding properties, determined wholesalers that do secure homes will sell faster and at top dollar.
- Decrease in Housing Inventory: Given the ongoing transmission of COVID-19, people have put off selling their houses to minimize contact with strangers. Competition within the housing market then increases—decreasing the chances of wholesalers getting properties at a discount. Nevertheless, it also makes exiting deals much easier and at a higher profit—where supply is low, demand is high (due to low mortgage rates), and home prices are soaring.
The pandemic might be a one-time thing, but disruptions and changes will always happen in the industry. The only thing constant is change—which means wholesalers should stay updated!
Wholesaling real estate is deceptively easy… And it is if you know what you’re doing.
Start on the right footing, and you’ll set yourself up for real estate success in the wholesaling business. Continue to learn from successful investors who freely share their best tips, join networking groups to discuss with other wholesalers in your local area , and get familiar with:
- Generating wholesale leads
- Analyzing properties properly
- Securing the right documents and contracts
- Learning how to double close wholesale deals
- Turning any lead into an investment opportunity
- Adapting to shifting markets
With these in your back pocket, you can be just as excited as Carlton Sheets about real estate investing. You’ll have the knowledge required to truly become a successful wholesaler and “start on your own path toward financial independence” today.
Image courtesy of Djordje Petrovic