While you might be tempted to cover areas beyond your local real estate scene, it’s possible that you’re already sitting on a wholesaling goldmine—and you just didn’t know it!
Here are the signs of a market that’s ripe for a booming wholesaling business:
Overwhelming amount of cash purchases
Abnormally fast sales
Houses getting multiple offers
Escalation clauses (to avoid getting outbid)
If your local area has all these factors, you’re in a great place to become a wholesaler.
Read along to find out the two-prong strategy that will help you dominate your local real estate market and build a successful wholesaling empire—right where you live.
Search-Optimize Your Wholesaling Business
Aside from doing offline marketing, there is also a world of possibilities online. Not only are geographic boundaries removed, but the internet also enables you to effectively target and reach your audiences with SEO (search engine optimization) tools.
Check out these online marketing platforms for real estate wholesaling:
MLS (Multiple Listing Service)
Online forums and auctions sites
All of these efforts hinge on the fact that we do practically everything online nowadays. Your customers are more likely than ever to search online for new properties.
Your goal is to be visible and easily accessible via an online search. This is where keyword research comes in. By knowing what keywords to target, you can also maximize your reach on search engines, gain valuable traffic, and generate qualified leads.
Do a simple test to see how your business currently ranks in search engines:
Search “real estate wholesaler [location]” on Google.
Look at the top results.
Does your name or business appear? Where do you rank versus your competitors? Who shows up before you do?
Well, you need to beat them.
Optimize your searchability by choosing keywords that your buyers will search for, then incorporate them in your blog posts, listings, and website.
All of these methods are effective in finding wholesaling deals, but networking is the most important strategy when trying to dominate a market.
The good thing is that all competitive areas have an REIA or two in the community – Metro Detroit definitely does.
REIAs are a great place to start making your presence known—the goal is to establish your wholesaling business to outshine other wholesalers and be the go-to property supplier for the local area. REIAs give you access to a whole group of people for:
Building an active cash buyers list
Developing strong and reliable connections
Boasting your overflowing housing inventory
You can also team up with Bird Dogs or acquisitions managers who are interested in the local market. The more properties they bring you, the more inventory you have to sell to cash buyers.
The key to dominating your local wholesaling market is good marketing—both on-ground and online. By networking closely with the community and optimizing your online presence, you’ll set yourself up for long-term success wholesaling in any competitive space. Ultimately, you want to establish yourself as an expert—and building your credibility with a great online presence and consistent quality service is how you do this.
To succeed even in these uncertain times, go through our wholesaling trends and insights that have surfaced during the pandemic. Get a good grasp of the present and future of wholesaling real estate to dominate the business in your local area—and beyond.
Need help in beating your local competition? Get in touch with us! Our team is more than willing to help.
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!
1. Generating Wholesale Leads is Harder than You Think
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 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 dealsif 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…
2. Analyzing Deals Correctly Will Make or Break Your Success
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.
3. Having the Right Documents and Contracts is Key
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.
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.
4. Keep Your Profit Margin Private by Following the Double Closing Technique
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.
5. How to Turn Any Lead Into a Deal
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.
6. Adapting to Shifting Markets is How to Scale & Sustain Your Wholesaling Business
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.
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.
Real estate wholesaling often gets a bad rap, but is it fair to call this an illegal or shady form of real estate investing? How did it get this reputation in the first place?
The problem is, wholesaling is usually chosen by first-time investors as a way of getting into the industry with little or no upfront capital required – which is great. But it also means that newbie investors get into this field and make a lot of mistakes, and that has led to some serious misconceptions about wholesaling over the years.
If you’re an investor who’s excited to get started as a wholesaler but is hesitant because of things you might have heard about it, this article will pull back the curtain on five of the most pervasive wholesaling myths.
Wholesaling real estate is not outright illegal, but it’s governed by specific laws that require you to have certain contracts and documents before you can proceed. Wholesaling gets its bad rap largely due to the illegal practice of unlicensed brokering, which isn’t the same as wholesaling.
1. “It’s illegal to wholesale real estate.”
To ensure full compliance with local real estate law, here are some steps to take when wholesaling properties:
Have a bilateral contract with the seller that stipulates your acquisition of the equitable interest.
Have a proof of funds letter to prove your intent to purchase.
Wait until the house is under contract with the original seller before finding new buyers.
In the event of needing to defend your wholesaling activities in real estate commission hearings, having everything documented is essential for proving you’ve acted within the law.
2. “Wholesaling is only for beginner investors.”
Just because it takes minimal capital to get started with wholesaling, doesn’t mean it’s easy. For example, since you’re the middleman in deals, a buyer or seller can easily get rid of you to avoid paying an additional wholesaler’s fee—effectively taking you out of the equation altogether.
Secondly, while there is a low barrier to entry, wholesaling has a high barrier to sustainability. People tend to think that wholesaling fulfills a need in the market, where investors are looking for people to help them find their next deal. In reality, the investors themselves are already good at finding deals themselves. This makes finding good deals extremely hard. Plus, investors don’t want to subcontract finding deals to wholesalers, and those who do certainly don’t want to pay top dollar.
Wholesaling can be a stepping stone for beginners to get into real estate investing, but that doesn’t discount the fact that it’s highly lucrative for experienced wholesalers. Mastering the skills and acquiring the connections for a steady flow of good deals enables you to earn as much as other investment strategies.
3. “Wholesaling is inferior to house flipping.”
Let’s put the two investment strategies side-by-side for an accurate comparison:
Depending on your reason and goals for investing in real estate, you might choose one over the other. Either way, based on these key differences, wholesaling isn’t inferior to house flipping at all, it’s just a very different approach with a lot less maintenance required.
4. “Focus on buyers who’ve already bought from you.”
Often called the “easy button buyer” mistake, this refers to the tendency for beginners to send future deals only to the buyers that were willing to close on earlier deals. This is a common myth that wholesalers believe to be effective, but in reality, limits your potential returns.
Think of it this way: businesses thrive on supply and demand. After closing a couple of deals, you now know the area, the numbers, and what features attract more particular buyers. In other words, you have the supply to meet the demand in more than a couple of markets.
Position yourself as an opportunity to as many potential buyers as possible, and you’ll ensure you have a scalable wholesaling business for years to come.
5. “A buyer’s list is necessary to be successful.”
Many investors will say that you need a buyer’s list to be successful in wholesaling, but this is not exactly true.
The typical buyer’s lists are full of investors who do a lot of deals on a regular basis, meaning they’re serious buyers who can close with cash in 10 days. This is exactly what you want as a wholesaler, but you don’t need to have a buyer’s list to do this.
Instead, new wholesalers should focus on finding quality deals, rather than quality buyers. If you can find a great property, serious buyers will follow.
We’ve written elsewhere on how to find buyers for your wholesale deals, should you need further tips.
All these myths surrounding wholesaling real estate may give some the impression that this investment strategy is shady and unsustainable. However, with these common myths easily debunked, you can see there are actually many solid reasons that prove why wholesaling is an excellent way to invest in real estate.
If you want to learn more about wholesaling in the current market, we’ve also written an article that explains the top five insights you need to successfully wholesale real estate after a year of COVID-19.
Wholesaling real estate appeals to many investors, because it allows you to invest in properties without any upfront capital of your own, or the headaches that come along with owning and maintaining a physical property.
Now, with work-from-home seemingly here to stay, more and more people are searching for ways to get into property investments (while they can still hopefully secure a good deal on a home from a motivated seller) – only they want to do it 100% remotely.
But can you wholesale a property completely online, without ever seeing it, or meeting your buyer or seller, in person? Let’s consider why or why not.
What is wholesaling real estate?
Wholesaling real estate is essentially matching sellers to buyers, and taking a fee for your troubles. There are a few different ways to carry out the process, but in general, it works like this:
A wholesaler finds a motivated seller and negotiates to purchase their (often distressed) property at a below-market-value price.
They sign a purchase agreement.
The wholesaler finds a buyer and signs an assignment contract, assigning to the buyer the right to buy the house at a slightly higher price (the amount specified in the initial purchase agreement + the wholesaler’s “assignment fee”).
The wholesaler hands over the paperwork to a local title company, the buyer and seller close on the deal, and the wholesaler receives their fee.
How can real estate wholesaling be done online?
Wholesaling digitally is not impossible. In fact, according to the National Association of REALTORS®, more than half (52%) of homebuyers in 2019 found their home through the internet. And, because of the pandemic, shifting to online viewings is only going to become more common.
Nowadays, you can use 3D tours, video calls, and Google Street View to get a feel for the property and its surroundings, no matter where you are in the world.
However, there are some definite cons to wholesaling without ever viewing a property in person:
You’re limited to what’s listed online. Many wholesalers find the best properties by driving around target neighborhoods and looking for distressed houses. If it’s already advertised online, chances are you won’t be able to negotiate as good a deal, since there will be agent commissions to pay (although you can still find some deals this way, and by focusing on FSBOs). The other option is to have an awesome inbound marketing strategy – more on that below!
You can’t catch hidden problems. 3D tours and video calls will never completely make up for seeing a property (and the area it’s located in) for yourself. You can work with a local inspector or field agent on the ground, who will give houses a once-over for you, but you’ll have to ensure you trust them to spot any potential problems with a discerning eye.
You won’t be able to negotiate contracts in person, which can make it a lot harder to read the seller and build a rapport with them.
That being said, lots of experienced investors do buy houses sight-unseen. So, if you want to know how to wholesale online, here’s what you need to consider next:
Building a cash buyers list
The goal of a wholesaler (once they’ve negotiated a Purchase Agreements) is to find a buyer for the property. To do this efficiently, you need to build a list of contacts—either owner-occupiers, or individuals/companies that are looking to buy distressed houses and flip them at a profit.
Typically, you build this network by sending out mailing lists, taking out ad placements, or attending in-person events. The goal? Make distressed sellers come to YOU. Just keep in mind that, for every 100 ad impressions you get or emails you send out, you’re probably only going to get 1 response – maybe up to 3, if you’re really lucky. So it’s a numbers game.
Fortunately, though, there are also lots of ways to develop your cash buyers list completely online, by:
Joining real estate groups in MeetUp.com or Facebook
Running ads on Facebook, Google Ads, or other social media platforms
Setting up a website and gathering emails through a signup form – then sending out regular newsletters to your mailing list with details of all your available properties
Ideally, you’ll want to get the contact information and purchasing criteria of these buyers, and keep a simple database of their requirements and preferences, like:
How can I contact you for real estate deals?
Which area do you want to invest in?
What kind of properties do you prefer? What do you want to avoid?
What type of investment are you looking for? Is it cash flow, house appreciation, flipping, or do you want to live in the home yourself?
How quickly and often can you close deals?
Negotiating the Purchase Agreement
Once you’ve found some properties and have a cash buyers list, you need to evaluate each deal based on the following:
The market value of the property
The cost of repairing/renovating the property
The Assignment Fee you’ll be taking as part of the wholesale deal
Keeping these three things in mind will help you calculate your maximum allowable offer (MAO).
Then, you have to negotiate with the seller to agree to a price that leaves room for you to make your profit as a wholesaler. This is where working online becomes potentially tricky: at some point, you’re going to at least have a phone conversation (or several) with the seller, and without meeting them face-to-face, you need to have some pretty great skills as a salesperson to seal deals consistently over the phone.
Except, of course, if you’ve done a great job advertising your wholesaling business online, and motivated sellers are beating down your door trying to sell you their houses. In that case, the sales calls should be pretty straightforward!
For more wary sellers, you can try using video calls, but many won’t be used to Skype or Zoom, and many others won’t bother giving you the time of day. A lot of homeowners balk when they hear you’ll be putting in an offer without viewing the property in person – however, if you have a local agent going to view properties on your behalf, this isn’t usually a problem.
Once you’ve signed the Purchase Agreement, the next step is to start advertising the deal to your buyers list – and for that, you’ll need marketing photos. Even without visiting the property, though, you can get these relatively easily, either by asking the owner to take some for you, or getting your local representative to do it.
Closing the deal
Another common concern when wholesaling (even in person) is that, once the buyer and seller both see the amount you’re receiving from the deal as your Assignment Fee, they’ll want to back out, because they think it’s unfair that you’re making a profit from the sale.
When wholesaling real estate online, this can be even more of a danger. All they have to do is stop replying to your emails, and work out an arrangement between themselves in person. For that reason, a double closing may seem like the better option for online wholesaling.
In brief, the difference between assignment and double closing is:
Assignment of Contract is when you have the property under contract and you transfer those rights to another party (without ever owning the property yourself).
Double Closing is when you buy the property yourself, then immediately (often on the same day) sell it at a higher price to another buyer.
You’ll still need to have a representative attend the closings on your behalf, but it is possible to close on a house remotely, using e-signatures.
Closing wholesale deals online can therefore have several benefits, like:
You don’t have to wait long for physical documents to be signed, making it faster and more convenient.
The back-and-forth requires less energy than driving to in-person meetings.
Distance is a non-issue, so you can work with buyers and sellers who are out-of-state, or even out-of-country.
Everything is documented properly, with a digital paper trail.
You can access all of your essential documents in one place using cloud storage.
So, can you wholesale real estate 100% online? Yes, you can.
Should you wholesale real estate 100% online? That’s another question.
Most forms of real estate investing are not a way of generating passive income – unless you’re investing in a REIT (real estate investment trust). Typically, even with wholesaling, you want to view the property in person to make sure you’re getting what you paid for (and not taking on any nasty, expensive surprises which will prevent you from re-assigning the contract to a potential buyer).
However, if you have trusted partners on the ground who can meet with buyers and sellers and attend viewings and property inspections on your behalf, then wholesaling online becomes a lot less risky.
And, with our world becoming increasingly driven by technology, virtual wholesaling will probably only become more popular in the coming years.
That’s because now, with just a working laptop and fast internet connection, you can:
When wholesaling properties, transactions don’t always run smoothly, sooner or later you’re bound to come across some deals that don’t go your way
The more experience you get as a wholesaler, the more will you be able to manage these imperfect situations. Other times, however, you’ll find that the deal just isn’t going to be worth your time, that’s when it’s time to walk away.
Sometimes you can’t agree on a price, other times circumstances change, that’s why you have to have an ironclad contract with contingencies that will allow you to get out if needed. Having something in writing will protect you when you’re faced with adversity or a worst-case scenario. To be a profitable wholesaler, you need to stick to your plan. Hold firm to your requirements and don’t allow yourself to be taken advantage of.
A good buy will ultimately depend on how well you negotiate the terms and conditions of the contract, it’s a give and take. Do not bend on your principles or agree to terms that don’t fit your strategy. On the flip side, this is a negotiation, so avoid being too hard-nosed, as well. If you can’t agree on critical criteria, it’s time to walk away.
When you locate a property, you’re eager to get the property under contract so you can find a buyer and collect your check. As with any other business transaction, when there are multiple people involved, timetables can get messy. Inspection dates and closings get bumped all the time, so you should allow for a reasonable amount of flexibility. One of the keys to successful wholesaling is seller motivation. When deadlines are not being kept or if you feel like the seller is stalling, it’s time to walk away.
This sounds like a no-brainer, but if you won’t make enough money, then don’t waste your time.
There are a couple of reasons for little or no profit. First, the After Repair Value (ARV) is too low. There’s no point in buying a property if won’t be able to sell it for a profit. Second, there isn’t enough equity. Sellers want to walk away with at least a little cash in their pockets, but if they’re upside down, you’d have to configure a short sale. A short sale brings an extra hassle, but it is possible. However, very often, sellers don’t have the money to bring to closing. So if either of these is true for you, it’s best to walk away.
The world of real estate is forever changing. New laws, new code requirements, new zoning ordinances are changing the face and landscape of real estate. Stay abreast of current changes to avoid getting stuck with a property under contract and not being able to find a buyer for it. If any newly introduced factor will prevent you from being able to turn a profit, it’s time to walk away.
As you grow your wholesaling business, you’ll learn to spot warnings signs that will trigger your instincts. You’ll have a sense when there isn’t enough upside to make the deal worthwhile. Not all of your transactions are going to be home runs, but do your due diligence and stick your plan. There will always be another property that will fit your parameters. When you see that things are headed south, it’s just best to walk away.
To be a successful wholesaler, you have to be prepared to work every deal you find, even when they aren’t ideal situations
A motivated seller is a motivated seller. If there is money to be made, don’t let a small glitch prevent you from considering a deal. Wholesaling houses with mortgages is part of that deal.One of the burdens of home ownership is the mortgage. Even homes in affluent neighborhoods go into foreclosure. Remember the crash of 2008? Millions of homeowners lost or were at risk for losing their home because they were underwater on their loans.
Equity Is King
Some wholesaling deals will involve houses with debt. What matters to you as a wholesaler is the amount of equity the seller has in their home. It’s much easier to close a deal if you can offer them more than what is owed. They’ll simply use the proceeds from the sale to pay off their loan.
Some homeowners are still hesitant because they aren’t motivated enough. When the seller needs some convincing, remind them of the cash they’ll have in their pocket when this is all over. Look, the seller wants two things from the sale of their home, 1) to get out from under their home debt, and 2) to walk from the deal with some cash in their pocket. If your offer price is higher than what they owe, then the latter is true, but that’s not always the case.
The Short Sale
A less desirable option is the short sale. This type of transaction occurs when a seller owes more on the house than it’s worth. Though this is not ideal, anything is possible. Many wholesalers would, instead, not get involved with short sales because of the extra hassle involved and find it not worth their time, so they move on. This presents you with an opportunity. The seller would already have to be in default on their loan, be willing to take a hit to their credit score AND be able to bring cash to the closing table.
It’s important to realize that there are many reasons why a seller might be eager to sell or why they are behind on their mortgage payments. They may have inherited the home or suffered a job loss. Just because they are underwater on their mortgage, doesn’t mean that they don’t have cash in the bank. They may be going through a divorce or being relocated for work. The takeaway here is, don’t presume anything, your goal is to make money. If the deal presents an opportunity to do so, don’t make assumptions about the seller’s motivation.
Wholesaling houses with mortgages is really no different than most real estate transactions. It is far more common to find a seller that still owes on their home than one who owns it outright. As a wholesaler, that is the leverage you want. Your only concern is, can you find a buyer? It doesn’t matter to you how much the seller owes if you can strike a deal that turns a profit.
You have a found a great property for a fix-n-flip, but you don’t have the money, or it’s tied up elsewhere, perhaps another flipping project. Though those gurus on late-nite TV will rant about how you can buy a home with no money down, it’s tricky and much more complicated than they make it seem. In a more realistic scenario, you will need to come up some cash or collateral to fund your next project.
Here are the most common ways to raise cash for your next house flipping deal:
Private Investors or Partners
If you have close friends, family members, or business associates, who either have the money or have the ability to access a loan, they can be a good place to start. Don’t expect them to do it for free. If you have a bit of cash, you can pay them interest on the loan and pay it back in full after the sale.
If you’re confident that you can make it work, prepare a business plan and a contract that outlines the details including purchase price, rehab costs, ARV, and how the proceeds are going to be divided in the end. Both of you need to have realistic expectations of what kind of profit is available to each of you.
Full disclosure: if you haven’t done so before, know that doing business with family and friends can be a delicate situation and put pressure on your existing relationship. If the investments run into problems or fails, it can cause a rift or worse yet, you’ll fall entirely out of contact.
Another option is to find an investor that will allow you to work off your end with sweat equity. If you have the knowledge and skills to do some or all of the work on a property flip, you may find an investor willing to trade you for your portion of the labor. After the sale, you’ll split the money according to your agreement. You won’t make as much money as doing it all yourself, but it’s a good place to start. This strategy will provide you with the means to save up some cash to eventually, fund your own deals.
Hard Money Lenders
If you feel more comfortable keeping it impersonal, you can contact a hard money lender. They are real estate investors willing to provide you with a short-term loan. Because these lenders are familiar with the industry, there are some advantages:
Will provide approval for distressed, investment-grade properties that require work
Credit rating and other loan requirements are more lenient than a bank
Loan approval is quicker, allowing you to bid on deals and compete with other buyers
National companies make loans all over the country
Real Estate Investment Associations & Groups (REIA)
Most cities have real estate investment associations or groups, so join several in your area and start regularly attending meetings. REIAs bring together people with expertise that you can benefit from, including not only investors but lawyers, accountants, and contractors. Free advice is worth its weight in gold. These like-minded folks may be willing to fund your rehab, or at least be able to recommend someone.
Raising money and structuring your next rehab isn’t horribly difficult, but it may take some creativity. It may mean combining strategies to get the deal done. After flipping your first property, you’ll be able to roll-over any profits to fund your next deal. In time, you’ll be able to finance your own deals, and perhaps, greenhorn investors will start coming to you when raising cash for the next flip.
You want to get into real estate investing, but you don’t know how to start because you’re short on cash, nor do you have access to borrow funds.
If real estate is really what you want to do, then you have to find a way to do your first deal. One way is to start packing away money for a down payment – but, who knows how long that’ll take. Another option is to get started wholesaling properties.
We’re not going to get into explaining what wholesaling is here, you can Google that or read our previous posts. So, let’s cover why you should consider Wholesaling.
There’s no reason why you can’t start wholesaling right away, but there is a lot that goes into it. Before you start searching for a house to put under contract, you’ll want to study up or find yourself a mentor, as there is a bit of a learning curve. By the way, the best place to find a local mentor that knows the market you’ll be working in is by attending REIA meetings!
Let’s take a look at some of the advantages of starting your real estate career in wholesaling.
1) It doesn’t take a lot of money. There aren’t many businesses that can offer you a low-cost barrier to entry accompanied by low overhead. Since that was keeping you from buying your first property, wholesaling allows you to kick-off a new business venture with very little of your own cash. You’re not purchasing the property, only getting it under contract, so you don’t need a large lump of cash to put down.
2) A low credit rating won’t hold you back. Since you’re not actually taking possession of the property, you need very little cash on hand. Your buyer is the one who would need to apply for a loan or pay cash for the property.
3) There are always distressed sellers to target. No matter the area or economy, people are always looking to get rid of properties. You aren’t concerned with the condition of the property because you’re not paying to fix it up. Eager sellers provide the leverage you need to find money-making opportunities.
4) The potential for quick profits is high. Since you’re not waiting to find tenants nor for renovations to be completed, the faster you find a buyer, the sooner you cash your check. This is where having the proper contacts and a reliable buyer’s list comes in.
5) It’s a free real estate education. Wholesaling allows you to learn the real estate business from the ground up. By not being “cursed” with having a lot of money, you’re forced to learn the complex aspects of real estate investing using other people’s money. You’ll learn to vet properties, instead of buying them blindly hoping to turn a profit until your bank account runs dry. By starting at the bottom, you’ll also acquire a gift for spotting new opportunities.
requires motivation and an ability to network with people. Many wholesalers use
it as a stepping stone to flipping or landlording, but many successful
wholesalers choose to just stick to wholesaling.
What is a
wholesaler? Someone who buys and sells houses quickly, making minimal if any
repairs. The goal of the wholesaler is to acquire a property far below market
price and then quickly sell it off to another investor, usually a flipper or
wholesaler finds a motivated seller and gets the property under contract. Once
under contract, the wholesaler finds another investor to buy the property for a
higher price — ideally, without ever taking ownership. The wholesaler makes
money on the spread for In effect, “brokering” the deal.
Do People Think It’s Illegal?
this business practice being illegal spread because: 1) People don’t understand
the process, and 2) Many wholesalers actually do it unethically and some illegally.
the transaction legal, the wholesaler needs to get the property under contract
BEFORE finding a buyer. Otherwise, they are acting as real estate broker —
which they can usually only do if properly licensed (please check your state
laws). By the way, it is legal to have a prospective buyer or a pool of
investors in mind when negotiating with a seller, as long as you don’t contact anyone
about a specific property before signing an agreement with the seller.
illegal to use a “simultaneous closing” to close both your purchase
transaction and the sale transaction at the same time. Years ago simultaneous
closings were commonly used by wholesalers to use their buyer’s funds to close
on their purchase with the seller — using the two separate transactions to
hide how much they making from the wholesale deal. The transaction with the
seller hid the sales price to the buyer, and the transaction with the buyer hid
the purchase price with the seller. Laws have since changed making simultaneous
closings very difficult to do legally. So, many wholesalers now use
transactional funding to hide their profits from buyer and seller.
is attractive to beginning investors because wholesaling doesn’t take a lot of
money. All you need to do is get a property under contract, which may not even
require an earnest money deposit. Then you just need to find a buyer. It’s
essential to put some study time in to understand the process and avoid any
legal mistakes, but it’s not that hard. Many greenhorns start out working with
a mentor, sharing part of their profits In exchange for expertise.
Finding properties can be as simple as driving through neighborhoods with plenty of distressed homes and contacting owners, using bandit signs or staying in the front of your contacts via Facebook. The internet connects buyers and sellers through real estate forums, Craigslist ads, etc. More experienced wholesalers often are members of real estate investing groups and employ professional services to help them find their deals.
selling the property to someone else is key. Wholesalers keep a buyer’s list
which will include flippers, other wholesalers, or other investors willing to
make the needed repairs. Much like finding houses to purchase, real estate
groups, Craigslist, emails, and Facebook help build a buyer’s list.
Sounds Kinda Sketchy
is a sector of the real estate industry that people have strong opinions on.
Okay, it’s legal, but is it ethical? Opponents claim that wholesalers prey on
uneducated sellers. Many sellers are
unclear on the value of their homes and are desperate for quick cash. Meanwhile,
the wholesaler knows they are paying much less than the property is worth. So,
what’s stopping the seller from calling a real estate agent to get the actual
market value for their home? Actually, nothing. What’s stopping the seller from
selling to someone else at true market value? Again, nothing. It’s really no
different than someone going to a pawnshop for fast cash Instead of waiting
days/weeks/months trying to get the best price.
Final Answer: No,
wholesaling houses is not illegal. It is a quick way to make a good return on
your money. It can be a juggling act of
sorts, but by having several houses or blocks of houses under contract simultaneously,
wholesaling can be very profitable with little or nothing at stake.