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Wholesaling

Which Type of Real Estate is Best?

The answer is, you can wholesale anything that has buyers!

That’s what makes things tricky.

There is a multitude of real estate property types you can potentially wholesale. But which one should you focus on? Which are more suited for the wholesaling technique?

Consider that the ultimate goal in a real estate wholesaling business is to generate profit by locating distressed properties that are owned by motivated sellers, putting their houses under contract, then assigning the contracts to buyers who want them. You don’t renovate or take ownership of the property. Instead, you find good deals, estimate repair costs and ARV, and collect a wholesaler fee when buyers sign purchase contracts.

Two crucial things here: the potential profit you can make from the properties, and the speed it takes to match them with buyers. The whole process should take only 30-45 days because the faster you close deals, the more successful you’ll be.

But which type of real estate should you focus on?

Single-Family Houses

SFHs are plentiful in all states. A quick search of US housing statistics shows that 60.3% of housing structures in the country are SFHs (1-unit, detached). This makes them familiar to most, including wholesalers, and the obvious preference of most buyers.

You can find plenty of distressed SFHs under market value. In places like the City of Detroit, which was hit hard by the housing crisis and has lots of blighted areas, foreclosure-related sales are common.

Here, you can scoop up distressed SFHs with minimal capital, but do people want to buy them? Especially in blighted neighborhoods? It’s all about location, location, location, so no matter how good some deals are, they’re probably not suited to wholesaling. You want to find sweet spot houses that are both affordable and marketable. Cheap, tear-down houses in undesirable neighborhoods are not marketable.

With single-family homes, you can typically seal 5-10 deals per month, each of them giving you $5,000-$10,000 in profit. This makes them the bread and butter of the wholesaling business. They’re easy to find and easy to earn from.

Mobile Homes

While mobile homes aren’t the most popular, there are wholesalers who swear by them.

Mobile homes are the third most popular (7.6%) housing structure in the US. Most of them are in the southern states: Florida, Texas, North Carolina, Georgia, South Carolina, and Alabama.

There will always be a market for a cost-efficient living, so it is possible to find buyers for mobile home wholesale contracts. You’ll experience less competition, a stable demand, and get your name is known in the market fast (the community of mobile homeowners is often close-knit).

In terms of margins, mobile homes are low. You’ll earn around $500-$2,000 as an assignment fee for most deals you find. (Though it’s not unheard of to make $30,000 in high-demand areas, those come rarely!) In general, it’s going to take at least 6 mobile home deals to equate to 1 SFH deal.

In terms of volume, there are fewer mobile homes than SFHs across the country, too. So it depends on how much leg work you’re prepared to do, and which properties are in higher demand in your area/the people on your buyers’ list.

Apartment Buildings (and Multi-family Homes)

Most beginners are intimidated by wholesaling multifamily properties, due to their size and difference in buyer criteria (versus the usual SFHs). Instead of basing the value on ARV, apartment buildings and MFHs depend on the net operating income (NOI) or cash flow that it will produce.

Apartment buildings range in units sizes from studio to 4-bedroom, and in building sizes from a few floors to dozens of stories. In general, they are most in-demand in metropolitan areas. Because of this, apartments are not as preferred in smaller towns as in big cities. Keep this in mind, as apartments that attract fewer tenants will have a smaller buyer base, taking more time and marketing costs to seal deals.

Larger properties and buildings also take a lot of time to analyze. You will spend more time on these deals than you will with smaller properties. This means you’ll have lower volumes, so will need to make more profit from a smaller number of deals, most likely.

Nevertheless, MFHs are still in demand today, due to how much income they can provide on a monthly basis. There is also ease of managing them and higher ROI per unit compared to SFHs.

Wholesaling one building can bring in five to seven figures per deal, making the higher time investment on your part potentially worthwhile. Higher prices, bigger profits! Just make sure you’re prepared to put in the legwork and find the right location to wholesale apartment buildings or MFHs.

Commercial Properties

Wholesaling commercial real estate includes office buildings, retail malls, warehouses, or buildings with mixed usage. You’ll be sealing deals with investors who are looking to make money from overhauling and repositioning the building to attract businesses or tenants, focusing on NOI instead of ARV (just like with MFHs).

The pros of wholesaling commercial properties are bigger profit margins, less competition, and easier financing.

Their values are usually in the millions of dollars, therefore, the assignment fee you’ll make will also be high. Most real estate agents are also more comfortable with residential properties, so there isn’t much competition in the field, allowing you to negotiate with investors.

The range you can earn from commercial properties is wide (a small office will vary greatly from a retail mall). But with the right connections and buyer’s criteria, most of them are also easily sourced. In fact, some have experienced a larger pool of distressed commercial properties out there than residential ones (if you count construction REO properties).

Vacant Land and Lots

Empty lands can be wholesaled, too. Parking lots, infill lots, demolished buildings, acreage, and lots that are great for building new structures are fairly easy to wholesale. Given their variety, buyers for land wholesale deals will also come in all shapes and sizes.

If there is a market for new construction in an area, there will be a demand for buildable lots. Some home investors, for example, are constantly on the lookout for new lots to build on. Wholesaling empty land that meets their criteria is as straightforward as it sounds. These potential markets can be found by searching for areas that have sold newly-built structures recently. Chances are, those are the areas where houses are being (and will continue to be) built. That’s where you should look to wholesale vacant lots.

Flipping vacant lots can mean a teardown (usually done where the land is more valuable than the house) or a cleanup. Once you turn the land around, selling it can be fast – if it’s in a desirable area. The margins are smaller than with SFHs, however, unless you’re dealing in larger, more expensive plots of land.

Each property type has its pros and cons–and this list does not cover it all. At the end of the day, it boils down to what you want, how many deals you want to do, and how much you want to make off each deal.

If you’re looking for straightforward wholesaling, go for SFHs.

For beginners, start by understanding your market and building your buyer list. You can do this by joining local real estate investor clubs. It’s easier to find properties that match buyers’ criteria than getting stuck with properties that nobody is interested in, so make sure you research the level of demand in your area for each property type before getting started.

What are your preferred property types to wholesale? What are you curious to wholesale next?


the best thing a wholesaler can do is find a class C property in a Class B area. Second best option: find one very close to a B area.

Image courtesy of Rodney

Categories
Wholesaling

5 Wholesaling Myths —Debunked!

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.

Conclusion

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.

Image courtesy of Monstera

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Wholesaling

Wholesalers: Should You Obtain Your RE License?

Should real estate wholesalers operate with or without a real estate license? There are a lot of mixed opinions about this, and legality varies by state, but as long as you make sure that you abide by the law, you may not need to have a real estate license to wholesale properties. Let’s look at some of the pros and cons of acquiring a real estate license, as opposed to operating as a real estate wholesaler without one.

Benefits of Wholesaling with a Real Estate License

  • May offer increased credibility with sellers, buyers and associates in the industry.
  • Gets you access to the Multiple Listing Service (MLS), although most wholesale deals are done on off-market properties, meaning you won’t find them listed on the MLS. 
  • You could use your RE license to earn additional income, if you want to earn commissions on selling properties, but this is a whole different beast to wholesaling, so ask yourself – do you want to be a real estate agent, or a wholesaler?
  • Being a licensed agent also serves as a good starting point when growing your network, by giving you the chance to connect with brokers and agents, who could potentially bring you future wholesale deals. This is also a great way for beginners to learn more about the ins and outs of the industry.
  • Not worrying about state requirements which the number of annual transactions you can do without a license.

Drawbacks of Wholesaling with a Real Estate License

  • Acquiring a real estate license requires ongoing time and money.
  • Bear in mind that if you’re a licensed agent, you can only work if you’re employed by a brokerage, which means that they are entitled to a commission from each sale you make. What’s more, being part of a brokerage means you’re limited by the policies set out by the firm, and therefore you might not be able to conduct business in the same way that you would independently.
  • By law, you are also required to disclose that you are a licensed agent, which could negatively impact your ability to source deals and put you at a disadvantage, when compared to an unlicensed wholesaler. This isn’t necessarily always the case, but it’s worth being aware of.
  • Potentially getting fined, or worse, for exceeding state limitations on the number of annual transactions one can do without a license.

Regardless of whether you decide to operate as a wholesaler with or without a real estate license, there are certain risks you should always be aware of. To safeguard your credibility, as best practice, it’s always important to carry out proper due diligence by staying informed about your state laws. We highly recommend consulting a real estate attorney for their legal opinion. Also, be extra mindful of the language you use when sourcing deals and marketing them, so that all parties involved understand what your participation in the transaction is. 

 

Image Courtesy of Subhan Saad

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Wholesaling

Bandit Signs — Lead Magnet or Eyesore

Image by: Collis

You know those ugly signs you see when you’re sitting at stoplights that offer to BUY YOUR HOUSE FOR CA$H — those are called bandit signs. They are a disputed tactic in real estate circles, some people swear by them while others shun them. 

Why They Work

Do you ever think to yourself, “Who keeps putting up these stupid signs?” Or better yet, “Who actually calls these numbers?” You might be surprised by the answers to both questions.

  • Answer #1 – Property wholesalers are responsible. Wholesalers look for motivated sellers to buy their (usually) distressed homes. Then they mark the price up and try to sell them off was quickly as possible without making any repairs.
  • Answer #2 – It should come as no surprise, but motivated property owners. They’re lured by the idea of getting quick cash and getting rid of a property they don’t really want.

So why are they so effective? The signs are purposefully designed to be simple and non-threatening. They target motivated sellers who want or need to get rid of their homes fast. The message is simple and clear. That’s why they look like some guy with a magic marker scribbled his number on some poster board and nailed it to a utility pole or stuck it on someone’s front lawn. And that’s not far from the truth, except for most of them are made from corrugated plastic. By being ugly and straightforward, homeowners are less intimidated to phone an “average Joe” than some real estate agent. 

Legality

They are called bandit signs for a reason — they violate city ordinances in almost every community across the country. They are considered litter, so city crews just throw them away. That’s also why they usually pop up on Fridays after city offices close. Hefty fines can be levied per infraction and increase with the number of violations. Clearly, wholesalers remain unfazed by the threat of fines.

How To Profit From Them (Without Getting Caught)

1) Keeping your message simple and brief. 

2) Not using your company name. 

3) Taking the proper steps to avoid getting fined:

  • Only use prepaid cell phones (burners).
  • Never use your own name.
  • Place your signs on the weekends, most city employeesonly work Monday thru Friday.
  • If possible, use private property to place your signs. Ask the owner first. 

4) Placing them in high traffic areas for maximum exposure.

Wholesaling is YOUR business, only you can determine what strategies to implement to meet your income goals. Bandit signs have been proven to be excellent lead magnets, but they aren’t the only tool at your disposal. If you decide to use them, it’s best to incorporate them into your overall marketing strategy.

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Wholesaling

How to Wholesale Houses with Mortgages

A row of houses.

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. 

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Wholesaling

How To Find Cash For Your Flipping Deals.

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

Look to friends and family when preparing for your initial funding

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.