The Whole Basics of Wholesale Real Estate Explained
The process of wholesale real estate is focused on controlling a piece of property by getting it under contract and then selling the contract rights to an investor at a profit. Many of the properties that a wholesale real estate buyer works with are distressed and have highly-motivated sellers.
Working with wholesale real estate is a short-term investment strategy and requires little capital to get started. It is possible to control a property with a contract that requires no money down or by using a small deposit of $5,000.
This strategy is useful for those learning how to invest in real estate as long as they are willing to do the hard work to find properties that they can control, which are selling for below market value. The only risk is losing the deposit if they fail to find a buyer during the period that they control the property. One way to avoid this risk is to have buyers lined up before contracting to purchase a qualified property.
Buyers may be investors who do not have the time to hunt for bargain properties or rehabbers who like to fix up properties and “flip” them for a profit after they are remodeled. A real estate wholesaler earns profits by finding properties at a decent price and having the negotiation skills to secure them under contract.
How do You Begin to Wholesale Real Estate?
There are five steps to take when starting out in wholesale real estate, which are:
- Research
- Find Buyers
- Financing
- Find Properties
- Sell the Deal
The most important thing a person can do when getting started is to spend a lot of time getting to know the local market, where they will focus their efforts on finding properties. Learn about the value of homes, how long they stay on the market, and the recent closing prices.
There is no point in finding homes and putting them under contract if you do not have buyers already lined up to take the properties. Look for investment groups that are active in the marketplace, investors who are not located in the area but seeking qualified investments, and building contractors that are remodeling houses in the area for resale.
Determine your needs for financing. Make sure you have any financing you may need to be lined up in advance. Typically, if you need to use financing to control a property, you will use a “hard money” loan that is a high-interest rate loan for a short term that can close quickly. It is also better to have some cash available for a good-faith deposit that can be offered to secure a valuable deal.
Your main job is to hunt for properties that can be purchased below their market value. You may be lucky and find a property that is listed; however, it is more likely that you will find properties that are not yet on the market. They may be pre-foreclosure deals, estate sales, or other properties that are not yet listed for sale.
You can sell the deal in two ways. One way is to offer the assignment of the purchase contract to your buyers. Be sure your purchase contract allows you to assign the contract to others without restrictions. The other way is to use the technique of a double closing, which is the simultaneous buying and selling of the property. In a double closing, you must be able to fully finance the purchase even for a very short period.
Do You Need a License for Wholesale Real Estate?
As a wholesale real estate investor, you are the purchaser in a transaction, and when you re-sell the property, you are the seller. There is no requirement to have a real estate license for this process.
Even though there is no legal requirement to have a license, many find having a real estate license is helpful. If you have a license, you can access the information in the multiple listing services (MLS), which is a source of leads of properties for sale.
Getting a real estate license requires taking classes, passing the real estate license exam, and being sponsored by an associated license real estate broker who acts like your supervisor. Being associated with a real estate broker may increase your chances of finding investors to buy properties.
When working with single-family homes, an investor can make an average profit of $5,000 to $10,000 per deal. That is considered exceptional. Occasionally, you may make more depending on the value of the property.
Example of a Wholesale Real Estate Deal
A wholesaler locates a highly-motivated seller with a property they desperately need to sell as fast as possible. The homeowner is willing to sell it for below market value. Perhaps the property is distressed and in need of a significant investment to make repairs that the homeowner cannot afford, or perhaps it is soon to be foreclosed upon by the bank.
The wholesaler contracts to purchase the property by using a purchase agreement that includes the unrestricted rights to assign the purchase contract to another party. Perhaps, the wholesale buyer needs to give the seller a cash deposit in good faith to secure the deal.
The wholesaler then sells the purchase contract to another buyer for a profit. In this structure, the end buyer is not purchasing the real estate from the wholesaler; instead, the end buyer is purchasing the right to buy the property under the existing purchase contract. The end buyer then closes on the property to acquire it.
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Is Trying to a Wholesale Real Estate Worth the Effort?
While it may sound easy to be a wholesaler, it requires significant effort to learn the local market dynamics, find buyers, and capture good deals that can be re-sold to your buyers. There are many pitfalls, including contracting for a purchase price that is too high to be profitable and losing the deal because the purchase contract expires before the deal can be sold.
You do not need as much cash as would be normally required to buy real estate outright. Still, you need to find the right properties with motivated sellers who will agree to sign an assignable purchase contract that can be resold to your buyers at a profit.
To be successful in this business requires dedication, hard work, and the ability to go without pay for long periods while you hunt for buyers and qualified deals. If you are a self-motivated, “people” person, who is good at networking with others, you have a better chance of being successful. If you are not internally driven to work hard and need someone to push you to do the work necessary, you will be unlikely to succeed in this effort.
How hard is it to be successful in wholesale real estate?
Some people do extremely well at being a wholesaler; however, it is challenging work with no guarantee of success for a newbie. Many real-estate gurus teach how to make money with no money down. Most of them make more money on selling courses than they do in real estate. You can learn from these courses, but exercise caution for any that makes it seem like an easy-to-get-rich scheme with a high price to take the course.
Should you wholesale your house?
In general, it is a good idea to get an appraisal before selling a house and also to clean up your credit before buying a new home. You will not get market value for the house if you agree to sell it to a wholesaler. If you are highly motivated to sell and have a lot of pressure to sell, such as facing imminent foreclosure, wholesaling your house may be your only option.
Advertisements that say “we pay cash for houses” or “we buy houses in any condition” are typically wholesalers, so if you want to get a fast offer at a low price, that is who to contact.
What are the Goals in Wholesale Real Estate?
Locate buyers that are interested in acquiring certain types of pre-qualified properties
Find a qualified property for sale at below market value
Get the property under a purchase contract that is assignable
Sell the purchase contract to one of your buyers
How do You Find a Property to Acquire for a Wholesale Real Estate Deal?
The first thing you need to do is conduct research into the market dynamics of the areas you want to buy real estate. You must do this research to be able to recognize a good deal when you find one.
Take this step seriously and allocate plenty of time to get to know the marketplace. Get to know the best areas and the worst ones. Practice finding comparables for properties that are listed to be able to make a rapid investment decision before actually trying to negotiate anything. Make sure you know how to make a comparable market analysis to be certain you can tell the price that is below market value when making an offer to buy a property.
After you are sure you know what amounts to offer, make offers as frequently as possible. Have the expectation that you will need to make many offers before you secure a deal. Look for highly-motivated sellers. When viewing properties, ask the owner why they want to sell. Listen carefully for their reasons to determine how motivated they are to sell.
You will also want to hunt for properties that are not listed for sale. While it may seem morbid, some find opportunities to acquire properties as estate sales by watching for obituaries. An estate sale may offer a property below market value to quickly create cash disbursements for the deceased person's heirs.
Track Foreclosures
Another source for good leads is to track the foreclosure filings that are made part of the public record. If a person loses a home to foreclosure, all the equity they built up in the home will be lost. It is to their benefit to have someone buy the property even below market value before foreclosure to try to preserve some equity value that would otherwise be completely lost.
Be aware that many investors track foreclosures, so this is a highly competitive process. If you are interested in pursuing this opportunity, join a foreclosure notification service to get the most up-to-date information about new foreclosure filings. In this way, you will have the best chance of finding such an opportunity and quickly go to see it to make an offer.
One thing you will learn about foreclosures is that the homeowners in this condition are very difficult to communicate with. They may think you are a bill collector that they should avoid. They will typically be stressed and may feel you are a vulture taking advantage of their situation. Nevertheless, this is a circumstance where deals may be found.
How Does Wholesale Real Estate Investing Compare to Flipping Houses?
Flipping houses is a technique of buying a house at a low price, remodeling it, and selling it for a higher price. Wholesaling is selling the contractual opportunity to buy a property or conducting a dual closing procedure to buy and re-sell a property at the same time. Wholesaling does not require making the investment in the remodeling costs, which may be substantial.
Flipping a house can be profitable; however, it requires the ability to finance both the house's purchase price and the cost of the renovations. Some investors, who have sufficient financing and investment capital, work on wholesale real estate sales and flipping houses simultaneously.
What are the Pros and Cons of Wholesale Real Estate?
Here is a summary of the pros and the cons of wholesaling:
Success Tips
Many who make money wholesaling properties find it very enjoyable. One way to start with success is to locate an investor group and offer to scout properties for them in an area that they have an interest in investigating. Being flexible about where you work is an advantage. If you can relocate to explore new markets, you can find investment funds that will benefit from having an association with you.
It is vital to make technology work for you to leverage your time in hunting down profitable deals. Join social networking sites to make connections with investors. Start a newsletter to describe successful deals that closed and use this to build up an excellent reputation.
Build a website to attract sellers who are motivated. Use search engine optimization (SEO) techniques and paid advertising to create web traffic. Automate your business as much as possible to give you the data that is most useful, such as recent foreclosure actions that have been filed with the court.
If you decide not to seek a real estate license, consider partnering up with a real estate agent who has a license to get access to the information published in the multiple listing services (MLS). Also, consider partnering with a building contractor who specializes in flipping homes by renovating them. Often a contractor is so busy building homes that they do not have enough time to find deals. Is a decent strategy to keep your options open to see what opportunities you may discover.
Many people do the wholesaling of real estate as a sideline in addition to other work. You are your own boss. You set the parameters of the work efforts that you make in this endeavor. That gives you the freedom to design a career path to your liking.
Conclusion
To be successful in wholesale real estate requires a well-trained mindset and an eagerness to hunt for the next profitable deal. It is important to be self-motivated and take on every task with dedicated effort. It may take many years to become an expert; however, if you like what you do, you will enjoy the process as you gain more skills and close more deals.