If you are interested in real estate investing there are many paths you can take to get started in the business. One way to get yourself involved is by wholesaling real estate. So how do you wholesale real estate – and, more importantly, what does that mean?
Investing in real estate can be lucrative, and there are many ways you can get involved in real estate investing without tons of upfront costs or long-term commitments. If you don’t have a ton of cash and lack a little know-how, getting involved in wholesaling real estate can be a smart move that pays off fast – really fast.
Wholesale real estate is a fairly simple concept that revolves around finding distressed properties and highly motivated sellers and connecting them with real estate investors who want to rehab or flip the property. A successful real estate wholesaler isn’t necessarily someone with a lot of money or experience, but someone with people skills and the ability to connect properties to potential buyers. If you are willing to put in the work you could see income within weeks with wholesale real estate.
What Is Wholesale Real Estate?
Wholesale real estate is when a wholesaler (you) acquires a temporary contract to a distressed property and then transfers it to another investor who will then develop or flip the property. You are not buying the property at any point. A wholesaler can best be described in this case as sort of a middleman between the seller and an end buyer. You are connecting distressed, below market properties with real estate investors.
A wholesaler looks exclusively for properties that are listed for well under what they are worth because of foreclosure, neglect, inheritance or financial strain. They then purchase a temporary contract for the property and estimate the cost of repairs and after repair value. With the calculations they then shop it to real estate developers to purchase and develop the property. In the end the wholesaler walks away with a wholesale fee as well as any “spread” left from the sale.
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How Do Wholesalers Make Money?
The wholesale business functions differently, and faster, than other aspects of real estate investing.
To get started a wholesaler needs to purchase the contract to the property, not the property itself. The cost to get a property put under contract is generally less than 1 percent of the purchase price depending on the property. This is what makes wholesaling much more inclusive to a range of investors because you don’t need to have a 25 percent down payment on hand.
After the wholesaler has calculated repair costs and has found a buyer they receive a “wholesale fee” when that contract is assigned to another investor. This fee is generally around 5-10 percent of the property value, much more than the initial investment to obtain the contract.
Wholesalers can also make money by selling a property for more than was stated in a contract and collecting the difference or “spread.” This is a strategy that can boost profits but requires some negotiation between the wholesaler and the end buyer.
Pros
- Requires little upfront costs and no hefty down payments so more people can get involved.
- A great way to get into the real estate investing business and learn as you go.
- You can earn money quickly.
- Does not require a long-term commitment.
Cons
- You may need a real estate license depending on where you are.
- Profit margins are generally smaller and are not always predictable.
- You can lose your initial investment if you are under contract and don’t find a buyer.
- Takes a lot of legwork and networking.
How To Wholesale Real Estate
Generate Leads
The first thing, and possibly most important thing, any potential wholesaler has to do is generate leads. Without a list of leads you have nowhere to start!
For wholesale you will want to look for sellers who are willing to sell for less than the property is worth because of time or financial constraints. Many wholesalers target homeowners that are facing foreclosure because they are often motivated to sell quickly. Another common target is individuals who have inherited property. If the owner has no interest in living in an inherited property they are often motivated to offload it quickly.
There are many ways wholesalers can find leads without spending a ton of money.
- Invest in high quality real estate software that allows you quick access to records and marketing tools.
- Create a website focused on attracting leads and spend time on SEO so leads can find you.
- Hit the ground yourself and look for properties in your area that may be good candidates.
- Run both digital and direct marketing campaigns to target potential sellers.
- Put up physical signs in neighborhoods that you are interested in or that have a lot of distressed properties.
Create a List of Potential Buyers
In addition to looking for potential sellers you should be proactive in creating a list of potential real estate investors to sell your wholesale property to. You don’t have to do all the legwork right now because you don’t have a property to market, but you should have resources available to know who you should market to once you are under contract.
You don’t want just the names of real estate investors in your area, you want to know who buys wholesale, who is a developer, who is a rehabber and who is a flipper. You want to know who is buying single family homes and who is more interested in apartment buildings. Knowing the specifics will help you determine if a property will be worth your time. Afterall, if you can’t find a buyer, you can’t make any money. If you do the work now you can set yourself up for success down the road.
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You can find potential buyers a few different ways including…
- Start networking with local investors. You can do this by attending events, joining real estate investing clubs or by being active in online investor groups.
- Use Craigslist to place listings and gauge interest in local investors.
- Be active on social media.
- Run direct and digital marketing campaigns to target local investors and introduce them to your business.
- Attend some auctions and pay attention to who is interested in what.
- Talk with real estate agents in your area.
Run The Numbers
In any wholesale scenario you need to make sure that you can actually make money with every transaction. That is why once you have found a potential seller you need to do a little math to figure out if it will work for you.
First you need to look at the after repair value (ARV) of the property. This number is how much the property will be worth after all the necessary repairs have been done. To get this number you need to research the local real estate market and accurately estimate the cost of repairs to the property. You may not have the knowledge to do this yourself just yet but there are plenty of resources out there including experts that you can partner with if you want to learn. This might require a little extra cost but would be worth it if you continue to wholesale real estate.
After that you need to calculate the maximum allowable offer, which is the highest offer you can make to the seller while also making sure the listing stays below market value and generates a profit. This number will guide you when you negotiate with both the buyer and seller.
Negotiate & Agree
Once you have identified a potential seller and determined that the property is one in which you could actually make money it’s time to negotiate. This may be one of the most difficult parts of the process because you are trying to convince someone to sell their property for less than it’s worth.
This is where your people skills come in. You want to be empathetic and have some contingencies available that you can waive that will make it easier on the seller. Be open and honest with the seller about the state of the property and the fickleness of the market. You may have to make some compromises so think of them in advance to ensure a smooth negotiation.
Once the seller has agreed you both have to enter into an agreement to get the process moving. Assigning a contract is the easiest and most common way to keep it going.
In this scenario you would not be purchasing the property nor have any rights over it, but instead you would be purchasing the contract giving you the ability to control its sale.
Find A Buyer
Once you have the contract you have to go out and find a real estate investor to purchase the property. Before you even begin your wholesale journey you need to do research and generate a list of local real estate investors who have a history of or willingness to buy wholesale properties.
Once you are under contract you are usually only given a certain amount of time to find a buyer. Sometimes this can range from only a few weeks to a few months.
Reach out to the buyers on your list who you think would be interested in your property as well as market the property online. Utilize all the digital marketing tools at your disposal to advertise your property including Facebook groups, LinkedIn, investor groups as well as sites like Craigslist. Additionally, target investors with direct mailing campaigns to make sure that they get their eyes on your property for sale.
Close Out The Property
Once you have found a buyer you will now negotiate with them on the terms of the sale. In this process you will want to be an advocate for yourself to make sure that you are walking away with your wholesale fee as well as any other fees you feel entitled to without alienating the investor.
Once an agreement has been made the sale will continue on like normal with the wholesaler walking away with their fees from the transaction.
Final Thoughts
Wholesaling real estate can be a great way to get yourself involved in real estate investing without making any long-term commitments. If you are a people person who doesn’t mind putting in the work you could see profits in a matter of weeks. But before you start on your wholesale journey, set yourself up for success by doing all the needed legwork and research to make sure you are making the best decisions for yourself and your business.
