A Primer On Real Estate Wholesaling
Real estate wholesaling is the process of buying a piece of property at a very low price, marking the price up slightly, then turning around reselling it to a retail buyer, who will then rehabilitate and/or stabilize the property and realize the bulk of the upside value.
The beauty of wholesaling real estate, is that your profits are cash, and they come to you quickly; within a week or two. The sellers wholesalers deal with are highly motivated to sell, making buying at very low prices possible, and the investors they sell to come to the closing table with cash, be it their own cash, or from a line of credit or rehab loan.
In the world of real estate wholesaling, “price” is the central issue. If you can buy a property cheap enough, no matter what it’s flaws there will always be a buyer for it. Also, the lower the price, the more demand there is for a deal and the more the wholesaler can demand payment in cash with no contingencies.
Possible Risks And How To Deal With Them
If you are wholesaling properly you are buying at low enough prices that, even with your profit added on, the price you are reselling for still gets investors greed glands pumping and they are falling over each other to take the deal off your hands.
The only risk you face wholesaling is when you are unable to resell the property because you paid too much to the seller and no investors want to buy.
When you put a property under contract you always have an inspection contingency, so if you haven’t found a buyer by the end of the inspection period you can give notice you don’t approve the condition of the property and the contract is null and void. Any earnest money binding the contract is returned to you as long as you have given notice before the expiration of the contingency.
Finding Deals To Wholesale
The key to achieving low price is marketing; 1) targeting sellers who are motivated and most likely to sell cheap in order to get a quick cash sale, 2) making offers to those sellers, and 3) following up with offers until their properties are sold, either to you or someone else. The secret to wholesaling lies in numbers, and creating high lead flow, and making a lot of offers.
Making Offers On MLS Listed Properties
Depending on the city, and the market phase, the MLS can be a rich source of deals. Older cities east of the Mississippi tend to have a lot of low end houses listed that are prime candidates for wholesaling. In newer cities, further west, the MLS is a good source of deals in down markets when banks are laden with REO and realtors are struggling to move their listings. When the market recovers though, and demand increases, MLS sourced wholesale deals are harder to come by.
When it comes to targeting motivated sellers direct mail is very effective, mainly due to the ability you have to segment the mailing list with criteria for motivation, and then mail only to them. No matter what county you live in, you can get the list of homeowners that is the tax roll from the Assessor’s Office. This is public information, so it is free. You just have to call and ask, and you will have it sent to you. The list you receive will contain details on every single house in the county; the property address, along the name and mailing address of the owner, where the tax statements are mailed. The most motivated sellers are the absentee owners; property owners living in another town or state. When you segment out the absentee owners from the rest of the list, and mail only to them, you will have a steady stream of motivated sellers calling you, wanting to sell their houses.
Having a classified ad in the Real Estate Wanted or Real Estate Services section of the main daily newspaper in your city produces a steady flow of deals. This can be expensive, and the calls don’t come in every day, however a single deal from your classified ad will produce enough profit to pay for the ad for the next ten years. Your classified ad should be in the paper 365 days a year. The key is, having a live answering service answer the calls and take down the sellers details, so the caller feels they have been taken care of and stop calling the other ads. With classified ads the calls come from all over; locally, out of town, out of state, other countries. They are a steady source of deals
Probate is the court process that results when the owner of a property dies without a will. Once in probate the property needs to be sold so the cash proceeds can be used to pay off bills, or be distributed to surviving family members. The opportunity with properties in probate arises out of judges knowing nothing about real estate, and proceedings being held up by real estate agents who promise a quick sale but produce an expired listing. The judge has no emotional attachment to the property, only a desire to liquidate the property and wrap up the hearing. When you submit a cash “as is” offer that closes in a week or two, even with a low price, it provides a lot of value to the judge. Most people consider probate too much work, or are afraid of the court process, so when you work probates it is often just you pursuing these deals. Probates are public record and can be researched at the courthouse.
Real estate wholesaling is buying cheap and reselling at a price that is still a bargain in the eyes of a fix and flip retail investor. When you do all the work involved with finding a motivated seller, negotiating a great deal, putting it under contract, and then offer it to retail investors at a price where they see it is easy for them to make money, you won’t have any problem finding buyers.
Placing an ad in the Sunday edition of the main daily paper will produce a lot of calls, and will by itself probably sell the property for you. With the headline, “Fixer-Upper Bargain”, followed by the brms/ba, the After Repaired Value, and your asking price, a lot of calls will come in. Many will be tire kickers, but among the callers will be pro investors to whom you can sell to over and over again. Make a list of all the callers you feel are pro retail investors. This becomes your Buyers List; an extremely valuable list of names.
Your local Real Estate Investor Association meeting is a place for you to network and make contact with retail investors. If you go to the meeting with flyers for a deal you have available, you’ll be a popular person at the meeting. Most REIAs have a session where you can get up in front of the group and pitch your deal to them. Assuming your deal is really “a deal”, this pitch will probably sell the property for you, along with unearthing all of the serious retail investors in the group. When you meet the pro investors, get their contact info and add them to your Buyers List.
Signs are incredibly effective for selling houses, but not the way you think. The key to them being effective is to stay low tech. Don’t go spending a lot of money with fancy designs, simply buy blank 18”x24” gold coroplast sign stock, and write on them with the fattest marker pen you can find at Walmart. Simply write House For Sale, the brm/ba, the price, and your phone number, on the sign. Buy some stakes from Lowes, bang them into the ground and nail on the sign with button caps. Do one in front of the house, and the others at nearby intersections and street corners where there is traffic. You will be amazed who calls. There are locals who know the area, and values, who want to buy it to fix up for a rental. There are other investors driving the neighborhood where they have an existing rehab under way, and stumble across your sign. There are investors just driving neighborhoods, looking for deals. Signs are a cheap, very effective way to find buyers.
The are two approaches to take when closing deals you are wholesaling. Which approach you take depends on whether the seller is an individual or an institution.
Assigning The Contract
Assigning the contract to your end buyer is the simplest way to close when wholesaling real estate. At closing, you sign an Assignment Of Contract, which transfers you position (right to buy) in the contract to the investor, in exchange for an assignment fee that goes to you as your profit. It is also incurs no extra closing fees as it is still only a single closing.
There are some situations, like buying REO from banks, when the seller doesn’t want to see you making any money and will not allow the contract to be assigned. In this case two closing are set up, one between you an the seller, and one between you and the buyer. When all contingencies are removed and finds are paid in, the two closings close simultaneously (on the same day). The difference between the funds paid in to the closing with the Buyer and the funds required for the Seller closing, go to the wholesaler as profit.
In the past, dry closings, where the Buyer’s funds were paid in first and were then used to fund the closing with the Seller. This is now illegal in a number of states, so “transactional funding” has appeared to provide funding for Seller closings.
Wholesaling Commercial Real Estate
The sheer number of foreclosures in recent years has created huge opportunity for wholesaling residential real estate. Along with this though is a continual effort by lawmakers and bank bureaucrats to make short sales and wholesaling REO more and more difficult. Lawmakers believe the homeowner needs to be “protected”. Bankers simply can’t stand seeing investors making a profit when they are taking a loss.
In the commercial real estate environment though, this conflict doesn’t exist. There are no unsophisticated homeowners to “protect”, and everyone understands that everyone else in commercial real estate is in the game to make money. No-one begrudges you making a profit. It’s expected.
Most people interested in wholesaling stay away from commercial real estate, thinking it is either not possible, or because of fear of the big numbers. The reality is, wholesaling commercial real estate is basically the same process as wholesaling residential real estate. It is actually a little easier because there is not a lot regulation to try and get around, and there is not much competition because most people are scared of the big numbers.
The big plus of wholesaling commercial real estate of course, is the bigger assignment fees. With higher transaction values come more dollars in profit. Whereas wholesaling houses assignment fees may range from $5,000 to $50,000 per deal, wholesaling commercial real estate assignment fees are $50,000 to $500,000, and up.
Real Estate Wholesaling And Wealth Building
The great benefit of wholesaling is the quick cash profits. The downside is, it is active income. There are only so many deals you can do each year, and so wholesaling alone, your profits will increase annually after getting started, but then plateau at a certain level.
Real estate wholesaling is far more profitable when used as the cash generating component of a long term wealth building program. Your early deals should be dedicated to paying off all debt, but once this is accomplished, your wholesaling profits are more effectively used as investment capital for the purchase of income property, where it can compound over time as the property appreciates.