How to Wholesale Real Estate and Make Money
I often receive letters in the mail from people trying to wholesale real estate. They most likely checked the city’s public records and found the name of my real estate business. While some people might consider it junk mail and toss it in the recycling bin, others might see it as a solution to their financial problems!
As a real estate investor, I do entertain these letters. However, I’m currently not in the market to sell. Instead, I’m always in the market to purchase another real estate investment!
If you’re wondering, “Is wholesaling real easy?” I’ll repurpose the question to “Is anything easy?” For example, “Is cooking easy?” Although I can make a mean bowl of cereal, I’m no Gordon Ramsey!
The answer depends on your skill level and how much work you’re willing to invest in yourself and a legitimate real estate wholesaling business.
What is Real Estate Wholesaling?
Real estate wholesaling (also known as wholesale flipping) is when a real estate wholesaler connects a motivated seller of a property to a real estate investor that will purchase a property at a wholesale deal.
For example, a wholesaler can get the house under a purchase contract for $100,000. An investor estimates that the after repair value (ARV) is $200,000. Thus, the investor purchases the contract from the wholesaler for $110,000. The wholesaler made $10,000 from this deal!
One of the difficult things for any real estate investor is to find great deals. Investors want to purchase properties below their real estate market value to produce an acceptable return on their investment.
Wholesalers do the work of finding motivated sellers and negotiating a price. Buyers leverage the efforts of a wholesaler to focus their time and energy on other things.
Wholesaling Real Estate Example
Ted recently bought a new house and has been unsuccessful in selling his previous one. He is tired of making two house payments and is motivated to move. He receives a letter in the mail from Alexis, a real estate wholesaler interested in buying his home, and gives her a call.
Alexis meets up with Ted and identifies why the house isn’t selling. Although the house is in a great neighborhood, the kitchen and carpet are outdated, and there is a stench from a pet.
Furthermore, the house has Greek blue paint on the exterior and looks like a distressed property. These issues deter potential buyers.
The house has been sitting on the market longer than Ted would like, and he doesn’t want to put any more money into fixing the house. He wants out!
Alexis is familiar with the neighborhood and knows the recently sold prices for a flipped house. Considering the necessary repairs for the house, Ted and Alexis agree on a purchase price of $150,000 (including closing costs) and put the house under contract.
Next, Alexis reaches out to investors on her “buyers list,” informing them of the property. An investor, James, shows interest and offers $155,000.
Alexis accepts and assigns the contract to him. They both agree she will receive the $5,000 fee at closing.
After a few weeks, James and Ted sign all the paperwork at a title company. James pays $155,000, Ted receives $150,000, and Alexis gets her $5,000 wholesaling fee!
6 Steps to Wholesale Real Estate
- Find an opportunity from a motivated seller.
- Negotiate a price that satisfies the seller and that can provide a wide enough margin for profit.
- Sign a “purchase and sale agreement” with the seller.
- Find a wholesale buyer.
- Connect the seller and end buyer with a title company.
- Collect your wholesale fee on closing day.
Do You Need a Real Estate License to Wholesale?
You don’t need to be a licensed real estate agent to wholesale. A person can wake up the next day and start wholesaling real estate.
Licensed real estate agents have to take classes, pass exams, purchase insurance, and go through a criminal background check. These requirements guarantee that the agent follows all proper real estate transactions.
For these reasons, people choose to become a wholesaler versus a licensed real estate agent. Furthermore, a wholesaler will keep the entire real estate commission, whereas an agent must share it with their broker. The wholesaler prefers to keep more money in their pockets!
Different cities have strict laws about wholesaling and can be deemed illegal. Therefore, I recommend talking with a real estate attorney or other real estate experts in your local real estate meet-up.
How to Find Deals
Finding great deals is the most challenging part of real estate investing. Investors know this fact because they know they make their money when they buy first.
Therefore, for a person to have a successful career as a wholesaler, they need to find great deals consistently! Here are some strategies to help you find those diamonds in the rough.
Also, there are many different ways to find deals. I mention a couple more methods in a related post, “What is an Absentee Owner.” So, if you’re interested in adding more to your real estate wholesaling strategy, go check it out!
Driving For Dollars
This strategy is a low-cost method that requires a wholesaler to only drive around in desired areas and look for distressed properties.
Direct Mail Campaign
This strategy is the practice of sending out mail to desired neighborhoods or particular people. The expectation is that only a small percentage of those people would respond to the mail. However, all that matters is that you can find a great deal from the responses.
Networking
One of the cost-effective ways to get leads is reaching out to your local real estate network. Attend one of your local real estate investor meetings and let everyone know you’re a wholesaler!
You might add new investors to your “buyers list,” but they also may turn around and provide you a good lead. As the saying goes, “You scratch my back. I scratch yours.”
Another one of my favorite networking strategies is asking the neighborhood postal worker to keep a lookout for you. I encourage you to give them a finders fee if something turns out good!
Craigslist
Craigslist is the world’s largest classified website. Real estate professionals can quickly post “I Buy Houses” on that site. Also, you can check rental listings and look for ads that state “For Sale By Owner.”
Online Marketing
You can pay for ads on someone’s Facebook wall. This practice is known as pay-per-click advertising. You only pay when someone clicks your ad.
You’ll also need a website to go along with your ads to collect the seller’s information. It doesn’t need to be fancy. It just needs to be Search Engine Optimized (SEO) to attract the right kind of people!
Multiple Listing Service (MLS)
The MLS is a database of properties for sale provided by various real estate brokerages. However, it can be highly competitive (especially in a hot market) because of the easy access for licensed real estate agents. You could get lucky and find a couple of gems in there.
How to Find Wholesale Buyers?
If you’re looking to grow your “buyers list,” the place to go is where other investors go and also ask those involved with real estate:
- Foreclosure auctions
- Real estate investor meetings
- Craigslist
- Public records
- Hard money lender
- Real estate agent
- ListSource
As you can see, there is an abundant amount of places where you can find wholesale buyers. But, the truth is you only need a handful of cash buyers.
You’ll save yourself more time not having to shop around your deal to a hundred buyers. Also, real estate is all about relationships, and it’s invaluable! If you consistently produce great deals for investors, you’ll get rewarded for it!
I’ve emphasized that finding a good deal is the most challenging part of wholesaling. When you have a good deal, finding cash buyers is simple.
Just like the saying goes, “If you build it, they will come.” In real estate, “When you have a great deal, investors will come.”
I usually spend 30 minutes a day browsing online real estate marketplaces looking for opportunities. One time, I got notified of a deal and jumped in my car to see the property. I was there in less than an hour!
How to Close The Deal
Assigning the Contract
After a seller and a wholesaler agree to a purchase price, the wholesaler has the option to assign the real estate contract to someone else, in this case, an investor.
It’s always important to be transparent with the seller about your intentions. Thus, a wholesaler should make it clear in the contract that either they or a business associate will buy the house. This language will give the investor the legal right to buy the property.
Double Closing
A double close (also known as a simultaneous closing) is when the investor will purchase a property from a wholesaler and legally sign for legal ownership. The wholesaler will then use the money to pay the seller the agreed-upon amount.
For example, the agreed-upon amount between the seller and the wholesaler is $100,000. On the other hand, the investor agrees to purchase the property from the wholesaler for $105,000.
On the day of closing, the investor will wire $105,000 to an investor-friendly title company and sign for the property’s legal ownership. The wholesaler will then wire $100,000 to the seller and keep the $5,000 from the investor.
Notice how the seller hasn’t gotten paid yet, nor has the wholesaler ever had ownership of the property at all!
Many title companies don’t allow this method. So, it’s essential to clarify with the title company how you plan to close.
Back-to-Back Closing
A back-to-back closing is when a wholesaler will purchase a property from a seller and have legal ownership of the property. The wholesaler will then go and sell the property to an investor.
The wholesaler can technically own the property for less than an hour!
The challenge with this method is that not all wholesalers have hundreds of thousands of dollars in their bank account to purchase the property. Thus, wholesalers use transaction lenders to pay the title company.
In turn, the title company will handle the payment to the seller. The wholesaler will reimburse the transactional lender with the investor’s payment and will receive a fee charge.
How Much Does a Real Estate Wholesaler Make?
The amount a wholesaler gets paid depends on the quality of the real estate deal. The bigger the margins between the seller’s price and the investor’s purchase price, the better. Usually, wholesalers can $1,000 to $10,000 a deal.
Unfortunately, this margin causes many wholesalers to act unethical and more predatory. They are in real estate wholesale purely to make money. Thus, they’ll make efforts to scare vulnerable people, making them feel like their house is worth nothing.
I do not condone this behavior!
A wholesaler needs to be a problem solver for the seller and the investor. Successful wholesalers don’t need scare tactics.
How To Be A Successful Real Estate Wholesaler
To be a successful wholesaler comes down to your marketing skills and your ability to solve problems. Real estate wholesaling works as a wholesaling business only if you can consistently find good deals!
Therefore, it’s essential to set real estate wholesaling goals. For example, which neighbor will you focus your real estate marketing? Or, what are the comps in the area?
Understanding your market and knowing your numbers can help you meet the needs of the seller and end buyer!
Pros of Wholesaling Real Estate
Turn Quick Profit
After a few weeks of getting a property under contract, a wholesaler can make a couple of thousand dollars. It can take months to make a profit for an investor flipping real estate properties.
Learn About Real Estate
There is so much information about real estate that it can feel like you’re drinking out of a fire hydrant. The way to learn about the best real estate investing strategies is by having hands-on experience!
And even though you might not win your first deal, these setbacks should be seen as experiences and not failures.
Cons of Wholesaling Real Estate
Small Margins
Wholesalers try to negotiate a low enough offer to increase their margins with an investor. Investors, too, want to save money. These potential low margins sometimes cause wholesalers to be predatory and greedy.
Furthermore, wholesalers are always racing against another investor that can go around the wholesaler and buy at a higher price. Therefore, you’re competing with everyone!
Requires Money
On paper, it looks like the end buyer will fully fund the entire deal. People become wholesalers because a guru sold them a dream wholesaling doesn’t require any money.
In reality, it does, even though it’s not much money compared to a down payment.
For example, a wholesaler has to put up an earnest money deposit as part of the purchase contract. Furthermore, wholesalers will have to spend money on marketing, such as direct mail, to find motivated sellers, which can easily cost $2,000.
Conclusion
The real estate industry has numerous investors’ opportunities to make money, such as purchasing a wholesale property. Investors are always looking for their next investment property to add to their portfolio.
However, they need to find properties that have a great return on their investment. Wholesalers fill this need by finding motivated sellers and connect them to interested investors.
