As of 2020, wholesaling is still one of the most underrated ways to get into real estate with little to no money or risk. New and experienced investors alike, this investment approach can produce significant revenue and contribute to your overall success as a real estate investor.
Basics of Wholesaling
When completing a wholesale deal, there will be three main players involved. The seller, the wholesaler, and the buyer. When wholesaling, you will be putting a property under contract and then selling your contract to someone else at a higher price. Since you are selling your contract, you are never closing on the property, which means you are not buying the property; someone else is. (This means no money, no credit needed from you). By doing this, you do not have to put down a large down payment, and you do not have to get a loan. The only money you will need is money for an earnest money deposit (EMD). In some cases, the EMD can be a minimal amount of money and can even be nothing at all.
What's the Next Step?
The trick to completing a successful wholesale transaction if you're low on money or credit is establishing your exit strategy beforehand. Start by building your network and try finding a buyer early. If you're not prepared to purchase the contract due to low funding, having a few potential buyers in mind can help ease some stress when coming to the end of your deal.
When wholesaling a property, you must put the property under contract at a discount. Why? Because you are placing the property under contract at one price and then selling to an investor at a higher price. There must be enough room or profit margin for the investor to pay your higher price. You can do this by offering to buy a distressed property. While you may not be in the position to do a fix and flip on your own, someone else might be. Making an offer on a distressed property can be easier because a lot of the time, the seller is motivated to sell quickly.
Most likely, you will have to make several offers to get one accepted, but that's OK. It costs nothing to make an offer. Making a low offer is also OK. If a seller accepts your first offer, you'll never know how much lower you could have gotten the property for. Remember, every dollar less that you can put the property under contract goes straight into your pocket. Let's look at an example. You find a property that has an ARV of $275,000 needing $25,000 in rehab. Let's say you can put the property under contract for $175,000. Say you sell the contract to an investor at $185,000, you make $10,000 and leave the investor $90,000 to rehab, pay money costs, holding costs, selling prices, and profit. Everybody wins!
So How Do I Start Wholesaling
Education! Every real estate investor should always start their real estate journey by getting the right education under their belt. Understanding the market, knowing the risks, analyzing potential exit strategies, and familiarizing yourself with the different processes of wholesaling will leave you feeling more confident and capable of performing a seamless wholesale transaction. Once you have the education, the only thing left is having the courage to take that first step. And that is up to you.
What is Your Role as a Real Estate Wholesaler?
Real estate wholesaling is easy enough to understand as a process. However, you may be wondering about your actual role. Put simply; you'll act as the middleman between distressed or undervalued properties and the property investors who seek them out. You bring value to the equation with the time, effort, and skills you put into putting everything together. When done correctly, you'll become a reliable source for undervalued properties that investors otherwise wouldn't be able to find.
Top Characteristics of Successful Real Estate Wholesalers
So, is real estate wholesaling right for you? It probably isn't unless you have the following:
- Property Valuation Education – The key to making money through real estate wholesaling is identifying properties that are undervalued enough to provide returns for you and the investors who ultimately acquire them. Therefore, you should be well-versed regarding the ins and outs of property valuation.
- Negotiating Skills – As a real estate wholesaler, part of your job is convincing investors of the merits of the properties that you have to offer. This means negotiating with them to arrive at terms that still deliver substantial profits for you. Depending on your exit strategy, you might also have to make a deal at the closing table or at other times during the process, so be sure to hone those negotiating skills.
- Marketing Prowess – One of the most crucial aspects of successful real estate wholesaling is effectively marketing yourself and your services. The better your exposure is in the local market, the more likely you will develop a pool of reliable buyers. Marketing also alerts others that you're interested in distressed properties, increasing the odds of coming to you when they want to unload them.
- Real Estate License – Technically, you don't need a real estate license to engage in real estate wholesaling. However, many wholesalers obtain them to gain access to crucial resources like the MLS. Having a real estate license is also a great way to bolster your networking capabilities, and it might come in handy in other ways down the line.
Top Characteristics of Successful Real Estate Wholesalers
As a real estate wholesaler, real estate investors will be your primary customers. They fall into two categories: fix-and-flip investors and long-term rental property investors. You'll need to employ different strategies with each group.
To appeal to fix-and-flip investors, you'll need an in-depth understanding of the costs of repairing and rehabbing residential real estate to ensure that the after repair value, or ARV, is high enough to ensure profits for all.
To appeal to long-term rental property investors, you should be well-versed regarding many factors, including the local real estate market, the local rental market, current rent prices and local demographics. It will help enormously understand things from your buyer's perspective, including what they consider to be adequate cash flow, how much they can expect to collect in rent, and the costs of maintaining the property and other related factors.
Steps for Building a Successful Real Estate Wholesaling Business
Here are the necessary steps for developing a successful real estate wholesaling business:
- Research the Local Market – Educate yourself about the market where you'll be wholesaling real estate to more effectively identify distressed and undervalued properties with enough value to go around for everyone.
- Curate a List of Buyers – Next, develop a list of investors who buy distressed properties in the local area. Strategies for building such a list include attending real estate events, promoting yourself and your services on social media, engaging in email marketing and using bandit signs to share your contact information across the local area.
- Line Up a Reliable Financing Source – Although you typically won't need much capital to engage in real estate wholesaling, you'll still want a reliable source for obtaining financing when necessary. That's especially true if you plan to use double closing as an exit strategy, which involves personally closing on a sale and immediately selling the property to a real estate investor.
- Find Deals – Next, identify distressed and undervalued properties with enough “meat on their bones” to provide profits for you and your eventual buyer. As mentioned before, obtaining your real estate license will give you access to the MLS, which is very helpful in this regard. Alternatively, you can use sites like Zillow and even Craigslist; it's also often possible to search public property records online.
- Choose an Exit Strategy – Finally, you should have an exit strategy in place before engaging in real estate wholesaling. Most people opt to put down earnest money, sign a purchase agreement, find an interested buyer, and then sell the contract to them, which transfers the obligation to them. Alternatively, you could employ a double closing. In that case, however, you must be prepared to close on the deal, which involves a lot more money and red tape.
Tips for Making a Profit in Real Estate Wholesaling
Real estate wholesaling is not without its risks, so it's crucial to study up about it as thoroughly as you can before you begin. Understand that if you sign a purchase agreement and fail to line up another buyer, you'll have no choice but to fulfill your legal obligations to the contract.
There are ways to increase your odds of success as a real estate wholesaler. Be prepared to spend a decent amount of money on marketing; the most successful real estate wholesalers are highly effective marketers. Set aside plenty of time for networking events, and keep business cards with you at all times. Get educated regarding property valuation, using real estate comps to assess properties, the costs of repairing residential real estate, and any carrying costs that you may be responsible for along the way. Finally, learn strategies for turning leads into deals; the main trick is talking to people effectively, so honing your communication skills is always a good idea.