Do you want to invest in real estate but don’t have much money to begin with? For you, wholesaling real estate could be the ideal starting point.
It’s a strategy that allows you to earn profits by connecting sellers with buyers, without the need to purchase, renovate, or even own the property yourself.
This article will take you step-by-step through the wholesaling real estate, making sure you have the knowledge and tools to be successful.
What Is Real Estate Wholesaling?
Real estate wholesaling is a strategy where you, as the wholesaler, find a property, get it under contract at a negotiated price, and then sell that contract to a buyer at a higher price. The difference between the two prices is your profit. You don’t have to make any repairs or renovations to the property, unlike house flipping. Instead, you act as a middleman, helping the buyer and seller complete their transaction.
Benefits of Wholesaling
- Low Risk: You don’t need large capital to start.
- No Ownership Required: You never actually own the property, which means less liability.
- Quick Profits: Deals can close quickly, sometimes within weeks, providing you with fast returns.
Common Myths and Misconceptions
Some people think wholesaling is either too easy or too difficult. The truth is that it requires a lot of effort, research, and persistence, but it’s a manageable and rewarding way to get started in real estate.
Two Methods of Wholesaling Real Estate
Assignment of Contract
In this method, you secure a property under contract and then assign your rights to purchase the property to another buyer. For example, if you find a house for $90,000 and assign the contract to a buyer willing to pay $100,000, you earn a $10,000 assignment fee. This is the most common and straightforward way to wholesale.
Double Closing
You purchase the property yourself and then immediately sell it to a buyer. Although you briefly own the property, this method allows you to keep your assignment fee private. For instance, you buy a property at $90,000, sell it for $100,000 the same day, and keep the $10,000 profit. This method may require short-term financing but offers more discretion.
How to Wholesle Real Estate in 7 Steps
Wholesaling can be a little tricky when starting out because it feels like there’s so much to do! When starting wholesaling, what should you do first? We made the wholesaling process simple for you by breaking it down into 7 steps here:
- Research Local Wholesaling Laws
- Identify Motivated Sellers
- Analyze the Property and Estimate Value
- Make an Offer and Get the Property Under Contract
- Build a Buyers List and Find a Cash Buyer
- Assign the Contract to Your Buyer
- Closing the Deal
1. Research Local Wholesaling Laws
Understanding Legal Requirements
Real estate laws vary by state, and it’s important to know the specific regulations in your area. For example, some states have strict rules about how you can market a property you don’t own. Consulting with a real estate attorney can help you navigate these difficulties and avoid legal problems.
Common Legal Problems
One major issue is advertising. In many states, you can’t market a property unless you own it or have a real estate license. Understanding these nuances will protect you from potential fines or legal issues.
2. Identify Motivated Sellers
What Are Motivated Sellers?
These are property owners eager to sell quickly, often due to financial difficulties, such as foreclosure or probate. Motivated sellers are more likely to accept lower offers, making them ideal for wholesalers.
How to Find Motivated Sellers
- Driving for Dollars: Drive through neighborhoods and look for vacant or neglected properties. Take note of addresses and research the owners later.
- Public Records Searches: Look for properties in foreclosure or with liens.
- Online Marketing: Use tools like Facebook ads or direct mail campaigns to reach out to potential sellers.
- Networking: Building relationships with real estate agents, attorneys, and other professionals can lead to more leads.
3. Analyze the Property and Estimate Value
Conducting a Property Analysis
Start by evaluating the property’s condition. Look at the roof, foundation, plumbing, and electrical systems. Next, use comparable sales to estimate the property’s market value. For instance, if similar homes in the area are selling for $150,000, but the property you’re analyzing needs $30,000 in repairs, the maximum you should offer might be $75,000.
Use the comps to estimate the expected market price of your target property.You can consider following factors.
- Location
- Size
- Number of bedrooms and bathrooms
- Condition
- Property style and age
- Improvements, renovations or amenities
- How recently the comps sold
Calculating Maximum Allowable Offer (MAO)
Use this formula to determine your offer:
MAO = (ARV × 0.7) – Repair Costs – Assignment Fee
If the After Repair Value (ARV) is $150,000 and repairs cost $30,000, your MAO might be $75,000,which allows for both your and the buyer’s profit.
4. Make an Offer and Get the Property Under Contract
Negotiating with the Seller
Approach negotiations confidently, but be realistic. Explain the costs involved in repairing and reselling the property to justify your offer. For example, if the property needs $30,000 in repairs, make it clear why you can only offer $75,000 instead of $100,000.
Drafting the Purchase Agreement
Once you agree on a price, get the property under contract. Ensure the contract includes:
- Purchase Price: The amount you’re offering for the property.
- Assignment Clause: This allows you to transfer the contract to another buyer.
- Inspection Contingency: Protects you if the property inspection reveals unexpected issues.
5. Build a Buyers List and Find a Cash Buyer
Importance of a Buyers List
Having a list of ready and willing buyers is important. These are investors who can purchase properties quickly, often with cash. Maintaining a strong buyers list ensures that when you secure a property under contract, you can quickly find someone to purchase it.
Strategies to Find Buyers
- Real Estate Meetups and Investment Clubs: Attend local meetings to network with potential buyers.
- Online Platforms: Join real estate forums, Facebook groups, and LinkedIn to connect with investors.
- Direct Marketing: Send emails or make calls to known investors when you have a deal available.
6. Assign the Contract to Your Buyer
The Assignment Process
Once you’ve found a buyer, you’ll assign the purchase contract to them. This involves signing an assignment agreement, which transfers your rights to purchase the property to the buyer. You collect your assignment fee at closing.
Completing the Transaction
The deal typically closes with the help of a title company or real estate attorney. They handle the paperwork, ensure the title is clear, and distribute the funds accordingly.
7. Closing the Deal
The Closing Process
Closing involves finalizing the sale between the seller and the buyer. Your role is mostly hands-off, but ensure all documents are in order and that the assignment fee is included in the closing statement.
Receiving Your Fee
Your assignment fee, typically ranging from $5,000 to $20,000, will be paid at closing. Make sure you review the closing statement to confirm your fee is correct and that everything is in order.
Tips for New Wholesalers
Start Small and Scale Up
Don’t try to take on too many deals at once. Start with one or two, learn the process, and gradually scale up as you gain more experience.
Focus on Building a Strong Brand
Your reputation matters. Be honest, transparent, and reliable in all your dealings. A strong brand will help you build trust with sellers and buyers, making it easier to close deals.
Utilize Technology and Tools
There are many tools available to help you manage leads, contracts, and communications. Tools like CRM systems can streamline your business and help you stay organized.
Pros and Cons of Wholesaling Real Estate
Pros
- Minimal Financial Risk: You don’t need a large amount of capital to get started.
- No License Required: Most states don’t require a real estate license for wholesaling.
- Quick Turnaround: Deals can be completed in weeks, providing fast cash flow.
- Networking Opportunities: Wholesaling helps you build valuable connections in the real estate industry.
Cons
- Competitive Market: Finding good deals can be challenging, especially in hot markets.
- Legal Complexities: Navigating real estate laws and advertising restrictions can be tricky.
- Lower Profit Margins: Compared to flipping or buy-and-hold strategies, wholesaling typically offers lower profit margins.
- Need for Constant Networking: To succeed, you must continuously build and maintain relationships with sellers and buyers.
Common Questions About Wholesaling Real Estate
Is Wholesaling Real Estate Legal?
Yes, wholesaling is legal in most states, but it’s important to understand and comply with local laws. Some states have specific regulations about how you can advertise properties and transfer contracts.
Do I Need a Real Estate License to Wholesale?
In most states, a real estate license is not required to wholesale properties. However, having a license can provide additional opportunities and credibility.
Can I Make a Living From Wholesaling Real Estate?
Yes, many people make a full-time income from wholesaling. However, it requires dedication, consistent deal flow, and effective networking.
How Much Money Can I Make on Each Deal?
The profit from each deal varies, but wholesalers typically earn between $5,000 and $20,000 per transaction, depending on the property and market conditions.
What Are the Main Risks Involved in Wholesaling?
The primary risks include not finding a buyer within the contract period, dealing with legal issues, and navigating competitive markets.
Conclusion
Real estate wholesaling is an easy way to get started in real estate without needing a lot of money. By finding sellers who want to sell quickly and connecting them with buyers, you can make a good profit without actually buying the property.
This guide has shown you the basic steps to get started, from understanding the rules to closing your first deal. With this knowledge, you’re ready to begin your wholesaling journey.
Remember, success in wholesaling takes time and effort. Start small, keep learning, and stay determined, and you’ll be on your way to making money in real estate wholesaling.
