Wholesale Real Estate: Back to Basics
Amongst the tough times that 2020 has brought, real estate has seen its ups and downs. No industry has weathered the pandemic unscathed. Despite the economic downturn, the housing market has shown more stability than most as median home prices have reached record highs and mortgage interest rates have reached record lows. However, finding the right property to invest in has become a bit more challenging if you don’t know where to look. With the market conditions as they are, wholesale real estate has been a popular strategy for many investors this year.
Wholesale real estate investing, or “wholesaling” as it is often referred to, is a popular strategy that can be used to make deals and it’s a great starting point for new investors.
Let’s take a quick refresher at what it means to be a wholesaler.
What Is Wholesaling Exactly?
Wholesaling is the process of finding lucrative, off-market properties and getting them under contract, and then passing the deal on to an investor. It’s an investing strategy that is low risk and doesn’t require significant funding upfront—part of what makes it appealing to beginner investors. It can still be a time investment, but on the whole (pun intended), it’s one of the quickest ways to turn a profit without having to do any heavy lifting.
Wholesaling in real estate isn’t quite the same as it is in retail. Your job as a wholesaler is to find a deal, get it under contract, and then find a buyer before your deadline. In essence, you’re acting as a middleman between buyers and sellers and not buying houses in bulk or making repairs to a property.
This strategy can be an excellent way for anyone looking to get their foot in the door, or for anyone that just doesn’t have the time to do a full-on flip. As a wholesaler, you make money by identifying properties that are under-the-radar or are being sold by motivated sellers, which allows you to get favorable terms on the deal. From there, you profit on the deal by agreeing with a buyer on a sale price that is more than the purchase price you established with the seller (more on that later).
So, how does one do wholesaling correctly and effectively? Well, keep reading to find out exactly how.
Getting Started with Wholesaling
One of the benefits of wholesaling is that you don’t need to be a licensed real estate agent to do it. Having existing knowledge of real estate certainly can help, but wholesaling can get your foot in the door to start learning how it all works. It is important to note that your local government has its own rules and regulations on who can make a commission from wholesaling. So make sure to do your homework!
To wholesale a property, you first need to find the right kind of property. Wholesale real estate often involves finding an off-market property with a purchase price below market value. Typically, wholesalers will find suitable off-market homes by searching for distressed properties, or properties that need a number of fixes that the owner can’t or won’t do themselves. This generally means the owner won’t be able to sell for full market value.
Another source for wholesale deals springs from a situation where a house doesn’t need too many fixes, but it has suddenly become a burden on the owner and he or she wants to get rid of it as soon as possible. These so-called motivated sellers are a great resource for finding off-market properties that are under market value.
And of course, we’d like to mention MyHouseDeals as your haven to find motivated sellers in your area.
As mentioned, wholesaling is a quick way to earn money in real estate investing. But the process leading up to making that profit can take a bit of time and effort. We absolutely recommend having a local network of investors and buyers. To those just starting out, you likely won’t have that, so commit yourself to the process of building those relationships. As you make your way through the process, following up on interested buyers and sellers is crucial for wholesale deals to succeed. That means you’re going to have to pick up the phone, rather than just relying on email alone.
Note that MyHouseDeals updates members with monthly blog posts about where to find local real estate investing organizations and their monthly meetings. Go here to view our most recent REIA Meetings post.
Research your local area and find out what neighborhoods have properties on the market that meet your requirements. Make sure you know what the average house is selling for. This means looking at housing prices in your area and compiling those prices into a comps list to understand the approximate market value of properties in the area. It’s essential to do your due diligence so that you’re informed.
After you’ve selected a potential wholesale property, do some research into how much the after-repair-value (ARV) will be. You’ll want to identify what repairs need to be made and how much they’ll cost. While you won’t be making the repairs, the buyer will, and they will want to know the cost. After all, the buyer you assign the contract to is looking to make money off of this deal too.
It’s your job as the wholesaler to make sure all parties involved in the deal are satisfied. Taking the time to make human connections can make the difference between a successful deal and costly frustration.
The Wholesale Contract
Next, let’s talk about the contract and why it’s so important.
Putting a property under a contract does not mean that you, the wholesaler, are buying the property. What you’re doing is putting the right to buy the property into a written agreement.
It’s in this document that you’ll establish a purchase price and time frame with the seller. Again, it’s important that the purchase price is below the market value, but also agreeable with the seller. Motivated sellers or owners of distressed properties want the property off their hands, so they will likely be willing to accept a low offer, but it still needs to be fair.
After you’ve reached an agreement with the seller, you’ll want to find the right buyer as quickly as possible. If by chance you fail to find a buyer by the contract’s deadline, you’ll forfeit the contract. This is why we recommend having a buyer in mind from the start, or having a buyers list at your disposal.
MyHouseDeals is a great resource to find buyers, with the option to post your wholesale deal on the website free of charge.
Money, Money, Money: Wholesaling Economics
Doing your research and staying committed are important steps to getting started in wholesaling. But it all culminates in two big questions: how much does it cost, and how much can you make?
Part of what makes wholesaling easy to do and why beginners start here is that it takes significantly less money than other real estate investment strategies. Though it’s possible to secure a contract with a seller for no money down, you’ll likely find that most sellers will ask for what’s called an earnest money deposit. The going rate can be as little as $500 but will vary from seller to seller.
A wholesaler doesn’t usually get involved with the renovations of the property they’ve contracted. While it is an option, wholesalers want to find a property, get it under contract, and assign the contract to a buyer and move on. By wholesaling a property, you’re saving yourself the time and money that a renovation can take, and minimizing your risk for any unforeseen problems the property might have.
Sometimes you just don’t have the money for a wholesale real estate deal. That’s where looking into private money lenders or hard money lenders can be your saving grace. MyHouseDeals members have access to an exclusive list of private lenders.
How do you make money from a wholesale real estate deal then?
Wholesaling and the Sale Price
Wholesalers make their money by establishing a sale price with the buyer that is more than the purchase price you establish with the seller. If the buyer accepts the sale price, then you get to pocket the profit. Think of it as a finder’s fee.
Here’s a quick example:
You find a property and establish a purchase price of $125,000 with the seller. You’ve done the research and know that this is below market price. You also know that the ARV is going to be significant enough that a buyer can make their desired profit.
Next, you agree on a sale price with the buyer of $135,000. The buyer accepts, you assign the contract, and you just made $10,000 off of this deal. Now you get to move on to the next one and do it all again.
Wholesale Real Estate: The Whole Picture
We understand that this year has been tough for a lot of people. Our routines have been thrown out of the window and we have been forced to adjust. We have likely faced stressors that we are unaccustomed to experiencing. While change can be difficult, it also opens new opportunities which is exactly what we have seen in the housing market. After a couple of weeks of a holding pattern in March, as we all took note of changed market conditions, activity has been consistently strong. Wholesaling is a sound investing strategy and one that investors have used to grow their businesses throughout the year.
Wholesaling is a great investment strategy for investors who don’t have time for a full property renovation or who won’t want to invest in a property long-term. Wholesale real estate also serves well those who might be intimidated by real estate investing or those who don’t know where to start.
Do the prep work and you will reap the rewards. It’s well worth your time to know your numbers, your market, your sellers, and your buyers. Let MyHouseDeals set you up with the tools to success by giving you a place to find or place wholesale deals and the resources you need to guide you every step of the way.
Our community consists of 100,000+ investors so it is easy to connect with those that can help you make your deals happen. If you need investment capital, MyHouseDeals premium members have access to our exclusive list of private money lenders, which is updated daily.
Real estate has always stood the test of time and this year is no different. Real estate has shown to be a stronghold, as in these unprecedented times, people are looking for asset-backed investments. Savvy investors are finishing the year strong and setting the foundation for a successful 2021. Make a wholesale deal a part of that foundation.
Happy (and profitable) investing!