How to Wholesale Real Estate: The Definitive Guide
What is wholesaling?
Wholesaling is a great way to get into real estate if you don't have a lot of spare capital to invest. It lets you make money through your smart wits and market research without tying up your money or taking undue risk. But you need to know your way around—the market changes and you need to keep up on key indicators.
What is wholesaling?
Put very simply; you find a property at a discounted price, you get it under contract, you find an interested buyer, and you put the two sides of the deal together without actually buying the property yourself (or with a nearly simultaneous purchase and sale, in some circumstances).
You will sign a contract with the homeowner which gives you the right to buy the house at a certain price, and you'll generally pay some earnest money up front, maybe as little as $500. 1–2% of the property price is fairly normal—below what you'd pay as a deposit on a regular purchase.
The contract gives you the right to buy the property. That right is assignable to someone else, a buyer who, if you are sensible, you have already identified as a likely target.
What are the advantages of wholesaling?
A big advantage of wholesaling is the limited need for capital compared with flipping a house or investing in a rental property.
You'll need to pay a 20% deposit for most rental investments. Hard money lenders who're ready to fund a flip will only lend up to 90% of the price or 75% of the expected resale value, so you'll have to find the rest yourself.
With wholesaling, you can start with a few hundred bucks.
You don't need a brokerage license. You don't need any qualifications.
And you'll get a fast turnaround. You can put a deal together and have it done within a month and a half, rather than 3–6 months or longer for a flip.
Is there a downside to property wholesaling?
First downside: property wholesaling is hard work.
You'll need to put at least a month into research and networking before you start looking for real estate. And you have to find both buyers and sellers.
Once you've started, you need to keep prospecting at the same time as progressing any deals you've made. If you don't have a real appetite for getting out and meeting people, this is not the right path for you to take.
Property wholesaling isn't guaranteed to pay a regular income. You may put together three deals one month and clear $45,000, and the next month—nothing. And the month after—nothing.
And margins are thin, compared with flips. However, that reflects the much lower risk you're taking.
Do you need a license for wholesaling?
No, you don't need a license, though local regulations may have some impact on the form of wholesaling you can use (we'll go into this later).
Having a brokerage license does give access to the MLS (multiple listing service) which can help you find leads more easily. But most of the time you're going to be trying to find off-market deals, as properties on the MLS are probably fully priced.
How can I get started?
There are five steps to getting started as a wholesaler. These are:
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Research your local market. Time you put in at this stage of the process will pay off later, so don't skimp it. Choose the key neighborhoods you'll focus on.
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Find your buyers—investors who buy refurbishment, flip, or rental opportunities in these neighborhoods.
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Secure financing if you need it (at least in principle).
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Start your search for properties. (Yes, this is step four—you need to find the buyers first or you can't make wholesaling work.)
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Do your first deal—and then keep going.
How to research your area
To make money as a wholesaler you need to know the neighborhoods where you work so well that you can walk into a house and within five minutes know just what it should be worth.
That means you'll need to specialize in three or four neighborhoods and know them well. In particular, you need to know:
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the range of prices for each type of property,
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the features which justify higher prices (i.e. a pool, larger garden, balcony),
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the fit and finish expected,
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any common construction issues,
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prices by the age of property (19th century, 1960s, 1980s, new),
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particularly favored or disfavored streets.
Just using formulas won't work, you need to walk the streets, look at properties, and understand the pricing instinctively. Narrow down your targets to just three or four neighborhoods you know.
You also need to understand the type of occupant/lifestyle and the type of buyers, including rental investors.
Finding buyers
Don't start looking for a property before you have a list of potential buyers.
Quality, not quantity is key. You are better off knowing two rental investors who want to buy an additional middle-income, single-family unit every six months than having a hundred business cards.
You've identified your neighborhoods, so you need buyers who invest in the kind of properties they'll find there. If you're in an area with mainly single-family houses, then investors in apartments aren't going to be your best customers.
Your best way to get started is to attend real estate events and network hard. Find out who in your area does renovations, for instance, and who invests in rental properties. Building firms and architects, hard money lenders, and lawyers may all have clients who are looking for opportunities.
Another way to find potential buyers is to attend courthouse auctions; by definition, anyone who's there is a cash buyer looking for bargain real estate.
Don't just get names and emails—know your buyers' exact requirements and tailor your offers appropriately. Instead of sending details to 100 maybes, if you have three people who have said that they're definitely interested in (say) downtown apartments needing renovations, your chances are much better.
You should know:
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how often each potential purchaser buys,
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whether they prefer light rehab or deep refurb projects,
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the price range they're considering,
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the type of property or tenant they want.
Build your relationships, not just a database. And keep developing your buyer base. Follow up after deals, to get feedback; ask for referrals.
Finding financing
Banks usually don't want to get involved in this area. If you need $5,000 earnest money, and you don't have it in cash, you'll need to go to a hard money lender.
Hard money lenders specialize in this area—short-term, property-backed loans.
They make fast decisions, often just a few days; you won't have to wait weeks as you would with a bank.
But they will want speedy repayment and charge a high interest rate.
Finding good deals
Only now are you ready to go out and look for real estate!
You need to find motivated sellers; homeowners who are behind on their payments, landlords who want out of the business, or couples who are getting divorced, for example.
Divorce lawyers and probate specialists won't likely be willing to talk about their clients, but may be happy to recommend you as a port of call for those wishing to sell discreetly and fast.
Of course you can look on Zillow or an MLS, but because to wholesale successfully you need to be able to buy below market value, you're most likely to get a good deal through personal approaches. You can:
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use delivery drivers as bird dogs to sniff out properties where people are moving out,
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post an ad on Craigslist,
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check out houses with home-made for sale signs or that show signs of disrepair (you need to be tactful, of course)
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look for houses on Craigslist with keywords like "must sell" or "fast sale,"
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have a website with advice for sellers and buyers and your contacts, plus a contact form,
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direct mail homeowners,
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or use bandit signs on lampposts, etc.
Bandit signs and direct mail can work with the right approach.
Persistence is important. Getting a name for yourself will make life much easier—and it will take time to build up your reputation.
Structuring a deal
There are two ways to structure a deal. You may need to adopt one particular structure because of state laws, or your buyer may have a preference. These two ways are:
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assigning the contract, or
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using a double escrow/double closing.
In the first case, your contract gives you and, crucially, your assignee, the right to buy the property under certain conditions at a certain price. You assign the contract to the purchaser who then exercises the right to buy, so you never actually own the property.
Ensure there is a contingency in the contract that allows you to back out if you cannot find a buyer. This is why you have to be 100% transparent about what you're doing. You'll also want contingencies for securing financing and for inspection.
When you use a double closing, you buy the property and simultaneously sell it to your purchaser. This will incur two sets of legal fees, so unless it's required by state law, it's not a great choice. You'll need a wider margin on the deal to pay those extra legal costs, too.
Don't forget due diligence—make sure there are no back taxes, unpaid loans, and so on.
Extra marketing tips
Don't forget that the world has moved on since Internet 1.0. In addition to Craigslist, you can now use Facebook Marketplace, for instance. This lets you follow discussions on comparable properties and get a good feel for the market, as well as tracking down potential deals.
Investing and real estate forums and even Reddit can be places to meet other real estate investors—great for networking, but not for marketing yourself directly.
Remember that wholesaling has become a saturated market with a lot of wannabes. You need to differentiate yourself. For instance, you might concentrate on becoming the first resort for local homeowners who find themselves in difficulties.
Or you might concentrate on the higher end of the market. You'll make more profit per deal, and you may be just what a buyer who wants discretion needs—no “for sale” sign up, no publicity, but a speedy and discreet service. And this is a market where word of mouth will do a lot of your marketing once you've gotten started.
Don't stint on your marketing budget. If you have a friend who really understands marketing, graphics, or SEO, ask for their help to set yourself apart from the competition.
Running the numbers
You've found a property. Will the deal work? Let's run through the numbers.
First, you need to establish what the property will be worth on the market once it's made good. This is the after-repair value (ARV). If you've done your market research back in Step 1, you shouldn't have too much problem doing this.
Then you need to work out the costs of getting the property to that point;
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the cost of repairs,
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the carrying cost (financing, taxes, insurance), and
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the buyer's closing costs.
You'll need to get contractors to look at the place and give you detailed estimates—and you'll need to convince the homeowner to let you do it. Remember, you may be good at DIY, but they know building codes inside out.
Subtract the costs from the ARV and you have the maximum the property is worth to a buyer. They'll probably want some contingency, too.
A simple example would be the following: a property with an ARV of $150,000 with $25,000 costs. If you can find a buyer at $125,000, and your below-market offer of $115,000 is accepted, you've made $10,000.
Running your numbers—and being able to show where you got them from—is important so you can show both your buyer and your seller why the price is right for the deal. You're also showing them that you're a professional and, as such, you've earned your money.
Selling to flippers
If you're selling to flippers, your life's not quite as easy as that, since many of them use the 70% rule. Their maximum purchase price isn't the ARV less the repair costs, but 70% of the ARV less the repair cost.
So with the same $150,000 property, a flipper might only be prepared to pay $80,000 - 70% of $150,000 (= $105,000), less the $25,000 costs. On the other hand, if you can sign up a property for less than this, you have a super-profitable deal if you can sell for a bit more!
What properties do I need to compare to?
We've already looked at doing your market analysis, but to arrive at the ARV, for a property you're looking at, you should consider:
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properties in the same neighborhood, or a similar one;
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properties within about a mile;
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properties sold within the last six months;
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properties of a similar date (don't compare a 1990s house with an 1890s house);
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properties with similar square footage and the same number of rooms;
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for houses, properties with similar locations (i.e. corner or mid-row) and similar-sized gardens.
If the market has been moving strongly, older comparisons are less relevant, so pay more attention to the most recent transactions.
How much can I make on a deal?
Most real estate wholesalers are looking for a relatively small profit compared to a flip—$5,000 to $10,000 for each deal.
That means if you want to make this a real business, you'll need to have an active portfolio of deals running, as margins are quite narrow. A flip, on the other hand, can easily make $30,000 plus—though of course it's a higher risk investment.
This is why the sweat equity you put in networking with buyers and finding potential deals is important. If you make $10,000 a deal, you'll need a deal roughly every two months to beat the US average salary of $51,168.
Learning to negotiate
You may already be a great salesperson and negotiator. If not, you need to learn.
You need to learn how to establish a connection by asking both sellers and buyers where they're coming from, what they need, and fully understanding their choices.
You also need to be transparent about the way you work and about the prices involved. You'll need to explain how the deal works, in terms of the mechanics, and how it works for your buyer/seller.
If you have worked out the comparisons and got builders to give estimates, or made your own, these help to establish you as an “honest broker”—the more work you put in before a meeting, the better it will go.
Also, check out any deal breakers—for instance, a minimum the seller needs to pay off debt, or a maximum beyond which a particular buyer can't finance the project.
How can I go wrong?
The main way people do badly in property wholesaling is underestimating the amount of work they need to put in. One deal is not going to make your fortune; you need to keep finding new deals.
Wholesalers who don't treat it as a business are likely to do badly. You need a business plan—how many calls to make, how many events to go to, how many deals you need to do, at what price level, at what margin. Don't forget to include legal costs and other costs as well as the purchase and sale price of the property when you're working out your margin.
You can also go wrong if you don't have a good lawyer on your case. This is a key relationship for any wholesaler.
Is property wholesaling legal?
Yes. In most states, you will find that you're not acting as a broker—which is regulated—because you are buying and selling a contract.
In a few states, you may need to exit by double closing rather than by assigning the contract. This involves higher legal costs, so you would need to get a larger slice of the action to cover the extra cost.
Another possibility is the creation of a special-purpose LLC for each deal. The LLC makes the contract and the buyer then purchases the LLC.
What can I do after property wholesaling?
Property wholesaling is a great way to build up capital while improving your knowledge and experience of the real estate sector.
You could decide to qualify as a realtor. Or you might decide, once you've accumulated enough capital, to get involved in flipping on your own behalf.
Or, you may enjoy the challenge of putting motivated buyers together with profit-seeking investors . . . in which case, consider making the move into commercial property or apartment blocks, where deals are much bigger and more complex, but at the same time can be more rewarding.
Happy, and profitable, investing!
