How To Start Wholesaling Real Estate: A Step By Step Guide
Wholesaling property is an exciting way to make a lot of money very quickly. There are certainly risks, but this guide will help you figure out how to make sales and get business connections that land you good deals.
What Is Wholesaling Real Estate?
Wholesaling real estate is a strategy that some investors use to make money in the relative short term. It’s important to note that it doesn’t follow the same principles as retail wholesaling, either.
Basically, an investor will find a property, often a distressed one, that’s for sale, and make a contract with the seller to purchase it. However, instead of taking on the property themselves or making renovations, the way that someone flipping property would, they simply find another buyer, and charge them more than what they contracted with the seller. The wholesaler keeps the difference in sale prices and thus makes a profit.
Finding a Property to Wholesale
Finding houses and other types of property is particularly difficult right now, based on market trends. Right now, the housing market is appreciating at a rapid pace. There are more buyers than there are sellers, so finding property is more difficult than ever.
Properties that are in desperate need of repairs are the most desirable when it comes to wholesaling. There are two types of agents; buying agents and listing agents. Listing agents are the people who put the house up for sale and publicize it on sites like Zillow.
Buying agents are the people who help those who are looking to actually buy the property. Typically, both of these types of agents would collect about 3% commission when working together in helping two parties sell and buy a property.
When looking for a distressed property for sale, it’s best to contact the seller directly without using a buying agent. This is called dual agency. Under this circumstance, the selling agent will get twice the commission if your offer is accepted.
The selling agent is now much more inclined to give you a better deal on the property because that agent’s commission just got doubled no matter what. The selling agent is, in a sense, working for your interests now.
This strategy will facilitate a foundation for future relationships with selling agents. They will eventually start to reach out to you with property listings because they want the double commission. Sometimes, listing agents will even let you know of future listings ahead of when they will be officially listed.
Sellers Who Are Motivated
One of the types of sellers to look for are estate heirs. These are people who inherited a property but don’t actually want to keep it. These people likely already have homes themselves, or they can’t afford the taxes on the newly inherited home.
Absentee owners are people who own properties but don’t actually maintain or even occupy the property. These types of owners are distinguished from active owners by being very hands-off and are much more likely to be motivated to sell.
Properties that have liens attached to them have owners that are likely trying to get out from under debt. They see selling the property as a quick way of getting the funds necessary to pay off their debts.
Foreclosures are public record, and many areas even offer lists of them. The reason they can be bought for so cheap is that they are being sold by the lender, and they only make a profit from any sale. Their goal is to simply recuperate the costs of the failed loan and then some.
Making an Offer
It’s important to understand the local market of the property you are looking to acquire. It’s not all about paperwork and negotiations. You also need to strengthen your relationship with potential sellers.
If you attempt to go about negotiations and offers with sellers in a way that seems dishonest, you’ll likely have your offer declined and damage your reputation. Selling agents are people just like you, and it’s best to be as transparent as possible with them.
Take care in explaining exactly what your intentions are and discuss what your process will look like. If done right, you will foster a lucrative business relationship with many selling agents that love working with you because it will benefit both of you.
There are three other parties that you need to have involved in the process; an appraiser, a contractor, and a title company. These parties will help assist you in making the process not only easier but much more lucrative.
An appraiser determines the value of a home by examining the quality of the property and making sure that everything is up to code and safe. Appraisers know where and what to look for on properties. They can point out things you might not know to think about.
They will perform a room-by-room walkthrough of the home and inspect for damage, quality of construction, and possible local code violations that need to be amended. The appraiser’s assessment can be used to leverage a better deal when negotiating a price.
Depending on the state you live in, an appraisal can cost anywhere between $200 and $400. It might be tempting to skip out on this part of the process altogether, but it’s not a good idea. Without a professional appraisal, you’re basically going into the sale blind.
Homes can look great on the surface, but who knows how many problems could be lying just underneath? Appraisers can point out things that may end up making the value of the property much less than what you were looking to sell it for.
A contractor can also inspect the property and assess what repairs or changes are necessary. The contractor will also be able to generate an estimate for the needed work. This estimate will inform your selling price later.
Always check your contractor’s history and follow up on previous work that they have done. The internet makes it earlier than ever to find reviews to ensure you’re getting a realistic estimate.
Title companies analyze the title of the property for liens, defects in the title, and claims of encumbrances. They mostly examine public records. This process can be complicated, though, so it’s best to leave it to a professional.
These companies ensure you’re actually buying a house legally and in full. If you don’t hire a title company, you could end up buying a property from someone who didn’t fully own it. It’s kind of like scam insurance.
Finding a Buyer
You can’t sell a property if you can’t find someone willing to buy it. Luckily, there are a number of ways to attract buyers and investors, and most of them will either cost little or no money at all.
Go to trade events that promote making business connections to possible investors. Social media is another great tool in your arsenal for connecting with other professionals in a quick, free way.
Starting your own website can also be a great way to attract higher-end buyers as long as it’s done well and is advertised. If you go to trade shows and events, be sure to have the website on your business cards.
This is also an opportunity to utilize your new connections with selling agents. If you’ve gained their trust, they can provide you with leads and potential investors. They have access to connections that you can possibly tap into.
Closing the Deal
Before discussing a final number on a deal, you need to agree on a finder’s fee for the property sale. Most wholesalers charge anywhere between 5% and 10%. There are two ways to finalize a sale; an assignment of contract and a double close.
Assignment of Contract
These types of contracts are fairly straightforward. You’re basically signing a contract that says you have the right to sell the contract to the buyer for a fee. This is a simple transfer of the rights of contract.
A double close is where you essentially have two separate transactions; one between the wholesaler and the seller and one right after between the wholesaler and the buyer. This method allows you to keep your capital gains secret from the two other parties.
Real estate is a risky market but also lucrative if done properly. The great thing about wholesaling real estate is that you really don’t need a realtor license. You also don’t need a lot of capital to get started.
Wholesaling has the potential of huge profits in a very short period of time. After you become more established and have the proper connections, you can do this practice many times over very quickly. It may take a few times before you get the hang of it, though.
There are certainly risks to wholesaling, namely, not being able to find a buyer. Greed is often the biggest killer of deals. If the prices you set are too high, you will struggle to not only find a buyer but also struggle to stay in good standing with selling agents.
Wholesaling real estate is not a consistent occupation, and there is no guaranteed paycheck. Income and profits are wildly unpredictable, so this type of work is probably best done on the side next to your full-time job.