Do you want to invest in wholesale real estate but you lack the know-how? If YES, here is a detailed guide on how to become a wholesale real estate investor.
If you are a newbie trying to break into the real estate industry, this is a great place to start because wholesaling does not require significant capital to kick off the business. This kind of business can help a young entrepreneur learn about the real estate market and as well as gain invaluable negotiation skills.
What is Wholesale Real Estate?
Real estate wholesaling is the process by which an individual, called the wholesaler, acquires a contract from the seller of a property and assigns that same contract to an end buyer. In real estate wholesaling, a seller goes ahead to find properties that are priced below market value. He or she reaches an agreement with the seller of the property, and assigns the purchase contract to another buyer.
Profits are earned in this business from the wholesaling fee that is attached to the transaction — often a determined percentage of the overall property cost. Wholesaling real estate, in general, is legal, contrary to what some people may believe. Your target market as a real estate wholesaler are real estate rehabbers or other types of investors who prefer not to spend time looking around for discounted properties or negotiating with sellers.
Real estate wholesaling is an easy business to start and you do not need much capital or experience to start off with, but the fact remains that you must know what you are doing before you can make a headway in this business. We are going to give you a few tips on how you can break into the real estate wholesaling market and become an investor.
How to Become a Wholesale Real Estate Investor
Becoming a wholesale real estate investor is easy, but that does not mean that you can do this on your own entirely. You need to consult a real estate attorney because of the many grey areas that exist in this kind of business, then of course, you need to have some cash to help you take care of sundry fees.
But asides that, you do not need a lot of training or experience before you can start. In fact, this business is mostly a training ground for rookies in the industry. Wholesaling real estate is easy, and these are the steps involved in it.
- Keep an eye out for distressed properties
The first skill to have in this business is the ability to locate distressed properties. These kinds of properties are typically best for wholesaling because they can be purchased under market value. Distressed properties are those in disrepair or those with owners want to dump off quickly.
Finding a distressed property will enable you to sell the property for more than what you put it under contract for. This does not say that you cannot wholesale other kinds of properties though. Since part of the appeal of wholesaling real estate is the low capital requirements, those new to wholesaling real estate will typically look for free or inexpensive ways to locate distressed properties.
Three of these sources for finding distressed properties are real estate wholesale and real estate investment groups, online real estate sites, and using the services of an assistant. Using any of these three and some other sources would typically get you what you want.
- Put forth your offer and Convince the Owner to Sell
Once you have identified a property that looks like good deal, you need to hone your skills so you can convince the property owner to sell the property to you or your client. This step is important because it will be how you secure properties to wholesale and make a profit.
When approaching a homeowner, it is important to go about it in a delicate way. Since a wholesaler is not a conventional real estate professional, you have to make efforts to gain the seller’s trust before anything can be done. You have to make efforts to be courteous and polite when going about this.
- Find a Title Company, Contractor, and Appraiser
A real estate wholesaler needs a title company, a contractor and an appraiser on their team, or people they can contact easily to carry out these services for them. These professionals add a level of professionalism to your team and help your entire wholesale transaction run more smoothly. Each professional will save you time and money in the long run.
An appraiser that you work with can come out on short notice and give you an appraisal for the property you intend to wholesale. This will ensure you are paying the right price for the property and that you have room to make a profit after the sale.
An experienced buyer will also want to see an appraisal before purchasing the property, so you yourself some good and make the necessary arrangements. A title company ensures the buyer is buying a legitimate piece of real estate. They run a title search on the property to see if there are any liens on it.
- Check what renovations the property is in need of
The profits to be made from a wholesaled real estate, sometimes depends on the state of the property. By assessing what renovations a property needs, you know the costs and ensure they fit with your plan to profit off the deal. A distressed property that needs renovations means a higher margin for the investor that you sell the property to.
This higher margin will allow you to make money off the deal as well. You can give the estimate of repairs, that your contractor drew up, to the buyer so they know what to expect.
They won’t be able to make you too low an offer based on overpriced repairs because you already know what repairs need to be made and how much they will cost. Having this estimate of repairs is a valuable negotiating tool and will increase your overall profit.
- Start looking out for a Buyer
You found a property to wholesale, have the necessary professionals in place and know what repairs the property needs. It is now time to find a buyer. Note that the people you should be looking out for may not be home buyers or families, but instead it will be an investor or a contractor who will be buying and repairing the property.
Finding a buyer is very important and you need to do this really quickly since there will be a settlement date on the contract which needs to be adhered to. When you are first starting out wholesaling, you may not have a list of buyers but you can find them in a variety of ways.
Some of the most cost-effective places to find buyers include: Advertising the property on free websites such as Craigslist and Zillow; Distribute flyers with the property information on it throughout the neighborhood; Email investors that you have met at investor meetup networking events with the property info.
Once buyers start calling about the property, save their name and contact info, even if they aren’t interested in this property so you can show them other properties later on. This will decrease your advertising costs, in turn increasing your potential profit.
- Negotiate a Deal with the Buyer
Once you have found an interested buyer, it is time to negotiate a deal with the buyer. This negotiation is critical since it determines your profit or how much money you will make off the deal. Again, the profit is derived from the difference between what the asking price of the property and what you’re wholesaling the property for.
When negotiating with the buyer, use the contractor’s estimate to your advantage. Let the buyer know that you have other buyers interested and if they want to get this great property, time is of the essence. The buyer will need to leave a good faith deposit, which can be made out to the wholesaler, or the title company and held in escrow until the property goes to settlement.
7. Assign the Purchase Contract to the End Buyer and Collect a Deposit
Now that you’ve found an end buyer and agreed on a purchase price, it’s time to assign your wholesale contract over to them. You can do this by executing an assignment of contract agreement. An assignment agreement is usually a one pager which states that you (the wholesaler) are assigning interest in the original purchase contract over to your end buyer for a certain amount (the assignment fee).
Let’s say that your original contract with the property seller was for $200,000 and your end buyer agrees to buy it for $210,000. In this case, you would fill out an assignment agreement where you assign all of your rights in the original contract to your end buyer for the amount of $10,000. Don’t forget to collect the deposit from your buyer after the assignment agreement is executed.
8. Close the deal
The closing of the wholesale deal is also known as the settlement. This is where you and all relevant parties meet, sign all of the necessary documents, and transfer the deed to the new owner. It is also where you and the end buyer pay all closing costs.
The settlement basically concludes the wholesale deal. The closing date will be mentioned in the contract you signed with the property owner and the contract you signed with the new buyer. All closing costs will be paid by the buyer and the seller unless otherwise agreed and the new buyer will receive keys to the property.
Tools Needed for Effective Real Estate Wholesaling
There are indeed things and skills a beginner needs to have before he or she can be successful in the business. They include;
i. Some knowledge of technology: Those who incorporate technology into their workflows tend to be able to process more information with accuracy, while also maintaining organization. Examples of tools that can help your business include customer relationship management (CRM) software and mobile applications that allow you to scan and store documents in the cloud. Learn more on how to automate your business with a real estate software.
ii. A trained mindset: You need to train your mindset to be able to locate deals out of thin air. Investors who are successful tend to have the right mindset—one that is cultivated over years—and can attack each and every task with consistency and dedication. This is the same with your real estate wholesaling business.
iii. A responsive website: According to the National Association of Realtors, 51 percent of today’s homebuyers find their home on the internet, representing the largest proportion of consumers who take to the web when searching for goods and services. Having a great website helps to establish your brand and authority, helping to drive more business your way.
iv. Reliable access to neighborhood comps: A real estate investor’s success largely depends on their ability to identify comparable home sales, so that they can price their properties competitively. In addition, neighborhood comps allow investors to identify properties that are being sold for under market value. One way to access reliable market transaction data is to partner up with a real estate agent who has access to the MLS.
v. Get your outsourcing game: Savvy entrepreneurs know how much their own time is worth. Juggling daily tasks and projects is a constant balancing act, and investors who try to accomplish everything autonomously can end up hurting themselves in the long run.
Cramming too many activities into your schedule can lead to errors, sloppiness, and even missing out on great opportunities. Knowing when to outsource or delegate tasks and projects can prove to be a worthy investment. But know that if you are still starting out in the game, you may need to do a whole lot of things by yourself till you are buoyant enough to start outsourcing.
When it comes to your real estate wholesaling, you must actually know what you are up against. This is especially true if you don’t have a lot of money and want to make a quick sale with minimal risk.
The wholesale business is also an ideal way of making money in real estate without owning property. It is really not difficult learning how to manage, grow and scale your wholesale real estate business. You only just need to take the plunge and watch things sort themselves out.