Do you want to get into real estate wholesaling as a realtor? If YES, here are 8 easy steps on how to wholesale real estate successfully even as a beginner.
Real estate wholesaling is a short-term business strategy investors leverage on to make big profits. Unlike what most people think, real estate wholesaling is nothing like retail wholesaling. In retail wholesaling, the wholesaler sells a large quantity of goods to a retailer, who repackages and sells it to consumers at a much higher price. Because of the volume of goods sold to the retailer, the wholesaler can charge the retailer a much lower price.
Real estate wholesaling doesn’t involve the sale of multiple properties at lower prices at all. In fact, it is a whole different concept. In this strategy, the wholesaler contracts a home, which is usually one that is distressed, with a seller; he shops that home around to potential buyers, and then assigns the contract to one of them.
Instead of purchasing a home and selling it, a wholesaler contracts it with the seller and finds a party interested in buying the property. Also, you do not need a license to wholesale real estate; you just need to be the principal buyer in the transaction. It is helpful to have specialized knowledge of the home buying and selling process, and there is no assessment required to begin.
Howbeit, obtaining a real estate license can have several advantages for realtors interested in wholesaling. With a real estate license, you can gain access to the MLS which is a great source of property leads. Obtaining your real estate license can also open you up to a number of networking opportunities, which could be helpful down the road.
How to Successfully Wholesale Real Estate as a Realtor
Just like it was stated above, wholesaling real estate is a very short term investing strategy. Some people confuse it with fixing and flipping, but there are key differences. Wholesaling real estate is beneficial if you want to get into real estate but don’t have a lot of cash, but downfalls can include confusion on its legality and complicated contracts. Below is a well detailed guide on how to successfully wholesale real estate;
- Locate the Property
To wholesale real estate, you have to first find the right property. The best properties for wholesale deals usually are distressed properties. Distressed properties can come in a few forms. They can be abandoned houses that need a lot of repairs, maybe owned by a bank and up for foreclosure.
There are many foreclosure auctions you can attend in your city. Do a simple internet search to find them. Another kind of distressed property that can bring in even better terms are those that have been on the market for a long time.
Owners get more desperate as time goes on; paying a mortgage for a house they don’t live in. You can use this to your advantage. Leverage sites like Zillow or Redfin to search for deals in your area that have been on the market for many months and prepare a list for evaluating them as potential deals.
Also, you can visit sites like Craigslist, FSBO, or HomesByOwner.com to find properties offered up directly buy sellers. You can utilize keywords like “motivated,” “must sell,” “fixer upper,” “as is,” and more to find the right kinds of deals that would work in wholesaling. Consider also hiring someone to help you find your deals.
- Be Sure Of The Numbers
Immediately you have ascertained a list of potential properties, you need to make sure to run your numbers. Don’t forget, your goal is to sell a contract, not a property, so you want to take different costs into account to make sure your fee is solid for your work.
Costs to consider include, title fees, any fees you might put out to have a contractor do an evaluation of needed repairs (you will use those findings to help negotiate the deal and to entice a buyer), and the services of an appraiser. Also, you don’t always have to hire these services and pay for them. Often you can simply have the escrow fee in the deal through your title company, but if you do, it is best to factor them in.
Judging from the findings, the aim is to simply know how much you need to put up for the deal and what you think you can sell the contract for. The difference between the two is your net fee. More or less, you will want your fee to be $2,000 or more, depending on how great the deal is. If you are not going to make that much on the deal, then it is not worth doing.
- Find The Property Owner
Although it all depends on where you find a deal. But have it in mind that you might have to do some searching to find the property owner. If the contact details for the owner aren’t in the listings you are looking at, here is a few ways to go about finding them.
Consider going to the neighbors, knock on the door, and ask if they know the owner. Most times they can give you a phone number or email to connect with. Or you can go to the local county assessor website, type in the address, and find the name of the owners.
This won’t give you the contact details, but it will help you know who to search for and often a simple Google search can reveal and email or phone number. Finally, if you are really having a hard time, you can hire a skip tracer, a person whose job is to find people, to hunt down the owner for you.
- Assess Property’s Renovation Needs
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 renovation 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.
Knowing what renovations the property needs and how much they cost will also give you an idea of how much the ARV of the property will be. This is particularly important to show investors so they can see the value and potential profit that your particular property will bring them.
- Negotiate the Contract
To succeed in this business, negotiating a great deal is pertinent. The better the deal the easier it is to find an investor and make a great fee. The name of the game in wholesale real estate investing is margin. The bigger the potential profit margin for your eventual buyer, the better your fee will be.
So, you will want to negotiate an amazing price for the property with the seller with significant upside for a potential buyer. Note this is where it helps to hire an appraiser and contractor.
By knowing the value of the home and the potential value relative to repair and construction costs, you can demonstrate the value opportunity to a buyer and create a lot of motivation. Ideas to entice a seller to go lower on pricing include highlighting that there will be no upfront fees, that all closing and escrow fees will be covered, and that you will handle all the details of the purchase.
For a distressed seller, these can be emotionally valuable triggers that will motivate them to go lower on price than they ever thought they would. You will also want to mitigate your risk in the deal. This means it is essential that you give yourself an out, or what is commonly called an escape clause.
In a wholesale deal, any number of problems can arise such as the property not passing an inspection, the property does not apprise for high enough of a value, or title issues. You want to write the contract in a way that provides exit opportunities for these situations. However, you can’t get carried away with escape clauses. Use as few escape clauses as possible, but have at least one clause to get out of the deal.
- Find a Buyer
Note that your ideal client won’t be a first time home buyer or a family, but instead, it will be an investor or a contractor who will be buying and repairing the property. Finding a buyer is important and needs to be done quickly since there will be a settlement date on the contract which needs to be concurred 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. Once buyers start calling about the property, save their name and contact info, even if they aren’t interested in this property.
You can create a quick spreadsheet or use a customer relationship management (CRM) software to save all of this info and this will be your buyer’s list. Every time you have a new property to wholesale, you can send it out to your buyer list. This will decrease your advertising costs, in turn increasing your potential profit.
- Negotiate a Deal with the Buyer
After you must have found an interested buyer, it is time to negotiate a deal with the buyer. This negotiation is important because it will determine how much money you make off the deal. Your profit will be the difference between what you purchased the property for and what you are wholesaling the property for.
Remember, when negotiating with the buyer; use the contractor’s estimate to your advantage. Make 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. When you are negotiating with the buyer, make sure all of your costs are covered
- Appraiser fee
- Contractor walk through fee
- Title fees, if you paid them, to get a head start on the title search
- Any marketing fees including what you will owe your birddog
Always make sure that after your costs are covered, you earned enough profit to make the process worth your time, effort and gas money. In general, most wholesalers aim to make at least $2000 profit off of each wholesale deal. If you aren’t making that amount, the deal isn’t worth doing.
- Closing on the Wholesale Property
The closing will have to take place at the title company’s office and will last about 90 minutes. All parties will come together and the deed will be transferred to the new owner. Once this is done, it will be the completion of a 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. You chose an investor-friendly title company that will conduct the closing to keep all parties satisfied.
Since there were assignment clauses in both contracts, the wholesaler will generally not transfer the property into his name. This person, usually an investor, will put the property in his name, or more likely his company’s name. This is a way to avoid paying transfer taxes on two separate transactions.