Wholesale is a “risk free” way you can get into the business without having to ever actually buy the property, taking title, getting financing or fixing anything. Actually, the only risk you have is your time equity / sweat equity by “Walking” neighborhoods searching for deals💰!
Wholesaling is the process of signing a contract to purchase a property from a seller and then entering into an agreement with a third party to resell the same property at a higher price for a profit (Flip - No Fix/Just Fee). Just like buying anything in a retail store there was probably a wholesaler between the retailer and the producer. The same goes for real estate.
The wholesaler is also known as the “middleman”. All rights to the original purchase contract are assigned to the new buyer and the new buyer pays an "assignment fee" to the wholesaler in order to gain all rights to purchase the property at the original purchase price. The original purchase contract usually has an "inspection period" which allows the original buyer to back out of the contract and not close on it if they do not find a buyer to assign their contract to.
" Most wholesalers have no intention of actually purchasing the property and simply use wholesaling as a tool to locate properties for other flippers & investors. Many times it is an active part of the $elling $trategy on the capital gain side or Exit $trategy on the cash flow side of investment."
The practice of wholesaling is often advertised as "No Money Down and No Risk" since the actual deposit can be as little as $10 and often even the deposit can be returned if the wholesaler cancels the contract before the end of the inspection period.
Wholesaling is not just for the “starting” investor trying to get the “capital gain” going. If you implement a professional marketing/prospecting process for deals, aka building a “Wholesaling Business” you can often make even more money from wholesaling than retailing. It is also a perfect supporting exit strategy for your properties in your Flipping Business and a perfect extra stream of income for your Investment “buy & hold” Business
You see, beyond just explaining the fundamentals, our true goal is to inspire you to think like and create your own “Wholesaling Business” (with a capital “B”!). Something that will allow you to reach your financial goals and create a business that works for you, rather than you working for it.
The ultimate goal here is to use “The Big $elling $trategies to propel you into Investing”, the only true way to riches!
The Wholesaler’s Profile
Great skills you need to have are marketing and deal prospecting (finding deals). It is essential to have systems to follow up with potential sellers and your negotiation skills need to be on point so you can get a price that will make everyone happy. A lot of negotiating is just listening to what the seller’s challenges are and figuring out a solution that allows both of you to come out on top and still make a profit for your flipper/investor. If you don’t learn and understand how to properly analyze and evaluate the property you will not last long in this business or investing in real estate. Period, end of story.
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The most important skill for you as a successful “Wholesaler” is to develop analyzing property value skills. You must be able to “estimate” repairs, understand the costs involved in a transaction and know after repair value (ARV) of the property.
The goal behind analyzing for the ARV (After Repair Value) is to find the price the house will sell for once you have done your rehab, improvements and up to “selling or retail” condition. Now you can work backward and take out all the costs like financing, selling (real estate commissions), carrying/ holding costs (insurance and property taxes) repair costs, closing costs and lastly your desired profit in order to “exactly calculate & know” your maximum offer price. This is the price you must stay under to make your money!! The more meat on the bone for flippers/ investors to make a profit, the happier they are to carry your assignment fee. So you make a deal when you “calculate” your deal.
If you want to learn to properly value your investment and know-how all your costs will affect your profits - Calc Like A Pro E-book has got you covered.
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How The Process of Wholesaling Works in 4 Steps
The steps of wholesaling itself are actually easy, but it’s the mastery of the individual skills to build a profitable business that will make it a challenge. You need to be willing to mind the due diligence, spend time conducting research, and putting an effort to master the marketing, the communication skills and putting your systems into place.
You can break “The Process of Wholesaling” down into 4 steps. These are the four basic parts of the process from beginning to end:
Find A Property; the focus of Wholesaling is to find properties that are being sold under market value so you can assign the contract quickly to a buyer (flipper/ investor) and easily make your finders’ fee. This is known as “market to motivated sellers” through marketing. You can direct your marketing campaigns through social media or direct mail, but keep in mind that following up on leads routinely, “Walking for deals” – door knocking, is just as important.
WHAT IS A MOTIVATED SELLER?
A ‘motivated seller’ is a property owner who is motivated (“needs”) to sell. A motivated seller is typically in a time crunch situation. Motivated sellers are like gold to investors, especially wholesalers. The more motivated a seller is, the better deal an investor can get on the property. If a seller needs or wants to sell quickly they may sell cheaper, and really need the services investors can offer.
3 Types Of Motivated Sellers
MOTIVATED SELLERS ACTIVELY MARKETING THEIR PROPERTIES
These are property owners who are in direct need to sell and are proactively taking action through: a Realtor, a For Sale By Owner (FSBO) method or contacting wholesalers / cash buyers online.
Sellers that are advertising their property for sale, but are unmotivated because they don’t feel much pressure of their situation thus taking too long to sell or asking too much. This is a great opportunity for investors to step up, provide help and motivate through negotiation skills by communicating the urgency of facing upcoming deadlines, turns in the market or other costs and risks.
MOTIVATED BUT NOT ACTIVELY SELLING
There are motivated sellers not actively marketing their property because they are too busy to take action, paralyzed by fear of making the wrong choice or just unaware to the possibilities. Motivated sellers can come from any walk of life, neighborhood, level of education, and salary level.
Situations That Make For Motivated Sellers.
There are situations that make for motivated sellers. This is why “Walking for Dollars or Door Knocking” is often a successful strategy in spotting these motivated sellers/properties:
Marriage/Divorce; Every time there is a marriage or divorce there is need for new housing. Whether before, during, or after a marriage/divorce there can be tremendous motivation to sell real estate.
Employment; Getting a new job, losing a job, or relocation by an employer can all mean serious motivation to sell a house. Few have any meaningful savings to get them through periods without income or to juggle two mortgages.
Distressed Property; Due to property age, deferred maintenance, storm damage, fire, flooding, vandalism, or buying a property with hidden issues that can quickly accumulate costs, fines, bills and violations. Many owners can’t afford to fix the issues. This is where “Walking for Dollars” comes in handy when finding “distressed” properties.
Inheritance/Estate; Often heirs can’t or don’t want to care for an inheritance property. They need to sell fast to avoid it becoming a financial drain or losing the inheritance altogether.
Foreclosures/Financial Default; Foreclosure is most commonly when falling behind on mortgage payments. Underwater mortgages, balloon mortgages, fraud, property tax delinquency, code violations, failure of insurance companies to pay claims, and even income tax issues can all lead owners down the road of foreclosure. The “Door knocking” strategy will typically find these painful “distressed owner” situations.
Auctions; This may be creditors auctioning off properties or owners and agents seeking a fast way to move real estate.
Developers; Builders and investors in the development market can also be highly motivated sellers. Builders and developers are on tight timelines to move units due to regulations, rising costs, changing market dynamics or personal issues. This may bring the opportunity to pick up deals in bulk.
Tax Law Changes; Tax law changes have often been big motivators to sell. When tax rules change investors may need to beat deadlines before their liability goes up or before the property becomes less attractive to other buyers. Note that interest rate spikes can also have similar effects.
Referral Partners; There are many professionals and businesses which are constantly dealing with motivated and distressed sellers such as attorneys, financial advisors, mortgage loan officers, bank managers, real estate agents, other real estate investors. These leads may include expired listings, borrowers turned down for loans, executors of estates.
Build A Buyers List; Finding a great property is no use if you don’t have buyers lining up ready to buy in time. Successful wholesalers businesses are so by maintaining an active buyers list. You can think of this as a list of real estate professionals who are continuously interested in purchasing off-market properties. Buyers lists can be generated by extensive networking, attending auctions, going to investor' s meetings and events, online & offline marketing campaigns targeting off-market buyers.
Negotiate the Deal; Once you’ve identified a motivated seller who is willing to sell their property below market value, it is time to try your hand at negotiation. First, do your research and “listen” to find the owner’s needs! Such as what they owe on the property, if they have any outstanding liens, and if there are any additional moving costs. Then, get ready to make an offer on your wholesale deal. You’ll want to leave plenty of room for negotiation, so make your initial offer low. Experts recommend anywhere from 40 to 60 percent below the asking. Just remember, distressed homeowners, want to sell their property at the end of the day. It’s always possible to come up with a mutually beneficial agreement.
Close The Deal; Get ready to close your wholesale deal as soon as you reach your agreement with the seller. It is crucial that you make clear to the seller that you are not buying the property yourself, but will be selling the contract to a third party. The contract should include an assignment clause that allows you to do so. This is important not to break any laws when trying to represent sales without being a broker. Don’t be oblivious illegal! If you are unable to find a buyer within a set amount of time, the contract will expire. Once you find your buyer, it is time to collect a deposit and assign the contract. Then, work with a reliable title company who will order title insurance and prepare all of the necessary paperwork for all parties to sign. Once you have reached your real estate closing, you can expect to be paid your portion within 30 to 60 days
The Rules Of The Wholesaling Game
The 70% of ARV (after repair value) “rule”; is a formula commonly referred to by real estate investors, when purchasing distressed real estate for a profit. Calculating the numbers on a wholesale real estate deal is important because it will determine how much profit you will make. The profit is the whole point of the wholesale business. The deal needs to make sense for the real estate wholesaler and still leave room for the investor, also known as the buyer, to make a profit too. The formula will calculate the maximum you can pay for a given property once you input two key factors, namely the ARV and estimated repair costs. The 70% rule is more of a guide than a hard/fixed rule. The % of ARV you can pay, minus repairs, will vary based on: local markets, exit strategy and housing type. Often times an investor will be more flexible than a flipper when it comes to their buying price!
Non-assignable properties; Usually properties that are either bank-owned or short sales will say in the contract that they are “non-assignable”. In this situation there are several things you can do:
With capital to fund upfront, "purchase the property with cash" and then turn around and sell it to the investor, in some cases they can use their own capital to fund the transaction.
Use “transactional funding“ to avoid using your own capital. This means you will use hard or soft money lenders for a few days until you close the deal with your buyer.
In case of a “deed restriction” on the property, which doesn’t allow you to sell the property for 30–90 days after you purchase it. If you have really good relationship with your buyers you can hold title during this period of time while they move on with fixing/rehabbing.
"Be an intermediary" in other words work with someone who might let you make offers in their name for a fee or a percentage of the profit that comes from the deal.
How You Get Paid
As a Wholesaler, you typically get your fee paid when you close on the purchase of the property (30-60 days). Another very attractive way is you get a percentage of the overall profit from the eventual rehab sale. In some cases where you have a long time trusted relationship building, you might even split your marketing/buying costs with your preferred or built-in buyer investor. Ultimately you might have a fix-fee upfront and a percentage when they sell is final set-up with multiple investors.
In closing 😉, wholesaling is a great strategy to add to your investment toolkit. If you’re a newbie it is one of the best ways to get a taste for buying and selling properties. You just need to focus on becoming great at marketing to sellers (relevant to any business right?), evaluating properties and negotiating win-win deals. Again it all boils down to knowing your numbers, what works for your markets and your investors to make a profit. Because in the worst case that you can't market well, but your numbers are fruitful -the numbers themselves will do the selling for you! Remember you make your deals when you calculate your deals. Everybody loves a good profit! 💰
Now grab your calc like a pro smart pack & set off from walking to running an amazing “Wholesaling Business”.