Real Estate Wholesaling 101
Most real estate experts and coaches out there encourage people to start with wholesaling because it’s so easy, and it can be done with no money down.
While at first blush there is a lot of truth in that concept, the words “easy” and “no money down” can be rather deceiving.
The reality is that while the concept is easy, the practice actually takes a good deal of hard work and dedication; while, in theory, you can actually do a wholesaling deal with no money down, you are going to need at least a little bit of capital to make a success of your real estate business.
Nonetheless, there are some true advantages to wholesaling properties:
- You don’t need any cash to wholesale if you use an assignment contract or “double close”
- You don’t need a contractor
- Your buyers are typically other real estate investors who are paying cash
- You don’t have to hold properties for months on end pending repairs or listing; thus you eliminate, or drastically minimize, risk
Real estate wholesaling is one of the most widespread approaches for new real estate investors because it can be done with limited funds and experience. However, you definitely have to be ready to roll up your sleeves, study, and put in the hours and dedication needed to see success.
To succeed at wholesaling, you need to be adept at a few core concepts:
- Understanding the math behind a good flip
- Understanding the math behind a good rental
- Ability to recognize and communicate well with “motivated sellers” in distressed situations
- Honest and fair negotiation
- Marketing for, and finding leads without incurring exorbitant marketing costs
- Research and discovery of good deals
- Estimating rehab costs, post-rehab values, and potential returns
Of course, you can build a team to handle some, or all, of these things, but as the owner of your real estate business, you need to know how it all works -that’s where education and hands on practice comes in.
A good wholesaler is somewhat of a juggler and skillful at creating a steady flow of terrific real estate deals. Deals take time as they must be worked into fruition; thus, a successful real estate investor is continually working to bring new leads and opportunities into the flow through strategic, and affordable marketing efforts, and by following up, building trust with buyers and sellers, handling due diligence on every potential deal, doing the math, preparing inspections or bids, and finally, signing deals.
In fact, at any given moment a successful wholesaler might have several different deals in varying stages of fruition, and his or her job is to keep everything moving steadily forward.
How to find good real estate wholesale deals
Direct mail may be one of the most successful ways to source good deals. I recommend outsourcing this task, but of course, you will save money (though how much depends on what your time is worth) if you do it yourself. Letters should be mailed to pre-foreclosure leads, owners of vacant homes, and expired or canceled listings, among others. There are a number of ways to source the contact information, including database systems such as Find Motivated Sellers Now.
Driving for Dollars
The oldest and most basic way to find good deals entails driving around neighborhoods looking for potential acquisition opportunities. Good opportunities usually stem from properties that are “distressed”. Typical indicators of a distressed property are boarded up windows, tarped or boarded up roofs, legal notifications in the windows or tacked to the door, unkempt lawns and gardens, or any other signs that the property is either vacant or a problem for someone.
Searching the MLS
The MLS is a database full of properties that are currently being sold by real estate agents. This is not the easiest route, because of the competition, but it is a source and I’d be remiss if I did not mention it.
Your local newspaper, billboards, the classifieds, and the Penny Saver are some great methods of finding good deals; it takes time to scour the ads, but some terrific gems can be buried in these mountains.
Craigslist, social media, database systems, and keyword searches in your favorite search engine are all great ways to find the deals you are looking for.
How to evaluate real estate deals & what to do next
Once you’ve found the deals that are out there, you need to be able to figure out if they are worth your time and effort in order to move in and sign them. Wholesalers find deals for other people; typically other real estate investors. So, when figuring out if a transaction will work to your benefit or not, you should start with the end number in mind and work backwards.
The price you end up paying is known as the Maximum Allowable Offer (MAO). The MAO is the highest amount of money you can afford to offer a seller, and still make the profit you want.
In order to determine how much you can pay and still make a good profit, you’re going to have to do a little bit of “wholesaling math”. The good news is, it’s fairly simple math. The not so good news is that you have to do it: no shortcuts.
In order to figure out your MAO, you’ve got to begin with the After Repair Value or ARV. The ARV is what the house flipper is ultimately able to sell the property for.
At the end of the day, the math looks something like this:
ARV- all costs associated with the deal = MAO
The costs associated with the deal are the investor’s profit, plus repair costs, plus fixed costs (including holding fees and transaction costs on both sides of the deal), and your profit.
As you may have guessed, the ARV is the most important amount in the equation; if wrong, the result could disastrously affect your bottom line.
There are several methods for determining ARV, but they all orbit one single principle: properties are worth approximately the same amount as what similar properties in the same vicinity have recently sold for.
The simplest way to determine ARV is probably just to ask a local real estate agent who is likely to have good data at hand based on homes recently sold in the area. You may need to compensate them for their time, but you also might find some success in cultivating mutually beneficial relationships; for example, if you’re unable to help a property owner by negotiating a wholesaling deal, you may be able to refer them to the agent so that the agent can assist by selling on the open real estate market. When you build solid relationships with real estate agents by passing along the leads you can’t work, you create a rapport that sometimes results in reciprocity.
However, if you can’t do that, you can simply try to make some comparisons, making sure that you liken “apples to apples”, of course. You want to be certain that the property you are matching is in the same immediate vicinity as the one you are relating to, and that other similarities are in place such as number of bedrooms, number of bathrooms and the condition of the home. If you can’t find another home for identical comparison, try to estimate the ARV by getting as close as possible and making slight allowances by compensating for added value such as an extra bathroom or more square footage.
How to sign deals
Once you’ve got your numbers down, it’s time to make an offer. You’ll need your negotiating skills to be in tip-top shape for this part of the journey.
Negotiation can be tough, but if you have thoroughly vetted the situation and your seller, then you know what matters to them. You have to hammer hard on that pain point.
Always keep in mind that you are the buyer and there was a reason they reached out to you. Stay focused on that and you’ll have a powerful negotiating tool. Finally, always ask how much they think their property is worth; let them know that you can’t give them a realistic number without seeing the property first. If they will not allow you to see the property, they may very likely be wasting your time.
Once you’ve come to an agreement on price, you’ll need to get the property under contract. In some states, you can get a standard approved purchase and sales document from your local Office Depot. However, it is often recommended that you craft your own with the assistance of a good lawyer.
This part of your journey is critical; one misstep in your contract or failure to handle your due diligence can result in catastrophic losses. It isn’t within the scope of this article to cover the ins and outs of a good contract, exit clauses or due diligence, but I do strongly recommend that you obtain a thorough education in this area.
There are a number of ways to close on the sale of a property and the way you write your contract is going to depend on how you plan to close.
In an assignment contract, you will write “and/or assigns” after your name. This indicates that you or the person you assign the contract to will buy the property. Assignment contracts are generally not permitted when buying foreclosures, but most homeowners are fine with it. Be upfront about your intentions. Then, sign an “assignment contract” with your buyer, which will officially assign them the property.
If you are doing a “double closing”, it means you will actually buy the property and then immediately resell it the same day. If you don’t have the cash for the deal, there are plenty of transactional lenders around who can fund the deal for you.
This is the good part, and best of all- there really isn’t much to do other than to sit back and let your Title Company or closing attorney (both of which should be familiar with wholesaling) take care of business. Be sure to ask your fellow wholesalers in the area for references on who to work with.
Wholesaling. It’s easy but not effortless. And, with the right amount of education, coaching and good old-fashioned elbow grease, you’ll be well on your way to a fruitful wholesaling business in no time.