Wholesaling houses may seem very complicated at first, but it really isn’t. New real estate investors often choose wholesale real estate as their first investing strategy.
This complete guide to wholesale real estate will provide you with the knowledge you need to start investing in real estate without cash, credit, or experience.
What is Wholesale Real Estate?
Wholesale real estate is a process where you find a motivated seller who is willing to sell their house below market value. You then get that property under contract and assign that contract to a cash buyer for a higher price.
Instead of buying the house yourself you find a cash buyer who is willing to buy your contract at a discount. Still giving them the opportunity to make a profit. Your fee is called an assignment fee.
Once you have both contracts in play, you can take the contracts over to an investor friendly title company or attorney. From there, the title company or attorney will take care of the entire closing process.
The reason why wholesaling real estate is suitable for most beginners is that this particular real estate investing strategy requires little to no capital or experience.
Let’s assume Micheal is a real estate wholesaler. He looks for the best real estate deals, stays updated with the latest offers and hangs out with real estate investors.
One fine day, he finds out that his friend Bob wants to sell his home before it goes into foreclosure. Bob wants $100k for the house.
Micheal and Bob both agree to a Purchase and Sales contract saying that Micheal or his partners will buy the home within X amount of days for $100k cash.
The real job for Micheal starts here. He contacts real estate investors to see if anybody wants to buy the house. One of the investors wants to see the house. Let’s name him Ross.
Ross agrees to buy the house for $110k because it looks like a great deal. As per the contract, Micheal OR his partners can buy the house. So, Ross and Micheal agree to an Assignment of Contract saying Ross will buy the house for $110k cash and pay for all the closing costs.
Now Micheal can hand over both real estate contracts to the title company or a closing attorney for further processing.
Lastly, Bob will get $100k as per the contract. Ross will buy the house for $110k as per the contract. So, Micheal will earn a profit of $10k without ever buying or fixing up the property.
Know before you start
The entire wholesaling process we have discussed looks very easy which it is. However, nothing is effortless, right?
There are many things that you need to keep in mind while you are wholesaling real estate.
Hard Work and Effort
Before you close your first deal, you will have to put in a great deal of time and effort. The above example seems easy to do but let’s get more in depth.
Michael found the cash buyer/investor (Ross) who was ready to buy the house. But, how can one find cash buyers so easily? For one, Michael spent a great deal of time putting together a cash buyers list. He searched for buyers online, networking and through marketing himself as a wholesaler.
Considering Michael sold a house at a profit of $10k without even buying it, you may be wondering, “is this legal?” Or “is wholesaling illegal?”
The answer is NO. It’s neither cheating or illegal as long as you know the correct way to wholesale real estate. Make sure you don’t need a license to wholesale in your state. In the great state of Texas where I close my wholesale deals, wholesaling is completely legal.
You do however need to ensure you have purchase and sales agreements along with assignment of contracts that will protect you from liability. For this, I recommend you consult an attorney.
Wholesaling Real Estate Time Frame
The last thing that you should know about wholesale real estate.
If you have read the above example carefully, it stated that Micheal and Bob agreed to a contract stating that Micheal will buy the house for $100k cash in x amount of days. This is very important to note. In this case lets say Michael has agreed to close the deal within 30 days.
What if Michael is not able to find a buyer and close the deal within 30 days? If the sale of the home is not concluded then Michael can either ask Bob for more time, or he can walk away from the home with no consequences. Michael has invested little to no capital on this property.
In this case, Michael did not have to forgo his profits because he had taken the time and put in effort to build his buyers list. He was easily able to market the property to his buyers and quickly closed this deal. You, like Michael, will need to work hard in marketing yourself and building a network of cash buyers. People that are willing to buy from you without any issues.
How to wholesale real estate the right way?
Now, let’s begin the wholesale real estate guide:
How to wholesale real estate?
Find out if you need a license and get familiar with the process
The first step would be to get a real estate license if needed and to understand the closing process.
There are many things that you will need to know. You should look for some of the answers to the following types of questions:
• Do I need a real estate license? • Should I use a title company or attorney? • Where can I get a PSA and Assignment of Contract? • What clauses should I include in the contracts?
You need to understand and know the legal aspects before you begin.
Decide your Goal
You will never be successful in the real estate industry if you don’t plan things properly.
Just like every other industry, it is necessary to have a goal in wholesale real estate. So, your next job will be to define your goals.
Here, we are talking about your real-life goals. Some of the examples here would be:
• I want to make my real estate team which consists of a VA, closing attorney, title company, real estate agent, contractor, real estate investing CRM, etc. • I will flip X amount of properties every month worth Y amount
Plan your wholesaling journey.
Finding your first property
The first real task would be to find a property. Look at various places where you can find a house for sale at a deep discount. This will make it easier to find a cash buyer fast and make a large assignment fee.
Here are some of the places where you can find properties:
• Look at the MLS. MLS Stands for Multiple Listing Service • Foreclosure listings and auctions • Newspaper listings • Place bandit signs that say We Buy Houses • Drive around neighborhoods looking for vacant houses and houses for rent • Websites like Craigslist, FSBO, or HomesByOwner can always be useful when you are looking for motivated sellers
There is a wholesaling math formula that most real estate wholesalers use. This formula is very simple to understand, and very important.
MAO and ARV
Before you can make a seller an offer. You will need to find out your MAO, Maximum Allowable Offer. To do this you must first find out the ARV of the home, After Repaired Value.
The formula I use is: ARV x .70 – Repairs – Assignment Fee= MOA
Learn the Art of Negotiation
If you are in the real estate industry, especially if you want to wholesale real estate, you will have to learn the art of negotiation.
Without negotiating, you will never get the right price and you will make little to no profit. Therefore, learn some negotiation skills to help you get properties under contract.
If you are a complete beginner in wholesaling real estate, you may find it kind of a challenge to negotiate with sellers and buyers.
Gaining negotiation skills will help you get the best wholesale deals.
Create a Cash Buyers List
You need to create and grow a cash buyers list. The most time consuming part. Your list needs to consist of cash buyer investors who are looking to buy houses fast.
You can look for cash buyers in the following places:
Once you create and grow a cash buyers list. It will be easy for you to sell the houses you get under contract.
Last but not least you will have to close the deal. As we mentioned above, there is a lot of paperwork that the title company or attorney will have to complete.
After you close your first wholesale deal, you can celebrate because you just closed your first deal as a real estate wholesaler.
Now don’t blow all your money. You will need to upgrade your game. Find better deals and try to close more of them.
One thing that you need to understand in wholesale real estate is that you will not close every deal as planned.
There will be many obstacles that you will face during the process. It’s all about how you work hard to overcome them.
Wholesaling Real Estate Tips
During this entire wholesale real estate guide, we have told you to learn this and do that. Now, the main question is what are the things that you need to learn to put together better deals.
Here are some suggestions that will be handy:
The first thing to learn to make a better deal is to know the ARV of the home. You must estimate your ARV as accurately as possible.
Be as accurate as possible when you calculate the repair cost.
Only deal with real cash buyer investors. Most people who claim to be cash buyer investors are really not.
Negotiating is surely an art that you should master. Just like the buyer will negotiate with you, you will have to negotiate with the seller for a better price.
To conclude, this was the complete guide to wholesale real estate. There are a lot of things that you need to learn as a beginner. If you are willing to put in the work, you will surely obtain success.
The last and most important thing is to take action. Now that you know wholesale real estate and how it works, it would be a good idea to attend a REIA meeting. This will allow you to meet new like-minded people which will help you achieve success in the real estate industry.
The South Texas Wholesaler
J.R. Medrano is a real estate investor who specializes in wholesaling inherited homes. He has been wholesaling real estate in the Corpus Christi, TX area for the past 5 years. If you would like some honest advise about wholesaling houses. Feel free to contact him at anytime.