Real Estate Wholesaling: The Basics and How To Get Started
To many, the idea of investing in real estate, and the returns that come with it, is extremely attractive. However, the large amount of money needed to get started, as well as the high risk involved, can quickly turn your real estate dream into a mansion-sized headache. Luckily, wholesale real estate is a great way for first-time investors to get their foot in the door with lower risk and a lower cost than traditional house flipping. With an understanding of wholesale real estate, you can begin your real estate journey in no time! Let’s dive into the basics and go over how to get started.
What Is Wholesale Real Estate?
From its name, you might assume that wholesale real estate involves buying a bulk amount of homes and selling them each for a discounted cost, just like wholesale retail. However, wholesale real estate differs from the wholesale-retail model. Instead, wholesale real estate is when a wholesaler contracts a property from a seller and then passes it on to a buyer for a fee. When a house is under contract, it means that a bid has been accepted, but the sale is not yet finalized. Only once the wholesaler passes on the contract to an interested party is the house sold. The wholesaler is paid for finding the property at a low cost and showing it to the eventual buyer.
What Are the Benefits of Wholesale Real Estate?
Selling real estate is one of the most lucrative industries in the world, gaining 2.5 dollars in value in 2020 alone . However, the heavy workload and serious time commitment that comes along with it can be extremely daunting. One of the greatest reasons to get into wholesale real estate is the relatively short amount of time it takes to see returns. While other types of investments like stocks and bonds require an initial investment of as little as one hundred dollars, it can take years to see any sort of significant return. With wholesale real estate, you can make thousands of dollars in a much shorter period of time. Additionally, when compared to house flipping , the amount of work involved is significantly less. As a wholesaler, you are not responsible for completing any renovations to the home. Instead, your value lies in your ability to make connections and find excellent deals on properties. Wholesaling also serves as a great crash course on the business of real estate and will teach you invaluable lessons about the real estate market, property values, and how to make connections within the real estate world.
Getting Started
While having a large sum of money may not be required to enter the wholesale real estate market, there are several things you will need to make sure your investment is a success.
Finding a Property
The first task of a real estate wholesaler is to find properties that will sell for less than the market price. Houses that are publicly listed often go up in price once a bidding war ensues, so the key to wholesaling is to find these properties before they hit the market. A few reasons why a property owner may be motivated to sell under market price are:
- The house is in need of serious repair
- The homeowner is faced with a foreclosure
- The homeowner has inherited the property from a deceased family member
In order to find these sorts of properties, you’ll have to be creative. Some methods include generating a mass email campaign, posting flyers around a particular neighborhood, and sifting through online public marketplaces such as craigslist. Like any business, the more exposure your potential clients have to you, the better.
Building a Team
As a real estate wholesaler, you will essentially be running a small business, so it is important to stay motivated and focused . One way to help you accomplish your goals is by building a strong team of individuals who specialize in different parts of the wholesaling process. Your team should include several important elements, including an appraiser, a contractor, and a title company. An appraiser will help you determine what the property is worth and ensure that you are contracting it for a reasonable price. A contractor will assess the physical condition of the house, and estimate how much the cost of renovation will be. This will help you determine an ARV or, After Repair Value, which is useful in showing an interested buyer the full potential of a property. A title company will run a title search, which proves the property’s legal owner and also reveals any claims or liens that would affect the sale of the property.
Signing the Deal
In order to get the best possible deal on a property, it is important to have keen negotiating skills. Explain to the seller that you will take care of all the work, from inspection to renovations, to close and help them understand the benefits of selling to a wholesaler. Above all, it’s important to be transparent. Explicitly state that you intend to wholesale the house and be clear with the numbers. Sellers will sell to the person they trust, not the person who they feel is trying to squeeze the best deal out of them. To further minimize the risk of wholesaling, it is important to have a contingency in your contract. This allows you to back out of the deal if you are unable to find a buyer before the closing date. You should also be sure that the contract permits you to assign or sell the contract to an end buyer.
Finding a Buyer
Once you have found a property and assessed its value, it’s time to find a seller. (Again, when you contract a property, you are not purchasing it, you’re reserving the right to buy it.) When wholesaling, it helps have an established network of potential buyers. If you are just starting out, a great place to make connections is by attending a local REI or real estate investors meeting. Here you’ll meet contractors, investors, and attorney’s who will help you along your journey. Additionally, Investing in advertising to create an effective marketing campaign is a great way to build your customer base and spread the word of your business. It’s also important to recognize that not all buyers are looking for the same thing. Make an effort to understand the sorts of properties each particular buyer is looking for. This will help you build a stronger relationship with potential buyers and make the entire wholesaling process more efficient. When negotiating with an interested party, make sure your asking price is neither too high nor too low. An unreasonably high price can turn buyers off, while a questionably low price can raise eyebrows and similarly scare potential buyers away. Having a strong online presence can be invaluable in establishing yourself as a real estate wholesaler. According to the National Association of Realtors , 51 percent of today’s home buyers find their homes on the internet, so having a polished website will help your business flourish.
Learning By Example
To a first-time wholesaler, this may all sound a little complicated. In order to see the whole process in action, let’s go over an example. Gary lives in a desirable neighborhood. However, his home has a damaged roof, making his property well under market value. Unfortunately, Gary doesn’t have the resources to make the necessary repairs to his house but holds on to the property because he’s afraid that he won’t be able to sell the property in its current condition. A real estate wholesaler approaches Gary and makes an offer on the house for 100,000. Gary agrees, and the wholesaler contracts the house, giving them the right to purchase it. Instead of purchasing, however, the wholesaler sells rights to buy the house to a flipper who is too busy with other projects to be seeking out properties. The wholesaler charges a fee of 10% to the flipper and makes 10,000 without spending a dime on the property itself. After the wholesaler is out of the picture, the flipper spends 50,000 on renovations. Since the house is in a desirable neighborhood, the flipper is able to sell it for 250,000, making a profit of 100,000. While the flipper’s return is much greater than the wholesaler’s, the wholesaler spends far less time and money while still making a significant profit.
What Are You Waiting For?
In conclusion, real estate wholesaling is a wonderful opportunity for those who have always wanted to have a career in real estate but are unsure where to start. Wholesalers can get started without having to worry about having good credit or a large amount of cash on hand. Even if your goal is to become a real estate flipper eventually, wholesaling will give you a strong foundation of connections and knowledge of the housing market. Additionally, real estate wholesalers are not required to be licensed brokers, meaning that this money-making method is perfect for those just trying to get their foot in the door. However, in order to ensure success, you will need strong communication skills, a talent for marketing, and above all, patience. If you are the kind of person always in search of a good deal, and values the freedom of being your own boss, now is the time to get started as a real estate wholesaler. Sources: Quick Real Estate Statistics | National Association of Realtors Find a REIA | National Real Estate Investors Association Housing Market Gains More Value In 2020 Than In Any Year Since 2005 | Forbes