How to Wholesale Real Estate
Wholesale Real Estate: The Ultimate Guide
Out of all the ways to invest, wholesale real estate has the potential to generate the most money in the shortest time possible. After all, there aren’t many other real estate investing strategies that don’t require large sums of money or fixing up houses and still produce checks for tens of thousands of dollars.
No wonder wholesaling is the most common route new real estate investors take. However, the vast majority of people that set out to become wholesalers never do one deal.
Why is that?
Even though wholesaling houses don’t require a ton of money to get started, it does require hard work and a unique skill set.
Fortunately, this skill set can be acquired with enough discipline.
This article discusses the skills and systems necessary to wholesale real estate successfully.
Whether you are a successful wholesaler or still looking for your first deal, we’re confident you’ll learn something here that will help you in your journey.
Let’s get into it!
Table of Content
- What is Wholesaling in Real Estate
- Pros and Cons of Real Estate Wholesaling
- How To Wholesale Real Estate Step By Step
- How to Wholesalers Structure a Deal
- Building a Buyers List
- How to Find Cash Buyers When Wholesaling
- What Comes First, Buyers or Deals?
- Marketing to Find Deals
- Running the Numbers
- Keys to Success When Wholesaling in Real Estate
What is Wholesaling in Real Estate
Wholesale real estate is when investors buy properties and sell them for more money to other investors or buyers.
The simplest way to understand real estate wholesaling is by comparing it to flipping houses. Traditionally, flipping a house involves buying it at a discount, making the necessary repairs and updates, and then selling it for a profit. Flipped homes typically sell to retail buyers, or people that plan to live in them.
Wholesaling works the same way as flipping except that the process is much faster, it skips the rehab step, and the end buyers are other investors instead of retail buyers. However, real state wholesaling is very similar in that, it involves buying distressed property at a discount and selling it at a higher price for a profit. The interesting thing about wholesaling is that you never have to own the house to make a profit on it!
Pros and Cons of Real Estate Wholesaling
What are the advantages and disadvantages of real estate wholesaling? Let’s explore the key points.
Pros of Wholesale Real Estate
- Starting expenses are minimal. You can begin by investing only a few thousand dollars on mailings to secure your initial deal.
- Discover the world of property investment. As a wholesaler, you’ll learn about property investment without spending a lot of money.
- Impressive Returns. Wholesaling provides an excellent yield on investment. With effective marketing and efficient data handling, you could earn between $5,000 and $50,000 per transaction. Most transactions only require a few weeks to finalize and a couple of thousand dollars in promotional expenses.
Cons of Wholesale Real Estate
- Income instability. This is a reality for all kinds of businesses. In the beginning, while you’re getting the hang of things, your income might be more unstable compared to your salaried job. However, this will balance out once you establish effective systems for handling your data, generating prospects, and sealing deals.
- Doesn’t contribute to net worth. Wholesaling offers a good way to generate quick money, which you can then use for long-term investments. However, wholesaling in itself doesn’t boost your net worth.
- Necessitates efficient systems. To grow a wholesaling business, effective internal systems are crucial. These systems should focus on finding leads, identifying sellers, negotiating deals, and closing transactions. Automating and systematizing your business will make it simpler to expand.
How To Wholesale Real Estate Step By Step
Here are the 5 simple steps to start wholesaling in real estate.
Step 1. Conduct thorough research
Research in Real estate wholesaling is essential. It helps you familiarize yourself with the business. But, first, you have to research the local market you want to delve into. Also, you need to research the law of the state and other wholesalers in that area.
For example, In some states wholesaling is viewed as brokering a deal that is illegal and has dire consequences. Therefore, you need to know without a doubt that the state supports wholesaling. Researching also helps you find other Real estate investors and network with them. This network eventually helps you strike a deal on time.
Step 2. Find a distressed property with a motivated seller
The essence of wholesaling is getting a property listed below market value and selling it for a higher price. So, when you are done with your thorough research, you must find motivated sellers. That is people whose house is facing possible foreclosure or in distress.
When you find a property you’d like to wholesale, the next thing to do is find the owner.
Step 3. Negotiate
Negotiation is an essential process in wholesaling. Once you’ve been able to reach the seller, you need to pitch your proposal. You need them to sell their property through you, which implies trusting you. During the negotiation process, you need to discuss the price, terms of sale, and timeframe. If the terms of the sale are favorable, you can go ahead and get a contract.
Step 4. Get a contract
When you’ve reached an agreement, it’s imperative that you get the property under a contract. The contract also helps you when getting a buyer. To be on the safe side, get an attorney.
Step 5. Find an end buyer
Getting an end buyer might be easy if you’ve got a network of real estate investors. However, when you find a buyer, you’d still need to negotiate and sell for a price higher than the seller’s bid. Ensure you get a favorable deal.
Step 6. Assign the contract
Finally, when everything is done properly, it’s time to close the deal. The end buyer signs the contract in agreement with the terms and conditions, and the wholesaler gets his profit.
How to Wholesalers Structure a Deal
Here are the most common ways a real estate wholesaler can structure a deal.
1. Assign the Contract
This is how you can profit from a house without ever owning it. To do an assignment, simply put the property under contract for a certain amount, then assign the contract to another investor for a fee.
The paperwork involved here is the original purchase and sale agreement between you and the seller and an assignment contract between you and the end buyer. The end buyer will be paying your original purchase price plus your assignment fee, so make sure to include that in the price that you advertise it at.
When advertising a deal structured this way, you must disclose that you are assigning your contract and not directly selling the property.
2. Double Closing
As its name implies, a double closing involves two separate closings. Whereas in an assignment, the end buyer purchases directly from the seller, the wholesaler actually closes with the seller in a double closing. That makes up the first closing.
The second closing is where the wholesaler sells the house to the end buyer for a higher price. In most cases, both closings take place on the same day.
Depending on your title company, you might need to have the cash available to fund the first closing. Some title companies will allow the money from the end buyer to fund the first closing. This is known as a “dry closing.”
However, others will require the wholesaler to bring the funds themselves. Unless you have the cash available, you will need a transactional lender to finance your purchase.
3. Long-Term Double Closing
This strategy is similar to a traditional double close, except there is a longer period between the two closings. The amount of time depends on the deal, but it is typically between two weeks and a month.
In this case, the real estate wholesaler must actually buy the house and hold it until they get it sold. If this is your plan, you’ll likely need a private lender to fund your deals.
You might be wondering why anyone would ever use this strategy if they have the other two options at their disposal. It all comes down to the logistics of the deal.
Sometimes the numbers make sense on a house, but the seller needs time to move out after closing. Instead of trying to advertise an assignment and having investors walk through the house while the sellers still live there, sometimes it makes more sense to give them the time to move out and then start advertising it.
Building a Buyers List
As a real estate wholesaler, your end customers are your cash buyers. In reality, sellers are also your customers, but cash buyers will ultimately be buying your product. Therefore, developing strong relationships with flippers and landlords in your area that are actively looking for deals is important.
A, B, & C Buyers
Not everyone who makes it onto your buyers list will be of the same caliber. Some cash buyers purchase several houses per month, while others only look for one or two per year. In order to streamline the process of selling your deals, it is helpful to segment your list. Here are the types of buyers you will come across.
“A” Buyers: These are the buyers that you should have on speed dial. They are buying multiple deals per month in your market, have plenty of cash readily available, and can close quickly. When starting out, your goal should be to find two or three of these buyers as quickly as possible. Having them in your back pocket will enable you to sell your deals much faster with less stress.
Not only that, but building a solid relationship with a dependable cash buyer will provide you with a ton of insider knowledge in the industry. Make sure to pick their brain as much as possible to learn how to improve your business and structure better wholesale deals.
“B” Buyers: These are still solid buyers, but they might need a little more handholding to complete a deal. Don’t write these buyers off though, because some may have specific criteria and be willing to pay more for a deal when it fits their goals.
“C” Buyers: These buyers aren’t necessarily worse than “B” buyers. They’re labeled with a “C” because they somehow made it onto your buyers list even though you don’t know anything about them. Instead of ignoring them, you should try to get in touch with them and see what they have going on. You could easily find some diamonds in the rough and move them from the “C” to the “A” list!
Constantly Grow Your Cash Buyers List
Even though a handful of dependable buyers can make wholesaling real estate a simple task, you should always be building relationships with other investors. Sometimes your go-to buyers will be too overwhelmed to take on another project, and having a larger database will allow you to still sell your deals in those cases.
Also, you might eventually look to wholesale real estate in areas outside of your immediate area. Moving to another market will undoubtedly require you to expand your buyers list to include cash buyers there.
How to Find Cash Buyers When Wholesaling
You likely understand the importance of having a dependable buyers list at this point, but you’re probably wondering how to actually find cash buyers in your market. There are several ways to do this. Here are some ideas to get you started.
Network at Your Local REIA
If you don’t already attend your local Real Estate Investor Association (REIA) meetings, you definitely should be! Dozens of real estate investors go to these events, and many are hungry for their next deal. You can quickly grow your buyers list by introducing yourself and asking what they’re looking for.
Real Estate Facebook Groups
Most cities have multiple Facebook groups dedicated to real estate investing. If you have a deal you need a buyer for, you can post it in these groups to see who would be interested in buying it.
Even if you don’t currently have a deal to post, you can scan through previous posts from other real estate wholesalers and see who commented on them. You can build a significant buyers list by just scraping the contact info from the comments!
However, don’t rely on just having their contact information. You should make a personal connection with them so they know who you are when you send them a deal.
See Who’s Buying Other Wholesale Deals
If you work in your market long enough, you will likely find out who the major wholesalers are. One way to find active buyers is to get on their buyers list. You’ll see the deals they send out, and after enough time has elapsed, you can use a tool like Propstream to see who bought those specific properties. At that point, you’ll just need to skip trace them to get their contact information.
What Comes First, Buyers or Deals?
Many people believe that the most challenging part of wholesaling real estate is finding discounted properties, so they argue you should focus on that, and buyers will flock to you once you market your deals.
While there is some truth to that, it doesn’t have to be that black and white.
Many new wholesalers fail because they have no idea how the flippers and landlords in their market are running their numbers. Consequently, they end up putting houses under contract for prices that are way too high, which results in them having to back out of deals and wholesalers getting a bad name in the real estate community.
One of the perks of having strong relationships with active buyers in your market is that if you ask them the right questions, you can get some valuable information about what makes a good deal in their opinion. You can also run ideas by them on new leads you have in the pipeline.
On top of that, knowing that you have buyers lined up ready to buy your deals allows you to make cash offers with much more confidence, ultimately allowing you to get more contracts signed and make more money!
Marketing to Find Deals
Although having a solid buyers list is essential, your success in wholesaling real estate hinges on your ability to find off-market properties. You are dead in the water if you can’t find motivated sellers and structure profitable deals.
So how do you find motivated sellers? Here are some of the most common marketing strategies to get you started.
Direct mail marketing involves sending postcards or letters to potential sellers to let them know you are interested in buying their homes. To get started, you’ll need to pull a list of people to send them to. Instead of blasting out mail to every house in an area, you should be more targeted and use data that will indicate a level of motivation to sell.
To do this, consider using an online platform such as Propstream. It will allow you to filter the houses in an area based on hundreds of metrics, such as estimated value, estimated equity, and occupancy status. Here are a few filter ideas to help get you started.
- Out of State Owner
- Low Equity (Great for creative financing)
- Expired Listings
- Senior Owners
You must be consistent with direct mail to see success. Most people will not call you after the first postcard you send them.
The most successful real estate wholesalers budget a healthy amount of money each month to continuously send out mailers. They’re not looking for immediate results. Instead, they want to always be fresh on people’s minds so that when they decide to sell their homes, they will be the first company the sellers think of.
Instead of waiting for sellers to call you, you can go ahead and get them on the phone. That’s the premise of cold calling.
Cold calling starts similarly to direct mail in that you must pull a list of potentially motivated sellers. However, instead of sending them mail, you skip trace them and call them.
If you plan to begin cold calling sellers, using a CRM to keep track of your contacts and calls is vital. This type of system will allow you to bulk import a list of contacts and begin calling them from one place.
Many real estate investors that use cold calling to generate motivated seller leads end up hiring a virtual assistant. This is because it takes a significant amount of time to find truly motivated sellers. Instead of doing all the initial calls yourself, you can have a VA pounding the phone for you and sending you the leads that seem motivated to sell.
Instead of hiring a virtual assistant to sort through your list and send you the motivated sellers, you can use text messages to do the same thing.
Using text messaging for marketing is very similar to cold calling. You start with a list, skip trace it to get phone numbers, and then instead of calling the leads, send them text messages in large batches.
A robust CRM is essential if you plan to send text messages to find leads. Not only will it organize all your contacts and conversations, but it will allow you to set drip campaigns where it will text a lead on a predefined schedule. They also have logic built into them to stop texting a lead once they respond.
SEO & PPC
Search Engine Optimization (SEO) involves building a website and optimizing it to rank on Google for terms that motivated sellers search for. Some common terms are “sell my house fast” and “we buy houses.”
Don’t you think many of the people putting in the effort to go to Google and enter those search terms are at least somewhat motivated to sell? The truth is that these types of leads can be the hottest ones out there.
However, the only problem is that it takes time to build a website and get it to rank on page one. Truthfully, it can take six months to a year to get there in most markets.
But as a real estate wholesaler, you want to get motivated seller leads now!
That’s where PPC (Pay Per Click) comes in. Instead of waiting for your website to climb the organic rankings, you can pay to run ads on Google that appear at the top of the search results for your target keywords. This is a great way to fast-track your efforts and begin pulling leads while you wait for your website to rank organically.
Going on Appointments
If you do a good job with your marketing, you should consistently be getting leads to come across your desk. Not all of them will be a good fit, but many will, and you should always set up an appointment to meet the seller at the property on those.
Your job on the appointment is to build rapport with the seller and get as much information as possible about the house and their situation. Many wholesalers find it helpful to go ahead and take pictures or videos of the property so they can refer back to them later. This is especially helpful if you plan to run numbers with your buyers later.
It is entirely up to you if you want to get the property under contract on the first appointment or not. This will depend on a few things:
- The seller’s motivation
- Your confidence in the numbers
- Your sales skills
Unless you’re confident that you can easily assign your contract for the price the seller is looking for, it is usually better to run some numbers on your own time and get back to them later.
Negotiating Discounted Properties
When learning how to wholesale real estate, one of the most essential skills to develop is the ability to negotiate. After all, wholesale deals are known for deep discounts since the wholesaler and the end buyer have to make a profit. That means you must negotiate even better deals than usual to leave enough spread for everyone to make money.
If you’re like most people, this is where you start getting nervous. You might think, “I’ll just stick to marketing and building a buyers list, but I can’t negotiate!” But this is where you really earn your money as a wholesaler.
Instead of thinking of negotiating as a bare-knuckle haggling match, try viewing it more as finding problems and offering solutions. At the end of the day, if the seller doesn’t have a problem you can solve with your offer, you will have a hard time getting a good deal.
One tip that will take your wholesaling business to the next level is to not always focus solely on price. If your only strategy is to negotiate deals at rock-bottom prices, you will miss out on a large percentage of deals that are out there.
For example, a seller might be looking for a high price but be open to a seller carryback at a favorable interest rate. Even though this type of deal wouldn’t work for a flipper, it might be a home run for a landlord, and they will be happy to pay you a generous assignment fee for it.
Running the Numbers
As a wholesaler, you must know how to properly run the numbers on a deal. Otherwise, you risk putting a deal under contract that none of your buyers will want.
Talking with your end buyers will be the best way to figure out how to run the numbers on your deals. However, here are some good general starting points.
Many wholesalers calculate their offers on flip properties using the 70% Rule, which says to multiply the ARV (After Repair Value) by 70%, subtract off repair costs and your assignment fee, and that is the most you can pay for a property.
While that usually gets pretty close, we recommend getting a little more granular with your calculation. To do this, start with the ARV and subtract off all expenses and profits. Expenses will include:
- Acquisition cost (closing costs when buying, inspections, etc.)
- Repair costs (often helpful to include a 10% hedge for unforeseen issues)
- Holding costs (loan payments, utilities, insurance, taxes, etc.)
- Closing costs when selling
- Agent fees
- Advertising expenses (staging)
Profits to subtract from the ARV are the flipper’s profit and your assignment fee. Once you work with some active flippers, you will get a feel for what they typically like to make on different levels of flips.
Most landlords try to use the BRRRR Method as much as possible, so it’s good to keep that in mind when running the numbers on rental property you are trying to wholesale.
The goal of the BRRRR Method is to refinance the property and pull all of your invested capital out of the deal. Therefore, it is helpful to know the ARV of the property and what percentage of the ARV lenders are lending at. They are typically between 75 and 80% of the ARV.
If you can keep their purchase price and rehab budget under the amount they can refinance the property for later, most landlords will be pleased with the deal. Of course, there are other considerations, such as making sure the house will cash flow given the new loan payment and market rent.
Even if they can’t pull all of their money out of the deal with a refinance, many landlords will still want to buy the deal as long as their resulting cash-on-cash return (COCR) is high enough. Most landlords are happy with a COCR of 12% or more.
Selling Your Deals
When you put deals with plenty of spread under contract, selling them should be the easy part. However, they don’t always sell themselves.
Your first step in selling a deal should be to go to your “A” buyers. If you have enough of these, there are likely one or two that you know will be interested in it.
If that doesn’t work, you can send it to your “B” and “C” buyers via email or text. If you plan to do this a lot, finding a platform that will streamline this process will be helpful.
When preparing to send out a wholesale real estate deal, you should put together a flyer that documents the details of the deal. Things to include are photos, property details, ARV, rehab estimate, market rent (if applicable), comparable sales, and your asking price.
Another way to advertise your deal is to post it in your local real estate investing Facebook groups. The flyer you made for your buyers list will come in handy here as well.
Keys to Success When Wholesaling in Real Estate
Here are some parting thoughts as we wrap up this article on real estate wholesaling. Implement these tips to maximize your success.
Keep a Full Pipeline of Leads
Real estate is a numbers game. Not every lead you talk to will turn into a wholesale deal. Knowing that, you must focus on consistently bringing in fresh leads to work on converting into deals.
It is crucial to track your metrics, such as your conversion rate, to determine how many leads you need to get a deal. That way, you can figure out how many leads you need to generate monthly or weekly to hit your financial goals.
If you don’t focus on keeping a full pipeline, you will undoubtedly hit lulls in your business and wonder why your income has dried up.
Communication Skills are Paramount
Even though real estate deals with houses, it’s really all about people.
Buying a house from a motivated seller differs from selling a product to a regular consumer. People have memories attached to homes, and often the property you are buying is their most significant asset.
Other people have a lot of emotional energy tied up in the house. This is common with people who tried to fix up the house on their own but became overwhelmed.
Emotional intelligence goes a long way in these situations. Active listening and asking open-ended questions are vital skills to develop.
Developing strong communication skills will enable you to structure more profitable deals than you ever thought were possible!
Don’t Put It Under Contract If You’re Not Sure
Many wholesalers get so antsy to get a deal under contract that they agree to a price that’s too high. Then they can’t find anyone to buy the deal, and they have to back out of the contract.
Not only is this extremely uncomfortable, but it also puts the seller in a bad position and gives wholesalers a lousy name.
Even though it may feel like more of a struggle on the front end, it is better to only put deals under contract that you have high confidence in being able to sell. This will serve you better in the long run by giving you a much higher closing rate.
Wholesaling is a Great Real Estate Investing Strategy
Whether you are just getting started as a wholesaler or have been using this strategy for years, we hope you have some takeaways from this article that you plan to implement in your business.
If you take these tips to heart and commit to working diligently, you will soon begin generating large paychecks for the deals you put together.