The secret to any business—real estate investments are no exception—is buying low and selling high. That’s basically what wholesaling is. But as we’ll see, wholesale real estate investors never really buy or sell a property. They essentially sell the privilege of buying property.
How to Wholesale Real Estate
In retail, a wholesaler is someone who buys a large quantity of goods for a lower price per item, and then sells off each unit to retailers for a higher price. That might make you think that wholesale real estate investing involves buying a large number of homes from a developer to sell off one by one, but while that strategy exists, it’s not real estate wholesaling.
Real estate wholesaling essentially involves finding someone who wants to sell their property, and then finding a buyer for that property. There’s no down payment, no closing costs, no mortgage, no renovations, no property management, but there is a whole lot of marketing and networking involved.
The wholesaler will offer to buy the property for one price, and then find a buyer who will purchase the home at a higher price, allowing the wholesaler to make a nice profit just for facilitating the connection. It’s a great way to get into real estate without the need for capital or credit.
Often, a wholesale real estate deal will look something like this: a real estate wholesaler will approach a motivated seller directly about their property, often without the help of a real estate agent. The wholesaler will attempt to lock the seller into a unilateral contract that specifies the wholesaler is the only person the seller can sell this property to. In return, the wholesaler might provide an earnest money payment in the form of cash.
This earnest money should not be confused with a down payment because a down payment (which also is a type of earnest money) is geared toward facilitating a mortgage, which the wholesaler will not be seeking. The wholesaler is not attempting to buy the property, but instead tries to sell and assign the contract to an end buyer who can make the purchase.
The wholesaler will reach out to their network or market the wholesale property until they find a buyer. They will then sell it at a higher price than the homeowner is selling it for—and pocket the difference as profit. Most of the time, the end buyer will be a real estate investor who is capable of obtaining a hard money loan or bridge loan for a flip or rental property. In some cases, a wholesale deal might be passed along to cash buyers who can pay for real estate property out of pocket.
Before you even start looking around for investment property to put under contract, you need to have a network of real estate investors to sell to. If you don’t develop that network before you start wholesaling, you’ll be missing an important part of the equation when it comes to wholesaling real estate.
Developing a network of real estate investors can easily be accomplished by joining a real estate investors association, many of which allow members to share potential deals at meetings. Social media networks, like LinkedIn, are also a great place to search for and start connecting with real estate professionals. The most successful wholesaler will have a ready investor buyer network that will allow him or her to quickly locate an end buyer.
Next comes finding the deal. Wholesalers may operate differently than other real estate investors, but in terms of looking for properties to buy, their modus operandi will be similar to investors flipping houses.
It’s true that a wholesaler doesn’t necessarily have to locate distressed property, but it’s a lot harder to find wholesale deals among homeowners who can afford to put their home on the market with a real estate agent. That said, a wholesaler will find a more ready supply of homes to put under contract among homeowners who are looking to quickly get rid of their property—either because they can no longer afford it or because they need to relocate faster.
Selling property to a wholesaler is an attractive option because there is less likelihood of having to wait for a mortgage application to get processed. Wholesale deals with real estate investors tend to close more quickly than a traditional buyer with a mortgage loan. Even so, a wholesaler will need to know the neighborhood and the art of a real estate investment in general. It’s very important to know how to price a home and the red flags to look for.
The real estate contract is at the core of the wholesaling process. This is the document that a wholesaler will use to lock a buyer into a unilateral arrangement, where the wholesaler can back out if he or she doesn’t find a buyer, while simultaneously locking the seller in by reducing their right to sell the home. This means that the seller can only sell to the wholesaler (or whoever the wholesaler assigns the contract to).
That said, it’s important to have a competent real estate attorney draft your real estate contract to minimize any costly snafus, both monetarily and legally. You’ll want to create a wholesaling business process to streamline your investments and close deals quickly. There will be details to hammer out. These details include:
The best part of the process comes when you have a consistent team of real estate investors to sell to.
Now that you’ve built up a real estate network, done your research, and created a contract and system, it’s time to go looking for deals and find properties.
This in and of itself is an art that requires some serious sales experience and people skills. You have to appear confident and act like you know what you’re doing in order to gain a seller’s trust.
It helps to have a portfolio of homes you’ve already sold so you can convince them that finding a buyer will be no problem. Offering the right price is part of this art as well. If you go too low, the seller may become wary and decline your offer. If you go too high, you run the risk of minimizing or even losing your profit. It’s all a delicate balance. The good news is that it often becomes second nature after you get some experience.
Once you’ve got a property under contract, it’s time to reach out to your network and find a potential buyer. Remember that you’re trying to make a profit, so the price you offer them will be higher than the price you’ve offered the seller.
Wholesaling becomes a lot easier when you’ve worked with certain real estate investors on a regular basis. Many of them will come to rely on you to find deals, but until that point, a potential buyer may want to see the property themselves or send a representative, like a home inspector, to check it out. You’ll need to factor this into the contract and prevent the seller and buyer from connecting over your head—which can be done using a trust (more on that later).
If you’ve built up a network of individuals who invest in real estate through real estate investing clubs and social media networks like LinkedIn, it will be much easier to find and reach out to potential buyers about your investment opportunities.
A wholesale trust is similar to a land trust. A land trust, or any kind of trust, is when assets are placed in the care of a steward, like a lawyer.
In the case of wholesaling real estate, a land trust is a legal tool that helps a wholesaling deal go a lot smoother. While the process of finding a motivated seller, setting up a purchase contract, and then passing that contract along to an end buyer sounds great, the reality is that many states restrict the process of reassigning a contract.
The way to get around this problem is to have your wholesale trust buy the property. When you find an end buyer, instead of selling them the property directly, you have them purchase a share of interest in your wholesale trust—which essentially becomes the property they acquire. This way, there is no two-step process of creating a contract and then reassigning it to another buyer.
While land trusts can turn the act of a wholesaling deal into a wholesale real estate business, creating a trust is a complex process that varies from state to state and should be set up by a competent legal advisor.
Wholesaling real estate might be described as the fast-food of real estate investing. It’s fast, easy, and bears none of the burdens of financing a property, fixing it up, or managing tenants. All you need to do is locate people who want to sell their home quickly, lock them into a contract, and find a buyer.
This is all easier said than done though. It actually takes a lot of research and networking, which many people will struggle to do. But for those who enjoy finding deals and connecting with other investors, the possibilities are endless.
You can check out the original blog post at andersonadvisors.com