In the single-family residential market, you have undoubtedly heard of wholesaling. Naturally, this might conjure up thoughts of houses sitting on tall shelves in warehouses. What exactly is wholesale real estate anyways?
Real estate investing can come in many different strategies. The industry is massive and has many other asset classes, hold times, and business models you can implement. When just starting, you may look into single-family rentals, the BRRRR Method, multifamily rentals, and commercial real estate.
What is Wholesale Real Estate?
Wholesaling is a nickname used to describe a type of real estate investing or transaction where the investor buys and sells an interest in the property without holding it.
The wholesaler has a direct relationship with sellers through various marketing forms. They can then negotiate the terms of a sale to take to another market and sell for a profit.
Since the real estate market is tight, investors like house flippers find much value in dealing with wholesalers to source their subsequent real estate investments.
Assignment Vs. Double Close
Wholesalers typically use a double close or an assignment of the contract to sell the property. The investor buys the double property close and immediately sells it to the end buyer. Frequently the title company waits until everything is signed and funded to execute both closings. The wholesaler assigns their interest in the purchase contract to the end buyer with an assignment model.
Benefits to Wholesaling
There are many benefits to wholesaling as a real estate investor.
- Wholesaling is a short-term strategy that an investor can realize benefits from quickly.
- It does not require a large pool of capital to start wholesaling.
- Wholesaling can be used to get direct experience in many aspects of real estate investing.
- Since wholesaling focuses on acquiring real estate and quick disposition, investors can cycle through more deals quicker.
Negatives of Wholesaling
- By selling the properties without holding them, wholesalers short-circuit one of the best ways to build wealth in real estate.
- To be successful, a wholesaler must accurately determine the ARV and estimate rehab costs to determine a property’s value. That can be very challenging for a new investor.
Skills Required for Wholesaling
Sometimes wholesaling is viewed as an entry-level real estate investing option. That is because it does not take a lot of capital to get into wholesaling. At the minimum level, the only requirement is to get out to potential sellers and get the property under contract.
Of course, without understanding other parts of real estate investing, it would be very easy to get things wrong and get a property under contract at too high of a price to make any money on the resale.
To be a wholesaler that can get a high percentage of deals to the closing table over the long run, you need a big picture skillset than just negotiating contracts with sellers. You need to see the end-use and work backward from there.
Marketing Directly to Sellers
When marketing directly to sellers as a wholesaler, you have many different options for getting in contact with a seller. Some wholesalers focus on one or two channels, and others embrace a multichannel marketing strategy.
Here are some of the most popular advertising channels used by wholesalers:
- Direct mail
- Cold calling
- Door-to-door marketing
- Social media advertising
- Radio ads
- TV ads
Once you contact a seller, it is up to you to build rapport with them, discover their problems, and see if you can help them solve them. Sometimes this is as simple as getting them a specific price and closing by a certain date. Other times, their problems might require a little more creativity to make the deal happen.
Frequently the sellers will be in what is considered a distressed situation. For example, they could face foreclosure, a divorce, or other problems where they need to sell their property quickly.
Wholesalers need to be aware of the benefits of selling to a wholesaler instead of listing with a realtor. These benefits are that a wholesaler can usually close quickly and buy the house as-is without repairs or cleanup. In addition, properties sold to retail buyers typically have an extensive due diligence period.
How to Get Started Wholesaling
There are two main aspects to work on to get wholesaling at a high level. The first aspect is to get the deal flow going. You can do this by starting a marketing campaign for potential home sellers. The second aspect is to build a buyers list. To make a buyers list, you will identify active real estate investors in your area and see what kind of properties they are looking to buy. Your job as a wholesaler is essentially to find properties that match the investors’ criteria that you know.
How do you build a buyers list? There are several ways you can go about this. The first thing to know is that you do not need to know every active real estate investor in your market. The two methods are to find local social networking groups. Facebook groups are pretty popular among real estate investors. There is likely a local wholesaling, real estate deal, or investing group in your area.
The other common way to build your buyers list is through networking: the non-online, old-school, face-to-face kind of networking. That is a tried and true method and has worked for many wholesalers. The best way to start is to find a local meetup or REIA meeting. When you attend these meetups, don’t just start by telling people you are a wholesaler and asking if they would like to be on your list. It works better to build the relationship more gradually and authentically.
You need specialized skills to be aware of and work on as a wholesaler. One of them is finding comparative sales or comps and adjusting to the subject property. You must understand the renovation process and how a flipper might approach the deal. For properties that are best as a rental property, you need to understand the rents and potential cash flow.
Most wholesalers focus on single-family residences. However, because these properties are so competitive, many wholesalers have started marketing to duplexes and fourplexes. Networking with property management companies can be a great way to get these multifamily properties under contract. Why? Because they often know when the property owners are looking to change their portfolios.
The Wholesale Real Estate Process
Of course, if you want to excel and make it big with a handsome flipping houses salary, you’ve got to understand the steps involved during the wholesale real estate process. Follow these helpful tips on how to wholesale real estate so you can begin mastering your real estate investment strategy for maximum results.
1. Research the market
Most beginners might not know how to wholesale real estate, but almost everyone in the housing game understands that having a clear focus on the market is tantamount to success. When it comes to researching the market, you have several different options, and the more creative your approach, the better your outcomes will be.
For instance, one of the best and most effective ways to assess the market is to rub elbows with the right people. After all, the more contacts you have in the real estate industry, the more informed you will be about the market. Socializing with other real estate agents or housing professionals keeps you in the loop.
You can start by building your social network of real estate contacts by attending real estate meetings. Consider joining local real estate groups or investment clubs. Finding killer wholesale deals often boils down to who you know and being in the right place at the right time. By communicating with others in the market, you have a better chance of getting those vital tip-offs you need to pounce on the ideal property for wholesaling.
Furthermore, crushing the real estate wholesale scene is largely a matter of having the data you need in your hands. The more information you have at your fingertips, the more capable you are of analyzing the market.
For example, go to federal agencies online, such as FDIC, USDA, and public land source websites, to obtain lists of auctions in your area. Market research can also extend to foreclosure listings through HUD or IRS seizure websites. You can also get even more market information by subscribing to wholesale foreclosure sites, which may come at a cost, but getting the data you need to round out your market research might be worth it.
Lastly, consider accessing a Multiple Listing Service (MLS) database. There are several ways to gain access to an MLS database in your area. You can get a real estate license (if you don’t already have one) or request permission to use an MLS login from someone with a real estate license. You can also access property information through websites such as Zillow, Redfin, Realtor, or Trulia. While these properties are common knowledge, it still gives you vital insight into the market so you can make smart decisions about your wholesale real estate game plan.
2. Ways to Market to Sellers
The hard truth is that you can’t ignite your wholesale enterprise without generating leads for sellers. There are several ways to get sellers’ attention and motivate them to sell their property to you. Some methods are more effective than others.
For instance, you can post what is known in the industry as “bandit signs.” These are physical signs that typically have a catchy slogan with your phone number or website address on them. The drawback to bandit signs is that you can’t put them just anywhere, as you may get fined if you place them without permission on private or business properties. Bandit signs sometimes come across as unprofessional, but this depends on your slogan, design, and sign placement. Also, be prepared to get a lot of responses to your signs from individuals with whom you’d likely never want to make a deal.
Another “old school” yet potentially effective way to connect with sellers is through direct mail campaigns. This tactic requires you to have a solid lead list to be assured that the money you invest in printing and postage isn’t wasted on the wrong people. You also need to be certain that you’re targeting the right people because direct mailings tend to be like shooting fish in a barrel. To explain, people are inundated with junk mail, and your direct mailings are likely to wind up in the trash, along with 95% of all solicitous mail received by homeowners.
A more savvy and innovative way to market to sellers is to run your own marketing campaign online. You start by building a website touting your services, skills, and expertise in the real estate market. Make sure your website is optimized for search engines (known as SEO). A website that employs SEO ensures you get higher ranks on search engine query results. In other words, sellers looking for your services are more likely to find you when you build a high-quality SEO website promoting your real estate wholesale business.
Once you’ve built a solid website, you can next launch marketing campaigns through Facebook ads and Google Pay Per click. These online advertisements cost money, but they’ve proven effective in getting clicks and gaining attention from potential sellers surfing Facebook or the internet.
Additionally, consider getting onto online homeowner discussion forums and advising forum members. Each time you leave a comment, help a member, or give advice – leave your website address or phone number within the comment. The more comments you leave in homeowner forum threads, the more chances you have to build awareness among sellers who are looking for your services.
3. Make A Potential Buyers List
Learning how to get into wholesale real estate is more about having the right information at hand than anything else, and a solid buyers list can be your biggest asset for success. Ideally, you should be building lists for every potential buyer or contact in the industry you’ve encountered through the aforementioned methods (such as in real estate meetings, contacts through your website, or marketing campaigns).
Other ways to build a buyers list include scouring newspaper listings and contacting homeowners who are selling. You might also build your list by contacting money lenders and finding out who sells houses in your area. Also, contact your local county auditor to obtain valuable information for your list, such as property tax information and the property owner’s name, hence adding another potential lead for your wholesale real estate endeavors.
In addition to connecting with people in your social networks and real estate meetings, reach out to individuals listing properties for lease or rent. Pay close attention to newspapers, websites, or social media for landlords or property owners who are listing their properties for rent. This could lead to a promising outcome because you may find one (or more) of these property owners is motivated to get out of the rental game and interested in selling their home to you.
4. The Agreement
A wholesale agreement is perhaps one of the most fundamental aspects of a successful wholesale real estate business. An agreement is a legal contract that defines the terms of purchase between the seller and you, the wholesaler. It should detail the transaction to declare you are the property owner and assume all the responsibilities associated with it.
As a wholesaler, your agreement should also be used to sell the property you’ve acquired to a buyer. In this next phase of the agreement, the document should outline the details of the purchase between you and the buyer that releases you from the responsibility or liability of the property once it is sold to the end-buyer. It should also inform the end-buyer of the original agreement drawn between you and the seller.
You should have a formal wholesale agreement prepared before negotiating your first deal. The agreement should clearly detail the terms and costs of the transaction and any important details about the property exchange. Drawing up wholesale contract agreements can be a tricky business. Therefore, you may consider obtaining an attorney – especially for your first contract – so you can rest assured that all the bases are covered, and you and your clients are protected while buying and selling a property.
5. Find a Buyer
The process of finding buyers is very similar to finding sellers in wholesale real estate. The name of the game here is all about networking and connecting with the right people. Many wholesalers claim the best way to find a buyer is by joining a local real estate investor group. These investor clubs or associations are a great place to promote your services and network with people in the industry for potential leads on buyers.
As with finding sellers, finding a buyer can also be done by building an online presence. For instance, you can connect with potential buyers through your website and engage with buyers through your social media platforms. In the same way, we suggested using online forums for connecting with sellers, you can also use forums to reach potential buyers. Join real estate forums geared toward investors, and begin communicating with these individuals in helpful ways. Again, the more you put yourself in front of the right people, the better your chances of making that coveted sale.
6. The Contract between Wholesaler and Buyer
When you draw up an agreement with the seller, you now have legal documentation that you have an interest in the property. However, in a wholesale agreement, the original seller retains the legal title to the property. Therefore, under the doctrine of conversion, your contract should allow the buyer to become the equitable owner of that property. In essence, the contract between wholesaler and buyer is a legal document that facilitates the transfer of ownership between the seller and buyer with you as the go-between.
A contract between buyer and wholesaler should transfer your contractual rights to an investor. For this, an Assignment of Real Estate Purchase and Sale Agreement is required. This contractual agreement declares that the new buyer assumes all liability and responsibility according to the terms listed in the purchase agreement.
To ensure the new buyer is fully apprised of the terms, you must lay out all of the original contract details, such as terms, conditions, contingencies, and agreed-upon pricing. You can attach a copy of the original purchase and sale agreement to the Assignment of Real Estate Purchase and Sale Agreement.
7. Close And Collect
When you get to this step, pat yourself on the back and congratulate yourself. Next, you’ll need to obtain signatures from all parties on the aforementioned documentation, ensuring the deed will be transferred to the end-buyer. The closing process also ensures that the end-buyer must pay all the closing costs and the agreed-upon cost of the property. Once the funds are received, you will transfer the money to the original seller and retain the profits for yourself. How much profit can you stand to make upon closing? You might want to read this insightful article, Wholesale Real Estate Salary: How Much Can You Make Wholesaling, for more insights into how to start wholesale real estate practices that result in lucrative profits.
How to Find Wholesalers in Your Market
If you are not looking to become a wholesaler but realize that wholesalers could be a good source of deals for real estate investing, finding wholesalers is essentially the same process as finding buyers as a wholesaler. You can go to local meetups and REIA meetings. You can also find the local groups on social media and get involved.
Buying a property from a wholesaler is an excellent option if you want to get into real estate by house hacking. House hacking is purchasing a home or multifamily as an investment and primary residence. Usually, it involves purchasing a property that requires some work, and wholesalers specialize in buying and selling this type of property.
Is Wholesaling Illegal?
Whether wholesaling is illegal depends on the specific methodology of wholesaling and the state where you are conducting business. The laws regarding transacting real estate vary from state to state.
Residential real estate transactions are highly regulated at the state level. Most states have restrictions on what you can and cannot do without being licensed in real estate sales. There are also regulations on doing as a licensed real estate sales agent or brokerage.
However, a few things can land investors in hot water in any state. One is advertising that you have a property for sale when you only sell the assignment of interest in a contract to purchase the property. Some states make it illegal to assign contracts, making it much better to do a double close or close and then sell the property.
What is Wholetailing
Wholetailing is a play on words by combining wholesaling and retailing. It has become more popular lately, with the retail market hotter than ever.
Wholetailing involves purchasing a more cosmetically distressed property than being generally poor. The investor then cleans up the trash and debris and does minimal cosmetic repairs such as new carpet or paint. The investor then lists the property on the MLS to market it to the retail buyer pool.
Many wholesalers get into wholetailing by getting hard money loans. These types of loans are given on the property’s security and the business plan’s strength. Hard money lenders are in the business of writing mortgages for investment properties.
Wrapping it up
Wholesaling is buying and selling properties to investors rather than retail home buyers. Many investors utilize wholesale as an effective strategy in their investing portfolio. As an investor, wholesalers can provide a steady stream of properties to invest in.
This article originally appeared on Wealth of Geeks.