What Is “Wholesaling”, Advantages, Disadvantages & How To Get Started
One of the quickest ways to make fast cash in real estate is by getting a contract to purchase a property at a great price, then marking the price up and selling it to another real estate investor. This is many times referred to as “Wholesaling” real estate. This investor who buys the property from you will either fix the property up and resell it or rent it out.
Getting Started As A Beginner
Wholesaling houses is the number one investment choice for beginning investors because it is a simple concept that requires virtually no money, absolutely no credit and you can make large amounts of cash quickly. All you have to do is find the deal, put it under contract and then match the property up to an investor or landlord on your list of buyers.
Once you have an agreement to purchase a property, you have an equitable interest in the property as a buyer. You can either assign the purchase agreement to your investor/buyer for a fee or resell the property to them at a higher price on the same day you purchase it from the seller.
You don’t have to come up with the purchase money, because the money to purchase the property from the seller, will come from your buyer. You simply do what is called a “Double Closing” or “Double Escrow”.
Your investor/buyer shows up to closing with the funds to purchase the property from you. The closing agent then holds those funds in escrow until you have a second closing with the seller. This can be ten minutes or even an hour or so later. The closing agent simply gives the seller a check using the funds from the sale to your investor/buyer and disburses your check to you in the amount of the difference between your purchase price and your resale price.
Some closing agents no longer float the funds from the closing with your buyer to the closing with your seller. In this situation, you will need to get a “bridge loan”. These bridge loans are short term investor loans which allow you to purchase the property using the loan and then close with your buyer.
Know Your Market Place & Build A Buyers List
There are two very important steps to getting started in this quadrant. They are… knowing your market place, and building a buyers list ahead of time.
To know your market place, you’ll have to learn in what areas other investors are looking to buy, what types of property they are looking for, and how much they are willing to pay.
As for your buyers list, how well you build a list of buyers is absolutely critical to wholesaling a deal quickly and it doesn’t take much effort to have an endless supply of buyers looking to buy your deals.
As soon as you find a deal and have it under contract, you’ll want to locate a cash buyer for the deal in a matter of days. Many investors who have been in the business awhile can literally have the deal resold in a matter of hours.
You can even wholesale a property before you have it under contract. You start by locating a potential deal at a low price. Knowing approximately what you can get the property for, you send a couple of your buyers by to see if they are interested. If they are, you then let them know that as soon as you have hammered out the final details you will call them back to proceed further.
This allows you to get a better understanding of the market and to feel out whether or not the property will be easy to wholesale (and for how much), before you even put it under contract. You can then proceed to negotiate a contract on the property with a lot more confidence.
You can also wholesale deals by working as a middleman between two investors. In this scenario, you start by locating another investor who has a property available at a wholesale price. You then refer a couple of your buyers to the property. Simply let the investor who is looking to buy, know that you are talking to one of your other investors which has a property they might be interested in. Using this strategy, you can wholesale a property from one investor to another and make several thousand dollars for doing just an hour or so worth of work.
Types Of Properties To Invest In
The type of properties that you will be looking to wholesale will be ugly. What do we mean by “UGLY”? For example, the houses should be smelly, have pealing paint, rotten wood, leaky roofs, broken windows, and over grown weeds and bushes in the yard. If the house still has a kitchen and bathroom, those should be falling apart and disgusting as well. The worse condition the property is in, the better. These ugly houses are where the cheap prices are and where the motivated sellers are.
If you can find a property at a good price that only needs cosmetic work, then great. However, the houses that need only minor to moderate cosmetic work are usually bought up by homebuyers who are willing to pay higher prices than investors will.
Target The Right Areas Of Town
The ugly houses will tend to be located in the lower income areas. These areas will most likely be areas full of rental properties, which means the type of investor/buyer you will be wholesaling to will tend to be landlords.
Also, you must know in what areas other investors are looking to buy, as well as what investors plan to do with those particular properties. Are the investors on your buyers list looking to buy a property that can be sold retail to a homebuyer or are they looking for rentals? This will help you to better target your buying efforts.
Advantages Of Wholesaling
There are many advantages to wholesaling properties especially if you are just getting started in real estate investing and have limited funds and/or credit. As we discussed earlier, when wholesale houses you do not have to come up with funds to purchase the property because the funds will come from the investor/buyer you wholesale to. The most money you need is for binder deposits & you won’t be getting any new loans so you don’t need credit. Also, because the only money you will be putting up is for binder deposits, you have very little at risk.
You won’t be owning the property for more than a few minutes at the closing table and you’ll be selling the properties in “as-is” condition which means you won’t be dealing with contractors or dealing with tenants. Nor will you have to deal with getting buyers qualified for financing at banks because most of the investors you will be dealing with will either be paying cash or getting the funds from their partners or hard money lenders.
You also don’t need good negotiating skills when wholesaling houses because you will almost always be offering cash. Therefore, the only thing that really needs to be discussed is the price and much of the time you’ll be dealing through real estate agents which means you won’t be talking to the seller anyways. Even then, you will know what you are able to pay, so you still won’t have to haggle about prices. You will simply put your offer in writing and let the seller decide. Either the seller is willing to take your price or they aren’t.
So, the benefits of wholesaling properties are that it requires very little money, you get instant profits that can be very large, you do little or no repairs, and you are dealing mostly with investors who pay cash so you don’t have to deal with qualifying homebuyers. It is no wonder that wholesaling is the number one choice for getting started among beginners, but let’s not forget that there are a few drawbacks to wholesaling.
Disadvantages Of Wholesaling
The drawbacks are that you will be buying properties at 50 to 60 percent of value. Which means that you are going to be dealing in houses that tend to be very ugly and that need extensive repair work most of the time.
The hardest part of wholesaling is finding the properties because you are limited to houses that can be bought well below the after repaired value. The seller of the property must be very motivated and willing to take a low cash offer. As a result, the number of houses that can be bought below market enough to make a profit and still leave room for another investor, can be somewhat limited. However, a lot depends on your market place and your ability to dig up deals.
If you are dealing in higher priced areas, it can be harder for buyers to come up with larger sums of cash and if you can’t wholesale a property to another investor before closing, you’ll have to come up with all cash or lose the deal and your security deposit. However, in the higher priced areas you can make larger paychecks per deal.
You also only get one payday and that is when you wholesale the property, so there is no residual income.
Finally, if you focus solely on wholesaling, you are missing out on about 75% of the deals that are out there.