Wholesaling: Real Estate Investing
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.
A beginner's guide to real estate wholesaling
Are you looking for the full story on real estate wholesaling for beginners? This is an appealing route for anyone looking to do high-volume real estate investing business in the market. The big benefit of acting as a real estate wholesaler is that you don’t necessarily have to see a deal through its full life cycle to get paid. You’re essentially acting as a "finder" who passes the baton to investors. That means that deals are often clean and quick.
Of course, wholesalers do plenty of work on the origination end before being able to deliver products to their clients. Let’s discuss why real estate wholesaling is attractive for someone looking to dip their toe in the property industry without necessarily getting their hands dirty with long, drawn-out deals.
The allure of the real estate wholesale industry
The big benefit of wholesaling is that you can dive in without a large financial investment. What’s more, you don’t necessarily need to have a ton of experience when it comes to closing real estate deals. You will need tenacity, great communication skills and the drive to attract new clients without help from anyone. A big part of becoming a successful wholesaler revolves around being able to cultivate relationships. Each deal you broker essentially acts as proof for the next client that you’re capable of delivering the goods.
What a deal looks like for a wholesaler
As a wholesaler, you’re playing the role of the "finder." That means that you’re pouring time and money into marketing and sourcing. In fact, a big part of the role of a wholesaler is to actively "campaign" for properties in the specific markets they serve. This can be done through print ads, radio ads, online ads, and direct mail campaigns.
Wholesalers also use strategies like searching neighborhoods for "disheveled" properties or using public records to see which properties are likely to fall into foreclosure. Typically, wholesalers present the option of selling a home as an alternative to moving into foreclosure. As part of wholesaling for beginners, here’s a typical life cycle of how a deal might look:
- A wholesaler strategically advertises "home buying" services to homeowners who need to sell. Campaigns specifically target potential sellers who are facing foreclosure, have inherited a property from a loved one or prefer not to use a real estate agent.
- A homeowner contacts the wholesaler.
- The wholesaler and homeowner meet to discuss the condition of the home, potential terms of a sale and all other considerations.
- The wholesaler makes an offer for the property.
- The homeowner agrees to the sale.
- A contract is signed stating that the wholesaler or someone contracted through the wholesaler will purchase the property at the agreed upon price within a certain number of days.
- Next, the wholesaler contacts a property investor/house flipper who actively pursues new properties.
- The property investor agrees to purchase the home at a price that is slightly higher than the price the wholesaler and homeowner have agreed to in their contract. The difference will be the wholesaler’s "fee."
- Something called an assigned contract is now signed by the wholesaler and investor that gives the investor the right to buy the home from the homeowner.
- The wholesaler collects the fee upon closing.
Not every deal is going to follow this exact path. There is room for some conditions, exceptions, and stipulations in many deals. However, the common thread in any type of wholesaler deal is that the wholesaler gets to make a profit from a home that they’ve never purchased, owned, or did a house fix and flip on. What’s more, you can see from this blueprint that the wholesaler gets to enter the scenario with what essentially works out to be no money down. That’s not to say that a wholesaler gets into a position to get a deal moving without putting down any money.
It’s nearly impossible to get the contacts needed to broker deals like this without investing in marketing and outreach. Homeowners looking to sell their properties can’t contact a broker if they don’t know the name of a broker. Your first job is to make sure everyone in town knows your name and face!
How to be an effective wholesaler
Being an effective real estate wholesaler is a delicate balancing act. The key is to gain access to a constant trickle of available properties that are attractive to investors. Of course, the kicker is that nobody is going to show you where or how to get access to those properties. In fact, the well can look very dry when you first step out as a wholesaler. A path to properties is something that you must build on your own. Let’s talk about how to do that.
Yes, wholesaling is a lead-based business. That means finding leads, building on those leads, and doing the work of vetting leads. There are many ways to get leads. Some involve directly contacting homeowners, others involve leading homeowners to you.
Yes, everyone who works with properties has a love-hate relationship with the ever-powerful MLS. The MLS lists all deals that are currently in the possession of agents. The obvious drawback to using MLS as your main source for leads is that absolutely everyone has access to the same information. As a result, competition for these deals is through the roof. However, it’s not impossible to find a gem using MLS. In fact, it’s almost foolish to limit yourself by not tapping into the same source that all of your competitors are using.
Searching the "neighborhood"
Typically, wholesalers focus on a specific geographical market when sourcing properties. This technique is especially beneficial for newer wholesalers because it gives you a chance to really gain expertise regarding a very niche area. As a result, you’re going to be able to become sharper when it comes to knowing how much investors will actually pay for the treasures you find. The best way to uncover what’s available in your designated " neighborhood" is simply to jump in your car.
What should wholesalers be looking for when driving around on the hunt for potential properties? You’re actually looking for "the worst" home on the block. Properties that appear to be distressed or neglected show telltale signs that owners have "given up."
Tall grass and faded shutters are signs that excite a savvy wholesaler. An unloved property means that the owner may either be on the brink of foreclosure or simply overwhelmed by the responsibilities of owning a home. Either scenario means that a homeowner will likely be very receptive to your offer to buy. This means that you can present the solution of having a way for a homeowner to "pass the problem" to someone else.
As a wholesaler, one of the best things you can do is to get your face in the mailboxes of everyone in the market you work in. You can also pay for a lead list if you’re interested in spending less by strategically targeted residents who have recently shown interest in selling. The way to make mailer marketing worth the investment is to focus on getting lead returns for a certain percentage of recipients.
No, you shouldn’t expect to be flooded with calls and emails from people begging you to come buy their homes. A "callback" rate of just 3 percent is reasonable. Let’s talk about what that looks like in terms of spending. Yes, you may end up spending $1,000 dollars just to get a handful of phone calls. However, the bigger picture to consider is that spending that $1,000 can easily turn into $5,000, $10,000 or more if one of your leads turns into a contract.
This is where a lot of would-be wholesalers drop out because the idea of potentially pouring thousands of dollars into marketing efforts before making a single dollar seems risky for many. The truth is that it’s a myth that there is no cost of entry to become a successful wholesaler. While it’s true that there is no fee to play the game, you often only get out as much as you’re willing to put in when it comes to building your brand.
Digital ads are increasingly being used by wholesalers. Using digital ads can be an effective way to grab attention. However, you’ll need to be precise about geotargeting or geomarketing to ensure that ads are only being served up to people in the specific market you work in.
You stand to waste lots of marketing capital if your ads aren’t precise enough. You have a couple angles to take when using digital ads for real estate wholesaling. The first is to simply post offers to buy that let people know you’re actively seeking to scoop up properties. The other is to try to attract people who have explored the idea of moving without actually listing their homes yet. Typically, this includes ads that provide information about moving services, the benefits of selling one’s home right now or concerns about foreclosure.
Are there free ways to advertise as a wholesaler?
There really are no free lunches in the world of real estate investing and wholesaling. However, there are a few "free" marketing resources that help to supplement the rest of your paid marketing efforts. Some wholesalers post "homes wanted" ads on popular boards like Craigslist. There is also the option to "cold call" homes located in your market to inquire about interest to sell.
Finding your "sweet spot" price as a wholesaler
At the end of the day, real estate wholesaling is very much a numbers game. Finding great properties doesn’t mean anything if you can’t anticipate the price difference between what an owner will sell for versus how much a real estate investor will pay. What remains in the middle is very important because that’s what you’ll take away from the deal. This essentially means that the value of the time and effort you’ve put into a deal will be determined by how much is left over after both parties you’re facilitating name their prices.
The big thing to remember as a wholesaler is that you’re not the only one in the scenario trying to make money. The house flipping investor on the buying end is also here to make a profit. That means that you’re being viewed as a means to a profit by an investor. This is so important to keep in mind as you strategize on price. As a wholesaler, you’ll be looking to identify the maximum allowable offer (MAO) when approaching homeowners. This variable refers to the maximum you can pay for a property while still turning a profit once you work the sale out on the investor end. You’ll need to get cozy with what is known as the after-repair value (ARV) of a home before you can determine MAO. This means tallying up all of the "hidden costs" of a property deal in your real estate business plan to subtract what will be spent before any house flipping profit.
This is where doing your homework regarding your market is going to be important. You can’t really anticipate ARV unless you can anticipate how much an investor will expect to make when flipping a specific property. Do your homework in the market you work in to be confident that you can anticipate the "finished" asking price just by looking at a property’s details and location. It can help to refer to recent home sales in the neighborhood where a property is located to get an idea of what a flipper would list a comparable property for after getting it in selling condition. Keep in mind that only "identical" properties can be used for accurate comparisons. This means that a recent sale you use for reference should have the same square footage, yard size, and number of bedrooms.
The desired profit point of the investor/flipper is really the focus here. First, you’ll have to be able to estimate the costs to flip a house. You’ll also need to have a grasp on all of the fixed costs involved.
Fixed costs include everything involved with getting a transaction completed. Of course, you also need to have a profit point in mind that makes each deal worth your time. Generally, entry-level wholesalers begin with profit targets as low as $5,000 per property. However, it’s not uncommon to regularly close deals for $10,000 to $20,000 for properties located in "ordinary" neighborhoods once you master the cycle of identifying and pitching properties correctly.
Miscalculation is a real liability when you’re a wholesaler. Unfortunately, one of the biggest pitfalls that can cause deals to go bust is underestimating the cost of repairs needed on a property. This is why that initial meeting with a potential seller is so important. It’s going to be necessary to make a seller comfortable enough with you to provide accurate information regarding the state of a home before you can crunch the numbers for your offer. You’re also going to need to become a pro at identifying ARV on a property. Professionals who have worked in a specific market for a long time can practically do this in their sleep as long as they get a good look at a property.
The biggest determining factor for ARV is going to be what other homes in the same neighborhood have sold for recently, also known as the comparables, or comps.. As stated earlier, you need a true apples-to-apples comparison for this method to be effective. A home located in the same neighborhood with half the number of bathrooms and bedrooms simply won’t do. In addition, a carbon copy of a home that happens to be located 30 miles away also won’t provide any type of accurate comparison. You’re always looking for a nearly identical home in the same general neighborhood to determine AVR based on recent home sales. You should also only look at sales data from the last six months!
Getting paid as a wholesaler
Always show up with a contract! The forms you use will depend on your state. Valid contract documents typically include purchase and sale documents. As a broker, it’s up to you to decide if you prefer to focus on cash buyers or stay open to all buyers.
It’s finally time to talk about getting paid as a real estate wholesaler. Generally, this is a very simple process. Your payment will actually be delivered through the title company (or lawyer) involved in closing. Your role is to ensure that the title company receives the purchase and sale agreement, contract and any other pertinent documents. It’s always beneficial to have relationships with a few title companies in your market that deal specifically with wholesale agreements.
Final thoughts on becoming a wholesaler
Yes, it is possible to thrive in the world of real estate investing without ever actually purchasing, fixing, or flipping a home! Wholesalers serve a very valuable purpose for investors because they do the "grunt work" of sourcing properties that would otherwise go unnoticed by house flipping investors who simply don’t have time to track down properties.
The last thing to say about pursuing a wholesaling career is that it’s always necessary to check the local laws regarding your ability to act in a "broker" role. Many states have special legal requirements that must be met before you can operate in a wholesaling capacity. Getting yourself in the right legal, financial, and strategic position to become a wholesaler is all part of doing the homework that’s necessary to thrive in this industry.