Do you want to understand the steps to achieve on how to do a wholesale deal?
In this article, you’ll discover how to put together a wholesale deal, how it works, and if it is even profitable for you.
Learning how to invest in real estate has been a committed journey for me for some time. It’s often been said that if you want to get involved in real estate investing the best way to start is learning the real estate wholesale strategy. Contrary to the belief that many “experts” throw out there. There are no shortcuts to investing in real estate and this includes wholesaling. It requires hard work, discipline, commitment, and consistency.
Real estate wholesaling is when the Wholesaler contracts with a seller (usually motivated) by purchasing property for a substantially below market value and assigns the contract (flipping it) to another investor or cash buyer. The wholesaler earns an assignment fee, which is the difference between the contract price of the seller and the funds purchased by the cash buyer.
Just with anything else if it was easy everyone will be doing it, and if everyone was doing it, it simply wouldn’t be profitable for anyone because the market would be flooded with people doing real estate wholesale deals.
However, if you have what it takes and you fully commit to your work and education as a real estate investor. Then success will soon come!
How to do a Real Estate Wholesale Deal
Wholesaling real estate requires to sometimes see what others cannot. Real estate wholesaling is finding a distressed property and flipping it to an investor. That is, as a wholesaler, you will find motivated sellers or property that usually needs some work, e.g. rehab, repairs, etc. However, not all property needs a substantial number of repairs.
For example, many buyers run from a property when they hear termites, but it takes ten to fifteen years for an infestation of termites to do serious and unrepairable damage. As an inspector, if you know where to look and examine the structure and the depth of the damage (if any at all).
You can analyze and estimate if there are repairs needed or if a termite treatment is needed. Regardless, a property as such you can bargain for because sellers want a headache is gone and you can negotiate a price with the seller and put that house under contract with a purchase agreement.
While the house is under contract you will simply negotiate a price with another investor who is interested in making the repairs. You will then collect the difference from what the seller’s price agreement is and what the buyer’s (investor) price agreement pays. And Ching, Ching! The wholesale deal!
How does Wholesaling Real Estate Work
Several years ago, I was looking into drop shipping for an online business. I always like the idea of building passive income through an automated system or website. However, I remember the start-up cost associated with this was a bit more out of my reach at the time and quite frankly I was concerned about my success.
The concept or business model was to purchase several hundreds of some type of a product and have it stored in a warehouse. I would purchase these items at wholesale and resale it individually at a retail price when customers make a purchase through a website.
Therefore, I could have been a wholesaler in that market. I was going to the middleman who would have been collecting a fee or the difference between what I would have been paying to the manufacturer and earning from the customer.
Obviously, this is how most retail markets work. You name it, Lowes, Target, Wal-Mart, etc. all are middlemen for these manufacturers. And we as consumers are very satisfied with paying a bit more for the cost of the product.
In Real estate investing, you don’t need inventory or to buy or rent out space to store that inventory. You don’t need trucks or a shipping method. Real estate wholesaling is simply the middleman who connects the seller to an investor. Wholesaling real estate is a type of investment but it is a different strategy from the investor who is willing to pay for the property.
Usually, wholesalers are investors who don’t have much capital or are simply starting out. And the investor who makes the purchase as a buyer is performing another strategy, e.g. fix and flip, buy and hold, etc. However, there are very experienced investors using this strategy as well. One of the downfalls is that you are not creating passive income. It’s more of a job or a trade, a deal! But it can always be very lucrative too many.
How to Wholesale Real Estate Step by Step
At first, wholesaling can be somewhat confusing at first. Just like anything new we learn. But there really are only eight steps in the entire process of the real estate wholesale strategy.
Step 1. Seek out a motivated seller or a distressed property.
The secret ingredient to wholesaling is consistently finding great deals to wholesaling. Therefore, a proper knowledge in marketing is essential to the success of your wholesaling business. However, in this step you will seek out potential property through means of marketing, e.g. direct mail, website, social media, driving for dollars, etc. Once you find a potential seller who is interested in selling their property then you move on to the next step.
Step 2. Determine the After-Repair Value (ARV) on the property.
Another critical step in the entire wholesale process is the estimating of the ARV. If you don’t know how to determine an ARV, then obviously you will need to contact professionals who can give you an ARV on a property you are seeking to buy by means of wholesale.
Step 3. Calculate the repairs and estimate the rehab cost.
Once you gather the information of the ARV you will also need to estimate the rehab cost or how much the property will cost to fix it up. Even on this step, you may still need to find a professional contractor to get you an estimate repair cost.
Step 4. Negotiate a price that fits you and the seller’s comfort level.
When you know the ARV and repair cost you can start dealing with the seller. In other words, you need to know your numbers before you start wheeling and dealing. You will need to consider the profit of the buyer, closing costs, holding cost (rehab time), and your own profit when negotiating. Usually, the more motivated a seller is the lower and quicker the deal can be made.
Step 5. Sign the purchase agreement with the seller.
Once you have the numbers in play get an attorney or professional to legalize the contract.
Step 6. Find another investor or a cash buyer, e.g. landlord, house flipper, etc.
Ideally, if you are a professional wholesaler you most likely will have a network or list of investors in your area. Simply call them up and tell them you spotted a deal that they may be interested in. And negotiate a price. Many investors do not mind paying a bit more for the property that you paid for because if the numbers are good they will also earn a profit, most likely, a bigger profit than you.
Step 7. Connect the cash buyer with the seller legally through contract.
Close on the property.
Step 8. And the fun step!
Cash out! Collect the difference between what the buyer is paying and what the seller is asking.
Do You Need Money to Wholesale Houses
The reality is, it is very difficult to start anything without some capital. Although, the actual wholesale deal does not require any money because you are simply controlling contracts and negotiating prices between the seller and buyer.
But the truth is if you want to consistently find good wholesale deals it will take a marketing plan to find these deals. If you are simply starting out it will require some hustling in your marketing, e.g. driving for dollars, making phone calls, sending letters, etc.
Benefits of Wholesaling Real Estate
Minimal Risk. Like many businesses, real estate investing can also have risks. Yes, there are potential investment risks but there are also legal risks involved, e.g. getting sued. However, wholesaling real estate allows you to minimize much of the risk that involves real estate investing. Again, nothing is entirely “risk-free” but with wholesaling, you are simply lining up the contracts from the seller to the buyer. Furthermore, if you correctly include contingency clauses in your contracts you can drastically minimize more risks.
Bad Credit, Poor Credit, No Problem. There are many folks who have very poor credit and are practically years away from having the opportunity for a lender to loan them capital. But with wholesaling you, for the most part, your credit score would not matter one bit. After all, you are simply connecting the seller with the buyer with the contracts.
Freedom. If you are the type of person that dreads working for a corporation or working a 9-5 job trading dollars for hours, wholesaling real estate could be the scapegoat for you. Although, this benefit is really for any successful business but with real estate investing you can start part-time and build up and out into other real estate investing niches. Particularly with wholesaling, you can still build systems, e.g. hiring virtual assistants, etc. to do the majority of the work for you. Once you implement and successfully structure your business. You will potentially have the time freedom you are seeking for.
More Real Estate Investing Niches. As I just mentioned, there are many more niches than wholesaling in the real estate investing industry. There are residential, commercial, rental properties, foreclosures, land development, apartments, senior living, etc. The key is to get active and continue to learn. Once you master one niche in real estate investing you can venture into other parts of the field.
Profits, Profits, and More Profits. I don’t want to advocate a “quick-rich” scheme but I do want to encourage that there are profits that can quickly be made. Again, I believe with anything, if you want to be successful it takes much hard work, discipline, consistency, and commitment. Many won’t succeed, but the few that do, there is light.
Sam Walton, the founder of Wal-Mart Stores, once said, that he was fully committed to the retail industry and read any publication and literature that he can get his hands on with retail. He even spent decades studying his competitors. One time having his tape recorder confiscated by a security guard. The point is, it takes a commitment that few finds.
How Much Money Can You Make Wholesaling Real Estate
It’s all about the money! In short? Probably more money than your 9-5 if you consistently produce deals. Obviously, the more work you put in the more money you will make. So, the question becomes very difficult to answer. It really comes down to the mindset of “do you really want this” attitude. You can gain all the knowledge, techniques, and strategies in wholesaling or anything for that matter. But if you don’t get it done. You will be limited.
Most wholesalers have a minimum on each deal. In other words, for example, they may have a minimum of $4,000 per deal. This also depends on your area of course. As the value in the area increases the minimum will increase. If you are in an area where houses cost on average of $60,000 at retail value than you may be able to budge the deal down a bit.
However, the entire deal and how much you can make is determined what the seller will sell the property for and what the buyer will purchase the property for. I would honestly say if you can put together a deal every day at earn a fee of $250 per deal. Would you do it? Probably so! Unrealistic that you could consistently find deals on a daily basis and close each one.
But, earning a wholesale fee of $5,000, $10,000, $15,000, or $20,000 doesn’t surprise me. And if you can do these 1 or 2 times per month. You are looking at a solid income stream.
I’ve heard of wholesalers doing 10-15 deals per month with an average wholesale deal at $5,000 per deal. When you are throwing these many deals around you most likely will have a team helping you. And if you do want to focus on this niche, as you grow you will want to hire staff to help you.
An Example Wholesale Deal
Here’s a fictional story of Thomas the wholesaler. Thomas the wholesaler was driving on a back road in his town. A road that he hasn’t been on for years and certainly not before he started wholesaling real estate. He notices this old, beat up, vacant home on the hillside. He immediately writes down the address and contacts the owner. He later finds out that the current owner is the grandson of the former property owner. Apparently, the owner passed away and the house has been vacant for a few years.
The grandson (John), being so busy with work, kids, and life hasn’t gotten around to trying to sell the house that he inherited from his grandfather. Although, the years have passed, and he would most certainly be interested in getting this house off his shoulders.
After a quick phone call, Thomas the wholesaler told the seller John that he will get back to him on a price, after, a quick analysis of the property. Thomas the wholesaler ran through a few comps in the area and he got an estimated ARV.
The estimated ARV was at $250,000. Thomas also analyzes the estimated repair cost and it to estimated at $30,000.
Thomas the wholesaler also analyzed and considered the holding cost estimated at $10,000, the closing cost estimated at $13,000. And he also considered a profit for the new cash buyer (investor), which estimated at $30,000.
He considered his minimum profit or assignment fee of $10,000.
Knowing these numbers it gave him an estimation of the maximum asking price at $159,000. In other words, this is the maximum amount that you could accept to purchase the house.
Once, Thomas got these numbers he gave the owner of the property a phone call. He first told the owner of the property of the estimated repair costs, holding costs, and closing costs. He gave an offer of $154,000 for the property. And after negotiated and talking they both settled at $159,000.
Thomas now reached out to the buyer and they too negotiated the buyer’s price at $169,000.
This entire wholesale deal is a win-win-win for all parties involved. It satisfies the seller’s burden of the property, it is profitable for the house flipper, and Thomas the wholesaler gets another big payday.
How to Find Real Estate Wholesale Deals
Finding real estate wholesale deals can be a challenge to some and it does require work and marketing skills. I personally recommend educating yourself about marketing and sales. These skills are just as important as being educated in real estate and real estate investing techniques and strategies.
It is important that you structure your business so that people know who you are, what you do, and how you can help. Here are ways to find real estate wholesale deals.
Real estate agents, brokers, and the MLS. Obviously, your local real estate agent may be ideal for these types of deals. It is probably best to build relationships with a few of them, so you can both benefit from each other’s business. They have access to the MLS and can see potential wholesale deals.
Driving for dollars. Driving for dollars is simply driving around your local area seeking potential real estate wholesale deals. However, you are not simply aimlessly driving around with no criteria in place. You are looking for properties that look vacant, with high grass, etc. Once you locate a potential property then you use public records to get in contact with the owner.
Ads. These ads could be on craigslist (very useful), and other outlets, e.g. newspapers are still in circulation, some stores have a pin-up location where people pin ads, etc. However, much of the ads nowadays have moved to the digital world. Facebook even now has a market for local ads.
Direct Mail. Direct mail involves a little bit of money. But sending out direct mail you expect a small percentage of them to return with potential real estate wholesale deals. So, you will have to analyze the possible return on investment (ROI) when considering or starting out with direct mail.
Digital marketing. Digital marketing is a mammoth and it is exponentially growing. My advice, if you want to be in business, stay in business, and thrive in business. You best learn how to do digital marketing, i.e. social media marketing. Social media is a huge market and if dealt with correctly and targeted for your local area. You can find great connections and potential deals.
Signs. There are a few things with physical signs and using them. There is a big controversy over using signs, e.g. bandit signs. I don’t endorse or encourage the use of these signs. Some local jurisdictions and municipalities ban them altogether, so be careful and be informed when or if you use them. However, if it is a property that I own or control. I most certainly will use them!
Foreclosures. Seek out foreclosures in your area and get the legal notices for these properties. It is recommended that you have cash when considering purchasing these properties.
FSBO. For Sale by Owner (FSBO) are homeowners who decided to sell their home without the use of the MLS and stick to other means to advertise their property. These homeowners generally want too much for their property, however, it is really a matter of the numbers. Perhaps, they don’t want to deal with the fees that are associated with a real estate agent. Nevertheless, it could be beneficial for you to check it out.
Title companies. Another good relationship to build is those who work in title companies. They know and learn just about every investor in the area and they may have or know of a potential deal.
Code-enforcement officials. Properties that have been cited for a local ordinance or a violation thereof are potential deals. Again, building up relationships with these government officials, they may let you know of a potential deal.
Property Managers. You should be building relationships with property managers as well. They know when their clients are ready to sell.
Networking. Building relationships with appraisers are essential too. They know what is going on in the market. They can give you insight into potential deals.
Private Lenders and Hard Money Lenders. In some situations, these lenders may have needed to foreclose on a property that they lend money to. Most do not want to own or deal with the property and that is where you may be able to help out.
I mentioned several times the importance of building up a relationship with those who are already in the industry, e.g. real estate agents, appraisers, etc. I believe your “net worth is no greater than your network.” This is a saying is very valuable and accurate. Investing in real estate is not an individualistic business it is a team sport. Although, you may have your own business entity. Your business will never be just you. Consistently learn to network. Build up your LinkedIn account and connections for your area. Let people know what you do and what you are looking for and even give them a finder’s fee if they see something.
How to Find Real Estate Investors
As mentioned in the previous section on ‘how to find real estate wholesale deals’ I talked about the importance of networking. This is another critical component to the real estate wholesale business. Without a cash buyer, you are forced to purchase the house yourself and cancel the contract altogether. In this section, I’m going to reiterate a few points and give a few other strategies to find real estate investors.
How to Build a Real Estate Investor Database
In short, use a Customer Relationships Management (CRM) tool. There a numerous of CRM software on the market from the free versions to the corporate versions, e.g. Microsoft Dynamics. I recommend researching a free version and possibly an upgrade. I do favor the software as a Service model or also known as hosted software. It is a common practice that software companies are favoring this method. There are no downloads and all of your data and information is stored on a cloud-based server.
If you don’t want to use a CRM your excel spreadsheet will do just fine. It is really up to you on how you want to build it. I’m more on the technical side but I also know not everyone thinks like. Whatever you choose to make it work for you.
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Meet Maurice, a staff editor at Bigger Investing. He’s an accomplished entrepreneur who owns multiple successful websites and a thriving merch shop. When he’s not busy with work, Maurice indulges in his passion for kayaking, climbing, and his family. As a savvy investor, Maurice loves putting his money to work and seeking out new opportunities. With his expertise and passion for finance, he’s dedicated to helping readers achieve their financial goals through Bigger Investing.
