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Handling real estate assets is quite intimidating, mainly because it involves multi-million dollar properties, property taxes, mortgage payments, and whatnots. As a beginner, you might ask where to start. The entry-level learning for beginners in the real estate industry is through real estate wholesaling. Get to know the basics of the wholesaling process and practical tips before getting into action.
Just the Nuggets
- Wholesaling real estate is business-to-business marketing within the real estate industry.
- Wholesalers find buyers—mostly real estate investors—for homeowners who want to monetize their distressed properties.
- When the deal is closed, wholesalers collect their finder’s fee ranging from $2,000 to $10,000.
- Wholesaling is different from flipping. In wholesaling, you only sell the right to purchase the property—not the property itself. This can be done through the assignment of contract or double closing.
- To determine the maximum allowable offer (MAO) of the property, the rule of thumb is to use the 70% rule. Then, estimate the after-repair value (ARV) and the repair costs.
- Wholesaling real estate is perfect for beginners because it does not need a license and a large capital to operate.
- Wholesaling real estate is a legal activity as long as you are doing it correctly.
- Strategies you can use to succeed in wholesaling are networking, marketing and advertising, and mentorship or bird-dogging.
Real Estate Wholesaling: An Example
Suppose you were driving around your neighborhood in search of run-down properties. After about an hour-long search, you finally found a two-story house with a house for sale sign on the front porch. Seeing that the house seems occupied, you decided to talk to the couple owners to know why they’re selling the house. Turns out, they’re migrating to another country in the next three months. They wanted to sell the property as soon as possible, and they’ve met with interested buyers but haven’t found the right one yet.
You don’t need the property yourself. Besides, you don’t have the money to pay for it. But you do know someone who might be an interested buyer. Seeing this as an opportunity, you promised the couple that you’ll find them a buyer within the next two months. At this point, you are already beginning to wholesale the real estate property.
Real estate wholesaling is the reselling of undervalued properties一affordable real estate assets priced below their true value一to buyers who are mostly real estate investors. It is a business-to-business or B2B transaction where a real estate wholesaler acts as a middleman between the real estate homeowner and the real estate buyer.
Roadmap of a Real Estate Wholesaler: A Step-by-Step Plan
Of course, it isn’t as simple as connecting the real estate homeowner to the real estate buyer as you do with referrals. As a middleman, a real estate wholesaler does all the legwork—from finding the distressed properties to transferring the ownership to the buyers. It may sound complicated at first, but once you undergo the process, it’s easy to replicate it. Here’s how you can start real estate wholesaling.
1. Find Property Leads
For starters, you could drive around the neighborhood or city in your spare time to look for prospect property leads. When you see for sale signs, strike up a conversation with the homeowners/caretakers or call their contact numbers. However, after getting warmed up with the process, door-to-door negotiations may cost you precious time.
Just like any sales process, know who your target market is. People who would most likely sell their properties in the shortest time possible are those with:
- properties on the brink of foreclosure
- old and dilapidated properties
- several other properties to tend to so they are too busy to find other deals
- properties that have been in the market for too long already
To reach your target market, make yourself known by using advertising materials or campaigns such as bandit signs, brochures, flyers, online groups, or a website. According to Richdad.com, visit sites like Zillow, Redfin, Craigslist, FSBO, and HomesbyOwner.com.
As a middleman, you act both as a buyer to the real estate owner and as a seller to a real estate buyer. So having a wide network of contacts is a huge advantage. Have a phone book filled with local attorneys, landlords, real estate investors, realtors, and more.
2. Run the numbers
If you have read the book Rich Dad, Poor Dad, you’d know that Robert Kiyosaki is a successful real estate investor. In his website Richdad.com, he has laid out steps for beginners in real estate wholesaling. One of the tips is running the numbers.
If you’re just starting, it would be best to find a mentor who will teach you the rules of thumb. Before creating contracts, you have to determine the purchase price first. This would depend on the following costs:
- Title fees – You’ll have to find a title company to help you with the land ownership transfer.
- Appraiser and contractor fees – Hire a home appraiser to estimate the value of the property and a contractor to evaluate the repairs needed for the property.
- Finder’s fee – This is the wholesaler’s income for finding the property and arranging the closing deal. According to RealEstateInvestor.com, the average finder’s fee should be between $3,000 to $10,000 per deal. On the other hand, according to Richdad.com, the finder’s fee should not go below $2,000.
Make sure that the purchase price is reasonable enough for the homeowner to get rid of his property, for the seller to buy the property, and for the wholesaler to be well-compensated. Doing this for the first time will be confusing. Guidelines for running the numbers will be shown later.
3. Sign a purchase agreement with the real estate homeowner
Wholesalers promise the homeowners that they’ll find them a buyer in a given period. To legalize the promise, a purchase agreement is signed by both parties. The most important thing to remember when it comes to wholesaling is, you are only selling the rights to purchase the property, not the property itself.
The contract may be simple and informative. There are a lot of purchase agreement templates online for your reference. Some sites can even generate contracts for residential properties. Usually, a purchase agreement may consist of, but not limited to the following:
- names and signatures of the real estate homeowner and the real estate wholesaler
- description and location of the property
- deadline of closing (this usually occurs from 30 to 90 days, but it depends upon negotiation)
- assets on sale (this could include home fixtures)
- agreed purchase price
- property’s physical condition
- payment terms
- mandatory disclosure of lead-based paint
- contingencies and warranties
4. Seek a title company
After a purchase agreement is signed, bring a copy of the document to a title company so they can start the process. A title company is responsible for:
- accessing public records for a title search to trace the history of the property
- identifying any encumbrances of the property
An encumbrance is any claim to the property other than the owner as collateral property. For example, a house might still have a banker’s lien if the previous owner has not yet paid off their debt.
- issuing title insurance, which will protect the buyer from any ownership disputes or damage to the property that the parties didn’t know about
- managing escrow accounts, which will hold the money between the parties until the transaction is completed
- furnishing the papers ready for signing
At this stage, you still don’t have a buyer. But handing the purchase agreement to the title company will let them begin with the title search. Make sure to choose a title company that is wholesaler-friendly—meaning, they are used to closing transactions through an assignment of contract or double closing. Both of these real estate wholesaling methods will be discussed later.
5. Build a buyers’ list
While the title company is working on the title search and title insurance, use the time to contact your buyers’ list. Just like finding property leads, building a buyers’ list is also a networking and marketing game.
Since this is a B2B transaction, it would be very handy to keep a database of real estate investors, landlords, local attorneys, contractors, and realtors. Join real estate investor groups, for example, or reach out to rental agencies. Always ask if you could keep their information for future reference. Over time, you’ll build your list so that when you find your next property, all you have to do is send a message to your list. Then when you gain experience, you’ll get to know the preferences of your buyers. Take note of these so you could classify the buyers into sub-groups by property type.
6. Seal the deal with the real estate buyer through an assignment contract
The contract should indicate that the wholesaler is selling the rights to purchase the property, not the property itself. Again, this distinction should be clear as day. The wholesaler is just the principal buyer.
An assignment contract may consist of, but not limited to the following:
- finder’s fee to be paid in check or cash during the closing
- location of property
- date and venue of the closing
- names and signatures of the assignor (wholesaler) and the assignee (buyer)
- name of homeowner or seller
- the selling price of the property
7. Collect your finder’s fee
Ask the buyer to bring the check or cash as your finder’s fee to the closing meeting. This will take place in the title company’s office where all the parties involved will be present. The title name will be transferred to the buyer after the costs are paid or pre-arranged to be held in an escrow account. The deal is completely closed, the wholesaler gets the finder’s fee, and all parties are satisfied.
Then that’s it. The work of a wholesaler is done. The rest is for the title company to ensure the completion of the transaction between the real estate homeowner and the buyer.
Different Ways of Real Estate Wholesaling
The general process described in the step-by-step plan is pretty much what happens during an assignment of contract. It’s a straightforward process without the need for a large capital because the wholesaler will not buy the property. They will only assign the contract to the buyer together with the homeowner’s name as the seller. However, in this method of real estate wholesaling, the prices are transparent to all parties.
To create a degree of privacy, other real estate wholesalers do a double closing. It’s called as such because two closes are done in a short amount of time, say, within the day. The first close is between the wholesaler and the homeowner. If short on budget, wholesalers can borrow funds from money lenders to purchase the property. Then the second close is when the wholesaler immediately resells the property just bought to the end buyer. Similarly, there is still a purchase agreement and an assignment of contract indicating that you immediately sold the property to the buyer. However, the signing will occur twice separately with each party. With this setup, there is privacy when it comes to price offers.
The Numbers Game
Calculating the maximum allowable offer (MAO) will depend on many factors including the cost of living, the property location, how much you want to profit, etc. Any offer price above MAO will not be profitable for the wholesaler and the buyer. To provide a rule of thumb for the beginners, the wholesaling industry applies the 70% rule:
However, it’s best to ask experienced mentors about these calculations especially when you’re still a beginner. This will only serve as your reference formula.
How to calculate the after-repair value
After-repair value (ARV) is the selling price of the property in the market after it’s fixed and improved. To get an accurate estimate of the ARV, you’ll have to hire appraisers. But if you don’t have a trusted appraiser yet, it’s wise to know the estimates to benchmark whether the ARV given to you is too high or too low.
You can estimate the ARV by visiting online sites that sell real estate properties. Find four or five comparable properties having a similar land area, bath and bed count, location, and type of property. Eliminate distressed properties from the choices. You can do this by editing the filter choices when searching for properties. Also, you can search for recently closed sales for comparable properties.
How to estimate the repair costs
Just like when estimating the ARV, you’ll also need inspectors and contractors to give you an accurate estimate of the repair costs. But for benchmarking, there are range estimates for the degree of needed repair per square foot of land.
|CATEGORY||ESTIMATED REPAIR COST||DESCRIPTION|
|Tier One||$15/ft2||Houses that only require a minimal upgrade. |
Repairs include flooring landscaping, light fixtures, and deep cleaning.
|Tier Two||$25/ft2||Everything that includes Tier One repairs with an additional upgrade of the kitchen and bathrooms.|
|Tier Three||$35/ft2 + $5000/big item||Everything in Tier Two plus 1 or 2 big items outside the scope of Tiers One and Two. For example, roofing, structural foundation, and ventilation system.|
There are also prepared spreadsheets you can utilize online with estimates of specific kinds of repairs. For example, Dave Robertson, founder and creator of HouseFlippingSpreadsheet.com, has a free Google Spreadsheet for estimated repair costs. If you want a more systematics database, they also have a web-based software tool.
Pros and Cons of Real Estate Wholesaling
1. A good training ground for beginners
Wholesaling gives you a diverse look into the different agencies or groups running the industry. Aside from homeowners, investors, and title companies, you will also come across property appraisers, contractors, realtors, mortgage lenders, and more.
2. No need for large capital
As a wholesaler, you don’t have to own the property itself because you’ll simply sell the rights to purchase it. For double closing where you’ll buy the property before reselling, you can borrow from money lenders.
3. Short turnover period
Once you get the hang of it, the process will be easy to reproduce. Wholesaling deals close within days. You can even make simultaneous sales to earn a greater profit.
4. No license required
Unlike realtors, a wholesaler does not need a license to operate. So the wholesaling route is the perfect pathway for beginners in the real estate industry!
5. No need for good credit
Because technically, you are not the end buyer of the house! So the mortgage companies won’t care about your credit.
1. Bad reputation or stigma
Operating without a license may be an advantage for beginners, but it also has a corresponding disadvantage. Without a license, you lack credibility to some investors and even title and mortgage companies. Because there is no licensing process, real estate wholesaling is an attractive pool for scammers.
However, wholesaling is a legal practice as long as you disclose the following:
- You do not own the property so you are not selling it. What you’re selling is the right to sell the property.
- You are only the principal buyer of the property. At a determined date, you will have to resell the property to the end buyer or just simply assign the contract.
- You are charging a finder’s fee to the buyer in exchange for negotiating the deal, not because of any real estate service.
2. Not quick and easy
Money can be earned fast when it comes to wholesaling real estate, but only when you close as many deals as possible. Hence, it is an active income stream needing constant effort, and there is so much effort to put in wholesaling! Remember—you are paid to do the legwork so that all the homeowners and buyers will just duly sign the documents and close the deal.
Right at the start, you have to realize that real estate wholesaling is not a real estate business. It’s a marketing business. You are not buying the property for passive income. All you do is apply sales strategies and close the deals. One deal after the other without owning a property for long. Thus, you’re in the marketing business within the real estate industry.
Success Strategies in Wholesaling
Being the middleman, a wholesaler must have connections in different aspects of sales and real estate. The key to success in real estate wholesaling is through engagement. These are some ways of building connections:
- Join real estate clubs to meet real estate investors.
- Exchange calling cards with realtors, contractors, appraisers, and landlords. Always ask for their information.
- Reach out to rental agencies and local attorney offices.
- Attend seminars and conferences about real estate to meet prospect leads and, at the same time, to learn about the real estate market.
Marketing & Advertising
More than selling the property, you are selling your expertise and the service you can give to the homeowner and the buyer. It’s important to position yourself in a way where you can help them alleviate their pain points or fulfill their dreams. Provide a better change your clients are looking for. You must create your branding that will establish a reputation for you in the real estate industry.
When you have decided how to package yourself to your clients, it’s time to spread the word. Be prepared for the advertising costs like bandit signs, brochures, flyers, and ad prints. Online, you can prepare a budget for Facebook ads or affiliate programs with real estate and finance blogs. Ideally, start designing a website to add credibility to your brand.
Bird-dogging is a term used in the real estate wholesaling business where a novice wholesaler finds leads (property and buyer) and assigns the contract for other experienced real estate investors. If you are a beginner and don’t know where to start, this is the starting point一find a mentor and be their bird dog.
To be successful in any endeavor, one of the effective strategies is to find the people who have already achieved your goal. Approach credible real estate investors and introduce yourself as a beginner in the business. Get to know their victories and gauge if you have the same qualities and values as them. Ask them if they’re open to taking you under their wing.
Your goal is to enter a student-mentor relationship through somewhat like a paid internship. In exchange for finding leads and closing deals, you can earn your finder’s fee. It could range from $500 to $2000 according to RealEstateInvestor.com. Although the pay is below the actual minimum recommended finder’s fee of $2000, you are still getting something more valuable than money一experience. Take Robert Kiyosaki for example. He is great in what he does because of the help of his rich dad mentor.
Is Real Estate Wholesaling for You?
If you’re a beginner who wants to find a way of earning while getting to know the real estate market, then maybe this is for you. But deeper than that, one must possess potential character traits to succeed in this business. If you don’t seem to have these character traits yet, don’t worry, everything can be learned and cultivated.
Real estate wholesaling may seem easy right when you enter, but once you’re there, everything is about finding connections. A wholesaler cannot succeed on their own. Wholesaling involves a lot of legwork, so being resourceful will put the gears into motion.
You’ve got to be resourceful with all the information. If you’re reading this, then you’re off to a great start! You’ve also got to be resourceful with your source of property leads and buyers’ list. Networking and marketing are resourcing. Always be on the lookout for prospects. You’ve got to be resourceful in hiring competent professionals who will help you determine the price offer you’re going to give. You’ve got to be resourceful of finding a wholesaler-friendly title company.
Strong communication skills
This is the bread and butter of the wholesaling business. Your profit depends mainly on your communication skills—if you have captured the needs of your clients and then found a way to address them. If you love meeting different kinds of people and your negotiation skills are impeccable, then this may be for you.
Just like the legal binding contracts, wholesalers must have a long-running commitment to make a successful career out of wholesaling. Clients are waiting for your service, so you’ll have to make sure you’ll deliver. Aside from being true to your word, you have to put all you’re responsible for on paper and add some contingency clauses to it for your exit. Be reasonably transparent to your clients. Aside from protecting yourself, setting boundaries and expectations will eliminate your liabilities.
Strong fighting spirit
Everyone in the sales business needs this. You’re not only negotiating with the buyer and the homeowner, but you’re also negotiating with the intermediate transactions like inspectors, realtors, and title companies. That is to say, you’ll encounter different personalities一from the ideal ones to the worst. When things turn out to be difficult, it would get exhausting at times. But if you’re committed to making a career out of real estate wholesaling, pack up a reserve of strong fighting spirit.
Important Reminders to Avoid Common Mistakes
Inevitably, you’ll make mistakes and that’s how you’ll learn. But fail small and fail fast so you’ll clear your way to success. Here are important reminders to avoid common mistakes in wholesaling, especially for beginners.
1. Study local real estate statutes
Wholesaling involves legal binding contracts without the need for a license. So there is a heavy weight to it when you think about the legal consequences. Both the assignment of contract and double closing are legal methods when done correctly. If you don’t have a mentor to guide you, then it is your due diligence to gather information.
Check out the real estate statutes in a specific state in the US here.
Otherwise, you’ll always have the option to ask help from your network of realtors and local attorneys if you want to ensure that all parties will be protected in the sale.
2. Know the difference between wholesaling and flipping
Flipping is when you purchase a distressed property, make improvements on it through repairs and construction, and sell it to the market to gain profit. Like in the stock market, the strategy is to buy low and sell high一buy the undervalued property and sell it high in the market. The process takes longer (months to years) and needs a large capital for the repair costs.
It’s important to make a distinction that a wholesaler only estimates the repair costs and the after-repair value (ARV) for the buyer’s reference. Also, the wholesaler’s name will never appear in the title documents.
3. Find a win-win-win situation
This is where negotiation with strong communication skills come in handy. One of the goals is to earn money through the finder’s fee, but it’s not the ultimate driver. Find an arrangement where all of the parties involved一seller, wholesaler, and buyer一end up satisfied. That is, giving the seller an exit strategy from paying mortgage on their unused property, giving the buyer an undervalued property that they could, later on, earn a profit from after flipping, and getting your fee for doing all the legwork.
4. Always ask for an inspector’s or appraiser’s expertise
Don’t simply take the homeowner’s word for it. If they say they shall only sell their property around a certain price, take note of it but always find a basis for your offer. Hire inspectors to see any damage or needed repairs in the property. Hire appraisers to get an estimate of the property’s market value. Let them know what the process is going to be if they sell the property through a wholesaler. Inform them of the fees you are going to charge and how much of that will be your finder’s fee.
5. Never advertise that you are selling the property
This could get you in trouble especially when title and mortgage companies are on the lookout for scam artists. Since wholesalers do not need a license, you are a hot lead for investigation. But as long as you emphasize that you are only selling the rights to purchase the property or you’re just the principal buyer or seller, then you’re good.
6. Don’t offer deals to everyone on your buyers’ list
When your list is short, send the deals to everyone on the list. But as it gets longer, you don’t want to waste time. Remember that once you sign the purchase agreement, you’re running on a deadline. As your list grows, you must also classify which buyers are looking for which properties. Streamline the calls you’re getting to make sure you’re dealing with serious buyers only.
7. Due diligence before signing anything
Make sure that everything written on the contracts is just and fair for all parties. Protect yourself by adding contingencies and escape clauses or signing Non-Compete Non-Disclosure (NCND) agreements.
One example is the inspection contingency clause. This is to protect yourself from anything found to be faulty after inspection. Other escape clauses may include any title issues which should be under the title company’s jurisdiction and not the wholesaler’s. Most importantly, include an escape clause that will not obligate you to buy the property in case you did not find a buyer within the allotted time.
Before signing the purchase agreement and the assigned contract, have each of the buyer and seller sign an NCND agreement. This is to protect you in case either the seller or buyer will bypass you and close the deal themselves. Unless you are signing an assignment contract already, withhold the contact information of either the buyer and homeowner. This assures that every detail in your negotiations will be confidential.
8. Get a license
You can start earning by wholesaling without a license. Once your earnings become stable, you can invest it in getting a license. Even though it isn’t required, having a license will give you more credibility. Your prospects will trust you more and be at ease when doing transactions with you. Plus, you can market freely, sell your own property, and even venture into flipping.
To sum it all up, anyone can enter into the arena of real estate wholesaling but not everyone gets through it successfully. You may start with little to no resource, but by now, you have learned that you’ll build your resources from the ground up. Networking and marketing is the name of the game. Both are skills that will fuel you to success. Best of luck to all beginners out there!
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