Can someone explain wholesaling?

Question

As I barely understand the concept right now, is it just buying a cheap house that needs work and then selling to an investor for him to make money off of by selling to a typical occupying family or resident for a profit? Thanks.

Tiara Murray · Answer

I am thinking about starting out in wholesaling. What is the typical profit from a wholesale?

Jorge Caicedo · Answer

Erick, that's interesting that you actually intend to close. I have yet to meet a wholesaler in my area who has that intention(of course b/c of day jobs, many of us don't have the time to clean and repaint a house, although I can see where that'd work for some people). I have only 1 exit clause and that's "subject to buyer's inspection and approval but to each their own.

Andrew S. · Answer

Thank you all for your input. It's very much appreciated.

Erick Gause · Answer

These are all good opinions and remember they are just that opinions and not a law to follow. For new investors I still believe it is an imperative part of learning the game of finding great properties and wholesaling by driving your farm area or targeted neighborhood (as well as doing your other methods of adverting for them). With that being said I also recommend that when you see a distressed property you stop the car and get out and take a closer look. This does a lot for a new investor. A closer look allows you:
1) To confirm if the house is vacant
2) You will start to see some houses with REO letters (bank owned), I avoid, lock boxes (means someone has an interest in the property already) avoid,  Tenant eviction notice (has landlords contact info and they will be motivated), foreclosure notices etc.
3) You will get a chance to network since you are out of the car- you will meet neighbors, where you can get the story on the house, contractors (mowers, handymen etc. which can give you info on the house as well as several others)
4) You get to understand the condition of the property by seeing it up close.

Driving your farm are in my opinion is highly recommended at least once a month (a lot happens in a neighborhood in a month), but is still one out of the 10 or more you should regularly doing to find these properties.

Personally I feel there is a moral obligation if I am going to put a property under contract that I have the intention of closing it myself if I can not find a buyer. Now this rarely happens but I have closed about 7 in my lifetime when I could not find the right buyer, however I was able to sell each one of these within 2 months at a higher profit (I cleaned them up and repainted them). Yes there are several "exit clauses" you can use on a contract, but I have always done well ,and have received better deals from sellers who have actually turned down other wholesalers even at a higher price because my reputation was that I closed the deal one way or the other.

Good Luck!
Big E

Jorge Caicedo · Answer

Andrew, while birdogging or driving the neighborhood is recommended by many investors and wholesalers, it's generally a waste of time and a lot of heartache..Your best bet would be direct mailand a website to find the distressed sellers..also Eric, that's interesting the statement you made regarding that you should never put a prop under contract you couldn't close on. I don't know any wholesalers who contract on a prop w/ the intention of closing..this is why there are "escape clauses"..of course that's not to say all wholesalers do that like me and my associates.

Robert Coomer · Answer

I forgot to answer the last part of your question regarding profit. The profit margin will largely depend on the investor you intend to sell the property to. Some investors want to be in a property at 50% of the ARV (After Repair Value) and others may feel comfortable being in at 65%. First, I recommend that you find a strong list of buyers and know their range. Whenever I purchase a property I have an investor in mind, but I also have a backup investor (or two) in mind in case the initial investor is not interested. I generally follow the principle that if it fits the investors mold and it is a deal for them, then it should not matter if you make $2,000 or $10,000 as your wholesale profit. With that said, there are always investors that do hibitual repeat business and I will regularly reduce my wholesale profit to give them a deal better than they ask for. This keeps repeat business and if they are happy, chances are they'll tell a friend!

Robert Coomer · Answer

Thanks for the addition Erick, I completely agree. Earlier, I wasn't trying to say that you can't be a wholesaler if have a full time job. I was simply noting that many investors are more than willing to pay a small markup in price for the convenience of a wholesalers services because they already have a full-time job and there just is not enough hours in a day or week to spend looking at properties when they have family obligations as well.

You can be a very effective wholesaler if you just want to work in your spare time around your work schedule, but it will take a larger time committment than just driving around and finding prospective houses. Investors generally want other information such as: Estimated After Repair Value (Estimated Appraisal), Renovation Expense, Taxes, etc. All of these things will require you to meet some people that can assist in your estimations. I have an appraiser that will get me comparable sales and the range that he feels the house will appraise in. You should also know the prices for specialty repairs (HV/AC units, flooring, etc.). Many of these vendors will be at the local REIA meeting and can give you a rough estimate based on sq footage.

Hope that helped!

Erick Gause · Answer

Your right it is almost the same but birdogging allows someone to make money with virtually no risk since you are not doing any contracts. It also allows you to learn the ropes from an experienced wholesaler and you can quickly learn what mistakes not to make; it is a great way to get into investing.

Birdogging or wholesaling can be done while working a full time or part time job. When I first got started I spent my weekends looking at properties and my weeknights analyzing the deals, making contacts, and looking for more deals to look at over the weekend.

I would recommend if you are serious about getting into it, then you will need to join a local REIA (real estate investors association) and find someone who wants or is currently doing the same thing you are interested in. You could buy a 100 books but never learn as much as meeting and doing it with like minded individuals.

Andrew S. · Answer

Thanks for the responses. This leads me to a few other questions. Wholesaling sounds like birddogging with the added step of actually putting the house under contract, right? And you said that most investors have fulltime jobs so this precludes them of finding the deals themselves. So is wholesaling something that another person with a fulltime job, like myself, could expect to successfully do? Also, what's the typical profit from wholesaling?

Erick Gause · Answer

Robert makes some good points above

I will also add:
Wholesaling is basically finding a deal, putting the deal under contract to purchase and then exercising your contract rights to assign the deal (sales contract) to another entity (buyer). You are typically not buying the property (however some do), closing and then reselling, you are selling your contract and not the actual property. You are therefore holding or controlling the property until your end buyer purchases the property. The price difference from your contract price and your new sales price to the end buyer is your profit.
You will want to look more into it and beware of certain moral obligations like (never putting a property under contract if you do not have the full intentions or capability to close it yourself.) The trick is to find the best deal possible. Most experienced wholesalers will tell you they will look through at least 100 deals before they find the right one.

Good luck
Big E