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7 Reasons To Start Flipping Houses By Wholesaling

by Danny Johnson on April 2, 2013 · 30 comments

  
Reasons to start flipping houses by wholesaling houses

Many people that want to get started flipping houses are having a hard time figuring out how to do so. Maybe you have learned a lot and educated yourself to the point where you could and should have already started. Why haven’t you?

What Keeps Most New Investors From Taking Action and Getting Started

For the most part, I think the fear of messing up when you are dealing with such a huge investment is what keeps us from ever really taking the plunge. Other than that, not having the money to buy a flip and not having the knowledge and skill to rehab a house also play a big part.

What I recommend for most people new to flipping houses is to start with wholesaling. You can avoid all of these problems by just starting with wholesaling. Wholesaling is where you put a house under contract (usually at 70% of market value in fixed-up condition, minus the cost to fix up, minus what you want to make as your ‘wholesale fee’) and then either assign that contract or close on the house and then sell it as-is to another investor. The goal should always be to to try and assign the contract, as you have a lot less risk and money in the deal.

Here are 7 reasons why I recommend wholesaling as the best way to get started flipping houses:
Note: I highly recommend marketing to and buying from motivated sellers versus dealing with listed, bank-owned properties. The following benefits relate to buying directly from these private sellers.

1. You can get started with very little money

You don’t have to have a lot of money to put houses under contract and then assign the contract. If you are marketing directly to motivated sellers (private sellers), the amount of earnest money can be as little as $1. I normally pay $25 for earnest money.

Once you assign the contract to your end buyer, they will be responsible for closing the deal and all of the costs involved with the closing.

2. You don’t have to take ownership of the houses

When assigning contracts, you never take ownership of the house. You are not the one closing on the deal and therefore are never in the chain of title. This will eliminate a lot of risk and costs involved with owning a house that is likely vacant and going to be repaired and sold.

3. You can make a lot of money very quickly

Wholesaling allows you to make great money in a very short amount of time. Usually within a matter of days or a couple of weeks. Compare that to how long it takes to close on a house, fix it up, market it, sell it, and finally close and get paid. That could be half a year in some cases.

This will help you prepare for when you transition into other methods of flipping and investing by allowing you to learn more on the streets and build a reserve fund. This cash reserve is something I highly recommend for anyone wanting to flip houses or become a landlord.

4. Wholesaling enables you to learn what good deals really are

If you are having trouble selling your wholesale deals, you are either asking too much or don’t have enough investor buyers to sell to. Usually, it is the former. It’s better to learn this lesson while wholesaling so that when you do go for that first fix and flip, you will already know from experience what a good deal is.

5. Wholesaling allows you to network and build relationships with successful investors

In the process of selling deals to experienced investors, you will begin to build relationships with them. If you are selling them homerun deals, this friendship will be immediate. The benefit of having friendships with these successful investors is hard to put a price on, it really is invaluable. You might even end up with a local mentor that can help you progress into fix and flipping.

6. Wholesaling enables you to become a master at finding good deals

This could be seen as a negative of wholesaling. You will need to find better house flip deals than what your buyers are finding. This is because you have to buy cheaper in order to fit your wholesale fee into the deal. I see this as a benefit, because you will learn how to work on and improve your marketing so that you can increase the number of leads you are getting so that you can find those homeruns.

I also firmly believe that a lot of people simply pay too much because they are too afraid to offer less. When wholesaling you have to offer less. Why not make it a habit?

7. You can wholesale houses part-time easily

Wholesaling can be done part-time, as there isn’t much for you to do. The majority of your time will be working on marketing and making offers. Once you learn how to properly screen leads, you won’t have to see as many houses because you know which ones are likely to be deals and which ones aren’t.

Fixing and flipping can become very time consuming and stressful. I love wholesaling a house and making more on it than I would have by fixing it and selling it retail. It doesn’t happen all the time, but when it does, it’s an awesome feeling.

Conclusion

If you’ve learned enough that you feel you should have already started but are hung up on the risk and cost involved in buying, fixing and fipping houses, you should seriously consider wholesaling.

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{ 30 comments… read them below or add one }

Steve April 2, 2013 at 10:21 am

Danny,

I’ve started wholesaling now. Been seriously into the real estate for about 6 months, I’ve taken classes, networked, marketed, and I just am having such a tough time finding those motivated sellers. I’ve come close but I’m just not finding those ideal sellers. My new plan of attach is to reach out to hazardous homes such as Meth homes or mold homes. I know the repairs can be very costly but those sellers are often more motivated.

So far I really do feel your 7 advantages to starting with wholesaling are quite accurate. Although I have yet to do my first deal, I know I’m learning the business more and more and building my confidence.

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Danny Johnson April 3, 2013 at 1:20 pm

Steve,

Thanks for sharing. What marketing have you tried so far and how often and how long did you try it?

Also, sometimes people won’t let on to being as motivated as they really are. Often their asking price will be close to market value but they end up willing to take far less. If what they owe is low enough, that would warrant going by and seeing the house, talking to them and finding out their true level of motivation.

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Steve April 3, 2013 at 3:24 pm

So far I have been marketing mostly to expired listings sending postcards. I’m between my 2nd and 4th sendings to the various leads. I’ve also sent out mass emails to FSBOs I found and most of those don’t sound motivated. Of the 100 I sent out I got about 20 responses, most of which don’t sound motivated at all, others have picked up a realtor. I’m planning a new strategy to target for the hazardous homes connections. Maybe beyond wholesaling and paying with cash or doing owner finance I can create another deal for the seller. I might not make money off it but knowing the plans work is a confidence builder for me.

When you mention seeing what they owe, what percentage do you aim for for them still owing on their initial mortgage?

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Danny Johnson April 8, 2013 at 10:59 am

Steve,

I would think those lists (expired and fsbo’s) will have a higher percentage of low motivation.

Why not focus on absentee owners, vacant houses (drive for dollars), probates, etc. These should get you some betters leads. It might still take hundreds and hundreds of mailings, but you will find some deals eventually if you do not give up.

I would avoid doing anything where you might ‘not make money on it’. Please do not do that as that is the quickest way to ‘lose a bunch of money on it’ and create all sorts of problems.

I like to make sure what is owed is less than about 65% of ARV so that I know there is a possibility we can strike a deal. Most people will ask for far more than they are actually willing to take so don’t focus so much on what they are asking.

Shaun April 12, 2013 at 12:19 pm

I’m not disagreeing with Danny about being careful about doing things that won’t make you money.

However I think he was reading it as you may take on a deal that will lose you money where I was reading it as maybe you can help the homeowner find a solution to their problem that may not result in you getting a fee.

If I am looking at your comment the right way I would say that is a good idea (Within reason for time spent) since it is a good way to learn about things, practice talking more with the sellers, and hey just good karma to help someone in need!

Often helping someone is as easy as refering them to someone that can help them better than you can. It maybe a Realtor to list the property, an attorney to help with a situation, a mortgage broker for a refi or even a contractor if they have the ability to do reparis themselves to be able to sell retail.
It is good to have these resources and in the long run if you are giving them business you will profit from the relationship when you need them to help you.

Takeya April 2, 2013 at 10:44 am

This is a good read and very encouraging as well as informative. I’m a new wholesaler here in Philadelphia and it’s very exciting. I’m a people-person and I like to help people solve problems so this is right up my alley. One of the hardest things for me to be is someone I’m not, so when I came to learn of wholesaling, I saw a fit. You’ve listed positive advantages to this role. Thanks for sharing!

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Danny Johnson April 3, 2013 at 1:25 pm

Glad you enjoyed it, Takeya.

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Cristina Corredor April 2, 2013 at 11:43 am

As a new wholesaler in Anchorage Alaska I find this article really motivating. That is wholesaling, to start with a good foundation for your business and then start some marketing in a smart and CONSISTENT way. Being there for people, be always finding deals, as Gary Keller says on his book “you have two jobs, your profession and lead generation” try to stay in business without marketing for leads… thanks!

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Danny Johnson April 3, 2013 at 1:26 pm

That’s a fantastic quote, Cristina. So true. So true.

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Ron Ridgway April 2, 2013 at 12:27 pm

I would like to connect with someone currently doing these deals and maybe mentor under them.

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Danny Johnson April 3, 2013 at 1:27 pm

Where in the world are you? Have you tried a local Real Estate Investment Association meeting?

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Steve Toohey April 2, 2013 at 2:55 pm

Danny,

How feasible is it to assign the contract in the current environment? I assume that if it is allowed, the big benefit is that you are able to get around the 90 day deed restrictions? I have not done any wholesales because longer term holdings (SFR rentals) are working for me right now, and I like the advantage of long term gains over short term… but I’m also open to looking at some other options.

Thanks, Steve

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Danny Johnson April 3, 2013 at 1:33 pm

Steve,

When buying from private sellers, you can simply add ‘and/or assigns’ after the buyer name. This will allow you to assign it.

The biggest benefit is that you don’t have to close on the house to make money on the deal. You save a lot of money not having to close on it first. Your buyer that you assign the contract to closes on it and has to honor everything that was in the contract you assigned to them. You make your money when they close.

Even if you are focusing on long-term, doing some wholesales every once and a while is a great way to get some quick cash.

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Terry P April 2, 2013 at 4:20 pm

I don’t get wholesaling, if I found a smokin deal why sell it to someone for pennies when I can make dollars.

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Danny Johnson April 3, 2013 at 1:35 pm

Because you can make dollars wholesaling as well. I’ve made more wholesaling on occasion than I’ve made on some fix and flips. Not only that, you can avoid all of the hassles involved with fixing and flipping (and there are a lot of them).

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Glenn Schworm April 2, 2013 at 5:25 pm

Nice Article Danny. We did it in reverse. first we did about 50 rehabs, and later figured out it was sometimes just as lucrative to simply buy and sell. We do about 1 wholesale a week on top of our renovation projects. It is a great way to increase cash flow for sure. Thanks for the article. Hopefully people will realize it is a viable way to make a great income starting out with no risk.

Glenn Schworm

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Danny Johnson April 3, 2013 at 1:38 pm

Hey Glenn.

We also started with rehabbing and still do most of the time. I’ve been telling my wife for years now that all I want to do is wholesale. More and more I am moving that way.

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Terry P April 3, 2013 at 4:11 pm

Yeah but seems like your biggest asset is knowing your market extremely well and that takes time. I been at mine for three months along with my day job and still can not figure it out. I am getting my RE license that will help. I wonder if agents can assign contracts…. They are in market all the time selling seeing good deals, why not?

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Danny Johnson April 3, 2013 at 9:41 pm

I don’t know of any problems with agents assigning contracts.

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Toby Barnett June 20, 2013 at 4:01 pm

I don’t know any sellers who would accept an “and/or assigns contract”. Here in WA State, REO seller’s or short sale lienholders won’t accept them.

As for finding “motivated” sellers, typical sellers want to achieve the best value for the home as we as real estate brokers counsel as such and most don’t “give their” property away unless the home is in poor condition.

Our builders prefer rehab homes versus wholesaling due to the uncertainty of finding a buyer. Also, there is a lot of liability is selling a home in which the “seller” still doesn’t have legal title. Just my 2¢

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Terry P April 3, 2013 at 4:14 pm

I forgot to mention I met a professional wholesaler last weekend at church, he said their company has an “aqusition guy” that spends all day finding deals. I don’t think finding them is as easy as people portrait, and if you put a value on your time not as profitable maybe in the beginning getting started, may depend on what market your in I’d guess!

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Steve Johnson April 3, 2013 at 5:39 pm

Terry, I very much agree with your comment about the value of your time being not as profitable at the beginning, but once you do recognize your market and find the deals I think you’ll feel like your time has been worth it. And remember, you’re learning the process so its going to be a bit slow at the beginning. I have yet to do my first deal, but I’ve come close a few times, and I freak out and try to get everything in order for it to fall through, BUT I’m getting more familiar with the process and building my confidence. Its going to take time.

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Paul Wiseman April 4, 2013 at 6:38 pm

Thanks for the article, BUT……………

1) Can’t imagine anyone lame enough to give you a contract on a house with only $25 earnest money.

2) What happens if you can’t find an investor to turn the property to in the allotted time specified in the contract? How do you get out of having to buy the property yourself?

These are actually the two dilemmas holding me back from wholesaling my first deal.

Again, thanks for the article – got me thinking again about trying the wholesale route.

All the Best, Paul

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Danny Johnson April 5, 2013 at 2:33 pm

Hey Paul.

1. I think thinking about someone as being ‘lame’ to accept $25 as earnest money is a horrible way to look at the sellers we buy from. They are having someone buy their problem for cash and as-is. The earnest money is not really of much concern to them.

2. When I put a property under contract, I’m almost certain that I can find a buyer because I am buying it cheap enough to do so. Some people recommend escape clauses to enable you to get out of the deal if you can’t find a buyer. Usually, if you can’t find a buyer it is for very simple reasons. Here are 9 of them: http://www.biggerpockets.com/renewsblog/2013/02/13/find-buyer-wholesale/

I hope this helps you to overcome what has been holding you back. Wholesaling really is a great way to get started.

Good luck.

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Michael April 6, 2013 at 8:36 am

Great way to break down wholesaling Danny. Being a rehabber/investor myself there are times my lender’s make more money and wholesalers so you are accurate. When that puts a smile on your face it puts a frown on mine. LOL.

Thanks for being a GREAT honest and ethical wholesaler and doing the industry justis.

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Danny Johnson April 8, 2013 at 11:01 am

Thanks Michael.

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Rhonda September 25, 2013 at 1:09 pm

Hi Danny; I’m interested in possibly joining the wholesale arena and I just want to make sure I’m understanding something. In order for a deal to be made, the owner must owe next to nothing on an existing mortgage? If so, would that eliminate short sales?

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Danny Johnson April 2, 2014 at 8:35 pm

It’s not that they need to owe next to nothing, they just need to owe less than what would make sense to buy the house at. This does not exclude short sales. Those just require a little more work and a lot more knowledge.

Danny

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keith April 1, 2014 at 7:33 pm

Danny-
I’m in the newbie-absorbing-mass information-and taking no action phase still myself. Have read through lots of material from several successful investors and/or flippers. I have two main questions really bogging me down at this point: 1) I have heard that it Is nearly impossible to find title companies these days willing to allow double escrows. 2) Most people state it Is highly recommended to have your buyer lined up before you ever take the property under contract. Am I missing something here, but how is it possible to market something for sale that another person would commit to, if you have not even secured it yet? Thanks for your insight.

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Danny Johnson April 2, 2014 at 8:38 pm

Keith,

1) It’s not impossible. Ask other investors/wholesalers who they use. This isn’t something most investors worry to much about sharing.

2) I think the suggestion is to find serious buyers and know what criteria they use so that you are in a better position to know that you will be able to wholesale a property as soon as you get it under contract.

Danny

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