Wholesaling is the selling of merchandise to anyone other than a retail customer. The merchandise may be sold to a retailer, a wholesaler, or to an enterprise that will use it for business, rather than individual, purposes.*
With a few tweaks, we can cater this definition to describe real estate wholesaling.
Real Estate Wholesaling
The selling of real estate (or the right to purchase real estate) to anyone other than the retail home buyer. The properties may be sold to another real estate investor, rehabber or landlord that will use it to provide business profit rather than individual use.
Whenever I hear someone ask about how they should get started in real estate investing, the response is typically to become a wholesaler. The classic “guru” pitch for perspective real estate investors is that you can get started in real estate quickly, easily and make huge checks from wholesaling houses for just a few hours worth of effort and no money. Just like every other guru pitch, this sounds good in theory but is very different in reality.
I cringe every time I hear that advice. Sure, there are people that get started with wholesaling and have success, but the vast majority do not. So I was very happy when I listened to BP Podcast 037: Full Time Income, Part Time Lifestyle Real Estate Investing with Aaron Mazzrillo. Aaron, who has done quite a few wholesale deals, also recommends that new investors do not start out with wholesaling.
Below are a few examples that I have seen of people who try to start wholesaling and fail.
Signs of a Newbie Wholesaler
- They attend a local REIA (Real Estate Investors Association) and pass out a “buyer’s application” to investors. This is part of building their buyer’s list, which they are told they need so when they get a good deal they have a large pool of people to purchase the property. They focus on quantity over quality and just want a large buyers list. Often times good wholesalers will only have a few buyers that they typically sell to, and these buyers will purchase most of their deals.
- They become frustrated when they send 100 post cards or put out a bunch of bandit signs and don’t get any calls. They say that it doesn’t work and quit on their real estate investing dreams.
- They present properties to investors that are not good deals. They have either not done analysis on the deal, or they have done the analysis incorrectly. This very quickly turns away investors who understand what makes a good deal as they do not want to waste time sifting through garbage.
- They don’t actually have rights to the property. I have been added to a wholesalers list where he sent on multiple houses per day, all of which were listed on the MLS.
5 Reasons Wholesaling is Hard
In his interview, Aaron mentioned 5 key areas that you need to be great at in order to wholesale.
1. You Need to Understand Marketing
Real estate investing is all about finding good deals. Generally the best deals are not the ones that everyone has access to, such as those listed in the local newspaper or the MLS, so you will need to determine how to find these deals. This generally means doing some form of marketing (and in reality multiple forms of marketing) and being persistent with that marketing.
Real estate is a people business and negotiating is a fundamental concept. As the common saying goes, “you make money with you buy, not when you sell”. Most people believe their property is worth more than it really is, so being able to understand their motivations and needs are fundamental to creating a deal that works for the seller and yourself. If you are a wholesaler, you need to be even better at this, since you will need to negotiate a good enough deal that you can take a cut of the profit and still leave enough in the deal for the person that you will sell the property to.
There are several different ways to wholesale real estate, some are more complicated than other. On the simpler side, you write-up a contract to purchase the property and have the buyer be your name and/or assigns (ex. Tom Sylvester and/or assigns). Then when you wholesale the deal, you add the person who will purchase the property at the end. Another scenario is a double close, where you actually purchase the property and sell it right away. Then there are more complicated methods such as purchasing a property in an entity such as an LLC and transferring ownership of the LLC. Either way, there are different scenarios for different situations and you have to understand the proper route and paperwork for your situation.
4. Estimating Rehab
In order to know if a property is a good deal, it is critical to understand what it will cost to rehab the property. Unless you have a construction background, most new real estate investors will not have the understanding of how to properly estimate the rehab costs.
Understanding the ARV (After Repair Value) is absolutely critical. Finding a good deals means starting with the ARV, subtracting out the rehab costs as well as the profit for you and your buyer. If you don’t understand how to get the ARV, then you will most likely struggle to find a good deal. Even worse, you mat think something is a good deal, even when it is not.
If you want to get started with real estate investing, skip over wholesaling and actually do a deal. This could mean doing a rehab or becoming a landlord. If you purchase your property from a successful wholesaler, they should have done most of the legwork for you. You will obviously want to double check their numbers, but they will have found the property, negotiated with the seller, signed the contract, estimated the rehab and determined the ARV. If you find the property yourself, you can work through all of the steps that I just listed and get experience with them.
Either way, once you have gone through the entire process of finding the deal through getting it rented or sold, you will be in a much better position to start wholesaling if you are still interested in it.
Do you agree? Leave a comment below and let’s talk.
Photo Credit: Jacob Bøtter