Wholesaling is one of the most popular strategies for new investors to get involved with because it can be done with limited funds and experience.
For those unfamiliar with wholesale real estate, this ultimate provides a great starting point for understanding how it all works. Consider this a foundation upon which you can build your wholesaling business.
What is Wholesale Real Estate?
Wholesaling is a term used in the real estate industry to describe the process of finding great real estate deals and getting paid to bring them to real estate investors. It’s similar to a “finder’s fee,” but with some added paperwork thrown in to make it more legal and acceptable.
Wholesaling can seem a little confusing, so I find it best to illustrate the concept with an example of how it’s done.
Jim is a wholesaler. He actively markets for incredible real estate deals but doesn’t actually want to buy them. On a cold January morning, Jim gets a phone call from Deborah.
Deborah wants to sell her home, but she doesn’t want to use a real estate agent. She tells him that the house is in bad shape, and she just wants to get out before she lets it go back to the bank in a foreclosure.
Jim meets with Deborah at the home and offers her $50,000 for the property. Deborah agrees to the price and they sign a contract—a purchase and sale document. This document states that Jim (or someone else he sells the contract to) will buy the home for $50,000 within the next 21 days.
Jim then goes and talks with his friend Tom, an active house flipper. He shows all the numbers to Tom, and Tom decides that this property would be a good flip.
Tom agrees to pay $55,000 for the property and knows he can make a good profit at that price.
Jim and Tom then sign an “assignment contract,” where Jim gives Tom the right to buy the home from Deborah—because remember, the contract between Jim and Deborah said that either Jim or someone else will buy the home. (This is known as an assignment, and we’ll go into more detail on this in a bit.)
Jim gives all the paperwork over to the local title company to process. In the end, Deborah gets her $50,000, the amount she wanted. Tom, the flipper, pays $55,000 for the house. And Jim, the wholesaler, keeps the $5,000 difference as his wholesale fee.
Jim never owned the property, but he made $5,000 for bringing together Tom and Deborah.
Keep in mind, this is just one common way that wholesale deals are put together. There are many other possible ways to structure a deal.
Now that you have a basic understanding of what wholesaling is, let’s move on and talk about one of the most common questions people have: “Can I wholesale without a lot of money?”
Can I Wholesale With No Money Down?
Yes… and no.
As you saw in the example above, it is possible to wholesale without money. However, the one thing I glossed over in the story is how Jim got the phone call from Deborah.
I’ll tell you this: he didn’t get it by sitting around in his undies playing “Call of Duty.”
Wholesaling is a marketing game, and the best wholesalers are the best marketers. And marketing is rarely free (though there are ways).
Instead, Jim likely spent a significant amount of time and money to get this phone call. We’ll talk more about that in just a moment, but understand this: wholesaling can be done without money, but not without effort.
If you are interested in learning more about various no money down strategies involved with wholesaling, flipping, or landlording, pick up a copy of The Book on Investing in Real Estate with No (and Low) Money Down here on BiggerPockets. (I wrote it, and there is an entire chapter dedicated to wholesaling. It’s like this post you are reading… on ‘roids.)
The rest of this post is dedicated to showing you the effort it might take to become a great wholesaler. But first, let’s talk about some legalities and my beef with wholesaling.
Is Wholesaling Illegal?
[Editor’s Note: Please be aware that this material does not serve as legal advice. To safely practice wholesaling, be sure to consult with a legal professional about federal and state laws specific to your area before executing any deals.]
One of the more “hotly debated” topics concerns the legality of wholesaling. In fact, wholesalers have at times been fined by the State for their “illegal practices.”
Scary stuff for any wholesaler!
I am not a lawyer, and laws like this are very state-specific, but allow me to share my opinion on the subject. As with any business transaction, you should consult an attorney before engaging in any kind of real estate activity.
What’s Illegal About Wholesaling?
The essence of the debate on whether wholesaling is illegal revolves around the term “brokering.”
Although each state has its own definition, a broker is someone who helps put a deal together.
Here is how the state of Florida defines a broker:
“‘Broker’ means a person who, for another, and for a compensation or valuable consideration directly or indirectly paid or promised, expressly or impliedly, or with an intent to collect or receive a compensation or valuable consideration therefor, appraises, auctions, sells, exchanges, buys, rents, or offers, attempts or agrees to appraise, auction, or negotiate the sale, exchange, purchase, or rental of business enterprises or business opportunities or any real property or any interest in or concerning the same.” (Source)
And in Washington State, “brokering” is defined as the:
“listing, selling, purchasing, exchanging, optioning, leasing, renting of real estate, or any real property interest therein” and “negotiating or offering to negotiate, either directly or indirectly, the purchase, sale, exchange, lease, or rental of real estate, or any real property interest therein.” (Source)
Those who argue that real estate wholesaling is illegal claim it to be illegal because the wholesaler is acting as a “broker” in the deal without being licensed.
Those who defend wholesaling without a license say that wholesaling is not brokering; it’s simply signing a contract and then assigning that contract to another, and therefore the law does not apply to this situation. They are not selling a property but instead selling the ownership of a real estate contract.
Check out this video on YouTube for more on that position.
To further complicate the situation, there is the issue of “marketing” a property that you do not currently own. Most states also include “marketing a property” as brokering.
For example, let’s go back to Jim the wholesaler, who buys a property from Deborah and then sells it to Tom. Had Jim put the ad for the house on Craigslist or elsewhere, is he marketing the property?
Most definitely! But what if he wasn’t marketing the property? What exactly defines marketing? If Jim knew the cash buyer Tom and told him about the deal, is that marketing?
If you were to ask 10 different lawyers, you might get 10 different answers.
However, I do believe the way many wholesalers work could be considered illegal.
Putting a deal under contract, marketing the deal all over Craigslist, and then assigning that deal is a fast way to get fined by your state government and get a nice misdemeanor on your record.
You need to ask yourself, “What is your intent and how comfortable are you if you have to defend that position if you find the local real estate commission asking questions?”
How to Wholesale Real Estate Legally
So, how can a wholesaler protect himself or herself from breaking the law? Here are a few tips (but again, talk to an attorney).
1.) Get Your License
Simple as that. No one can accuse you of brokering without a license if you have a license. Yes, this might cost you a couple grand, but it’s better than getting a penalty from the state for breaking the law!
2.) Buy the Property and Then Sell the Property
This is another option. Rather than “assigning” the contract, simply buy the property and then re-sell it—even if you only own it for five minutes through a “double close”. (We’ll talk about this more later.)
The truth about wholesaling is this: whether or not wholesaling is illegal in your state, it definitely falls into a gray area.
If you want to flirt with “the line,” that’s fine. It’s your choice.
However, if you want to be sure that you are operating your wholesaling business as pure and solid as possible, get your license or physically close on the property, take title, and then sell it after.
My Problem With Wholesaling
Everyone seems to love wholesaling. And what’s not to love? It just sounds so stinkin’ easy.
Find a good deal, find a cash buyer, and boom! Done.
So, why don’t I recommend most people start with wholesaling?
The reality is wholesaling is one of the most difficult avenues to make money with real estate.
Now, that’s something you don’t hear the gurus say often. In fact, most real estate gurus and trainers encourage people to start with wholesaling. It’s so easy, and it can be done with no money down, after all!
But here’s my beef: most wholesalers fail because it’s hard.
To be good at wholesaling, you need to be good at:
- Knowing the math behind a good flip
- Knowing the math behind a good rental
- Talking with motivated people in distressed situations
- Negotiating without taking advantage of people
- Marketing for leads that cost less than the marketing does
- Answering the phone
- Finding good deals
- Estimating the after repair value
- Estimating rehab costs
- Estimating potential rents
See what I’m getting at? Sure, you can outsource some of this stuff, but as the business owner, you still need to be the one in charge and you need to know how all of this works.
In other words, to wholesale real estate well, you need to be good at a lot of stuff.
Furthermore, you are competing with other investors who don’t need to make that wholesale fee and therefore can pay more than you.
For example, in the story above, Tom ended up paying $55,000 for the property, so he could have simply found Deborah first. Then, if Jim and Tom ended up competing, Tom could pay $55,000, but Jim would need to pay $50,000.
Who do you think Deborah is going to go with? Tom, of course!
A wholesaler needs to find great deals and thus needs to work harder to find those deals. And if you want to get what no one else will get, you have to be willing to do what no one else will do—hustle.
I don’t say this stuff to discourage you, only to dispel any belief that this wholesaling game is “easy” and “quick.” It’s a job, a business. It’s work.
However, for those willing to put in the work, great things can happen. The story above with Jim and Tom is fairly simple, but a $5,000 wholesale fee is completely normal for good wholesalers.
And good wholesalers don’t do just one deal… they do a lot, and a lot of money can be made.
Finding Great Deals
Wholesaling real estate without a good deal is as impossible as being a great butcher without access to any meat. It’s not happening. Therefore, a wholesaler must become proficient and effective at building a pipeline of great real estate deals.
I say “pipeline” because your goal as a wholesaler is likely not to do just one deal and be done. Your goal is probably to do a lot of deals.
However, deals must be “massaged” into fruition and can take quite a bit of time.
The most successful wholesalers are consistently filling up their pipeline with leads and working those leads through the pipeline.
This pipeline consists of:
- Finding the leads
- Taking the phone call
- Building trust with the seller
- Doing due diligence
- Doing the math
- Preparing inspections or bids
- Getting the deal signed at closing
At any given point, you might have 20 separate deals in your pipeline in different phases of the deal, and it’s your job to consistently move them all forward toward profitability.
Let’s talk about how to get deals into this pipeline to begin with.
First, understand that there are many ways to find good deals. I’ll outline just a few of the most common methods below, but creativity is key when finding good deals.
Hopefully the methods I discuss (and corresponding links) will give you a good place to start.
1.) The MLS
The MLS is the collection of all deals currently being sold by real estate agents. Although it can be challenging to find deals because of the competition, it is possible.
Keep in mind, it can be difficult to wholesale a bank foreclosed home, but it’s not impossible. The best part about wholesaling an MLS deal is the ability to still use a real estate agent to make it happen.
For more on buying on the MLS, see “Five Tips to Get Great Deals On the MLS (Including Buying Houses on Friday…?).”
2.) Driving for Dollars
“Driving for dollars” is the practice of getting in your car and driving around looking for potential deals. Typically, your goal is to look for properties that are “distressed.” This could be indicated by long grass, boarded up windows, tarps on the roof, legal notices on the windows, or anything else that makes the home appear to be someone’s problem.
For more on driving for dollars, see “Driving for Dollars Bible: Finding Distressed Properties and Marketing.”
3.) Direct Mail
Direct mail is the art and science of sending out targeted pieces of mail to motivated sellers. You can purchase lists of potential leads from companies like ListSource.com for pennies per name to send out postcards, yellow letters, typed letters, and more.
Your goal with direct mail is to get a certain percentage of people to call you and to get a certain percentage of those to sell you their home.
For example, you might send 1,000 pieces of mail, get 3.3 percent of those people to call you (30 phone calls), and get 3.3 percent of those to sell you their home, resulting in one sale. It might cost you $1,000 to send those letters, but if you can make $5k, $10k, or $20k on that investment, it might be a great use of funds.
For a much more thorough post on direct mail marketing, see “The Ultimate Guide to Using Direct Mail Advertising to Grow Your Real Estate Business.”
There are a lot of other methods to find good deals that aren’t covered here. Examples include Craigslist, billboards, online marketing, SEO, networking, co-wholesaling, and more. If you want to learn more about these, search the BiggerPockets Blog, and you’ll likely find numerous articles on each topic.
At this point, you should be able to start finding deals. But wait… how do you know if it’s a good deal or not?
This is when math comes in really handy. So, let’s talk about that.
Yes, math is not everyone’s favorite subject, but the fact of the matter is this: learn the math or don’t wholesale. There is no other way.
On a positive note, this math isn’t particularly tough. Once you figure it out, it’s fairly easy. Even better, there are online calculators that can help you tremendously in this area, and I’ll show you my favorite one in just a moment. But first, let’s cover the basics.
How Much Should You Offer?
Wholesalers find deals for other people. Therefore, it makes sense that the only way to find out what to pay is to start at the end and work backwards. After all, if you want to sell a property to a flipper, that flipper is going to need to make money or they won’t buy it from you in the first place.
The price you end up paying is known as the maximum allowable offer (MAO). It’s the most amount of money you can afford to offer a seller and still make the kind of profit you want.
To come up with the MAO, we need to start with the ARV, or after repair value. The ARV is the final price that the house flipper is going to sell the property for—someday.
From that number, we need to subtract all the costs associated with the deal. These costs are:
- The flipper’s profit: How much the flipper wants to make on the flip
- Repair costs: How much it costs to fix up
- Fixed costs: How much the deal is going to cost the flipper, including holding costs and transaction costs on both sides of the deal
- The wholesale profit: How much the wholesaler wants to make
For those who would rather see a formula, it looks like this:
MAO = [ARV] – [Flipper’s Profit] – [Repair Costs] – [Fixed Costs] – [Wholesale Fee]
Let’s use the example from the beginning of this post, with Jim, Tom, and Deborah.
Jim did his homework and knew that the ARV of this property would be around $110,000. He knew that Tom always planned to make $20,000 as a profit on any flip.
He also knew that the fixed costs on a flip would be about $15,000 (including the holding costs, the Realtor fees when Tom sold it, and the closing costs at the beginning and end). Next, Jim knew the home needed about $30,000 of labor and material to fix up.
Finally, Jim knew he wanted to make $5,000 on the deal.
MAO = $110,000 – $20,000 – $30,000 – 15,000 – $5,000
MAO = $40,000
This is how Jim determined that $40,000 was the right price to pay.
But How Do I Learn All These Numbers?
Most people understand the math up until this point. However, the mistakes are made when a wholesaler dives deeper into the math.
After all, how did Jim know that the fixed costs would be $15,000? How did he know the repairs would add up to $30,000?
If you are experienced, you can sit down and pencil out all these numbers. But if you are new to this and don’t plan on spending tens of thousands of dollars for personal coaching, I want to introduce you to the Wholesaling Calculator from BiggerPockets.
This calculator allows you to go in and determine your MAO for your next potential wholesale deal. You’ll simply walk step by step through the questions, and you’ll be able to make better, faster, more confident decisions.
Here’s a quick video of how it works, using the example from this post:
As you can see, all those confusing numbers become a lot more manageable when you walk through the process step by step. The calculator can even help anyone wholesaling houses determine the repair costs by walking step by step through the various components of the home that needs to be repaired!
Another great thing about it: you can choose whether or not you are planning to sell to a house flipper or a landlord and print out PDF reports specifically designed to sell your deal to those cash buyers. These reports were structured to show the cash buyer exactly what they need to see to make a decision—and make you look incredibly organized in the process.
The wholesaling calculator was designed by investors, for investors, and contains all the information needed to make a great deal. As a free BiggerPockets user, you can go in and test the calculator three times. After that, you need to upgrade to a BiggerPockets Pro Membership in order to use it.
One thing the calculator cannot do for you is determine a property’s ARV. And this is the most important number in the entire math process. Every single number is subtracted from this figure, so it must be accurate to continue.
So, how do you determine the ARV?
There are several methods, but they generally revolve around one simple principle: houses are worth about what local similar houses have recently sold for.
If a home sold 20 miles away, it’s likely not close enough. If a home sold with four bedrooms and your potential deal has two bedrooms, it’s likely not similar enough. If a home sold in terrible condition, it’s likely not similar enough because you are looking for the “after repair value”—in other words, the home in good condition.
Although it’s unlikely you’ll find a recently sold home that is identical, to estimate the ARV, you need to get as close as possible and make slight corrections. Two bathrooms versus one? Compensate for it in your numbers. (An extra bathroom is sure to add some value, right?) If your property has 2,000 square feet and a recently sold one has 1,500, compensate for that (because more square footage should be worth more, too).
An Easier Way to Find ARV
Perhaps the best way to find the ARV of a potential deal is to ask a local real estate agent. They have access to a tremendous amount of data on recently sold homes and can help you out quite a bit until you get the hang of it.
However, many agents will not want to do this work for you for free, so you’ll need to find a way to make it worth it for them. (Not that it’s a lot of work, but it does require use of their time.)
I recommend building solid relationships with a few agents so you can give them your “unworkable leads,” and they can potentially make money by selling those leads. For example, if you can’t help a homeowner by wholesaling their home, perhaps the agent can sell it on the open real estate market instead.
This can develop into a true win-win relationship between you and said agent.
Making An Offer
Once you’ve determined your MAO, it’s time to make the offer. This is when your skills at negotiating come in really handy.
I could tell you all about negotiating a deal with a seller, but it would pale in comparison to the information you’d get from The Book on Negotiating Real Estate by J Scott, Carol Scott, and Mark Ferguson, available from the BiggerPockets Bookstore.
If you want to take your wholesaling business seriously and want to do more deals this year, take the time to learn from the true-life stories, sample dialogue, and expert tips included in this book.
After negotiating the deal and coming to terms on a price, it’s time to sign the contract. In some states, you can pick up a standard state-approved purchase and sale document. In other states, you can pick up one from a local title company, buy one at an office supplies store, or purchase one online from a site like EZLandlordForms.com.
There are several ways to actually close on the sale of the home, and the way you write your contract is going to depend on which way you plan on closing (assignment vs. double closing).
In an assignment, you will simply write (in the spot where you write the buyer’s name) “and/or assigns” after your name. This means that you and/or someone you assign the contract to will buy the property.
Assignments are typically not allowed when buying foreclosures, but most homeowners will not care. However, it’s important that you are upfront with the seller about your intentions. Next, you’ll need to sign an “assignment contract” with your cash buyer, which officially assigns them the contract.
For a double closing, you can simply sign the document in your name or business name. A double closing is the process of actually buying the property and then immediately reselling it on the same day—usually within minutes.
If you don’t have the full 100 percent cash for the deal, there are numerous transactional lenders who can fund the deal for you for a 24-hour period (and a fee, of course).
Now you have your contract. It’s time to get it sold!
Sure, you could take that good deal and go buy it for yourself. Maybe you’ll make a bunch of money if you flipped it. However, you are wholesaling this deal, not flipping, so your goal is to get rid of the property as quickly as possible. Then, you can focus on finding other deals.
So… who are you going to sell it to?
Likely, you’ve heard the term “cash buyer” before. It’s a bit of a buzzword that a lot of gurus like to toss around, but it is certainly a real thing.
A cash buyer is a buyer who can pay cash for a house. Duh.
However, it doesn’t necessarily mean it needs to be their cash. Oftentimes, a cash buyer can use private money or hard money to put the deal together. The point is: the cash buyer doesn’t need to go through a lengthy loan process that might be declined. They can purchase the property from you, guaranteed.
Cash buyers are typically house flippers, but they might also be local rental property investors, as well. Everyone is looking for a good deal these days, and a lot of people have the cash to make it happen if you can find them the deal.
There is a lot of hype about finding cash buyers and building your cash buyers list. You can spend thousands of dollars for online programs designed to help you get thousands of cash buyers. But let me save you some money.
Listen up: cash buyers are easy to find. If you’ve done everything else right, cash buyers are everywhere.
The best cash buyers are individuals who have bought similar properties for cash recently in the same area. But how do you find them?
You could put a free ad up on Craigslist or pay for an ad in the newspaper, but another great way is to ask a real estate agent to give you a list of all homes within a 20-mile radius that were “cash sales.”
This data is easy and quick for them to get to you. Then, simply do some public record searching to see who bought those homes, and send them a letter or give them a call.
Again, cash buyers are looking for deals. If you can show them that you are a serious wholesaler who will make them money, it’s the world’s easiest sell.
Don’t fall for the hype that you need to build a cash buyers list. This is just a distraction from your actual job, which is to find a great deal.
Additionally, you don’t need hundreds of cash buyers. You don’t even need dozens. You need a small handful—or maybe just one.
Yep, I said it. Just one.
If you are just getting started wholesaling, one of the best strategies is to find one great cash buyer, have them tell you what they are looking for, and go find them a deal.
At this point, you’ve done your homework, marketed for properties, got a property under contract, assigned it to the cash buyer… now what?
It’s time to get paid.
This part of the process is actually pretty easy because there is not much for you to do. You simply need to get the title company all the information (the original purchase and sale agreement, the assignment contract, etc.) and sit back and let them do their magic. (If you are in a state that uses attorneys instead of title companies, then get it all to your closing attorney.)
The title company should take care of the rest if they know what they are doing. I’d recommend working with a title company familiar with wholesaling, as many are not. If you are unsure of what the best title company is to use, try asking some wholesalers in your area, ask around at an investors’ meetup, or ask on the BiggerPockets Forums.
In the end, the seller is going to get the money they were promised. The cash buyer is going to get a great deal. And you are going to be a little richer!
Now, what are you going to do with that money? Buy a new car? Get a new wardrobe?
Maybe. BUT if you are wise, you will look at this money as an investment and will recycle it back into your marketing budget to keep your pipeline full.
Doing one deal isn’t going to change your life, but creating a real estate wholesaling pipeline that consistently brings in great deals will.
A Final Note on Wholesaling and Real Estate Investing
I’ve made an attempt to be as thorough as possible within this guide while still maintaining some brevity. So, to aid in that goal, I’ve included several links to related BiggerPockets content so that I don’t need to repeat what’s already included in those articles. I encourage you to open each and every link, and read all this information.
Yes, it might take a few hours. But if you are serious about building wealth through wholesaling, it might be the best investment you’ll ever make.
Finally, understand that no matter how much I would’ve written, I could never cover everything there is to know about wholesaling. There are too many “but what about”s and “but what if”s. Instead, I want to encourage you to ask questions either in the comments below this post or in the Wholesaling Forum here on BiggerPockets.
The Forums are an incredible place to ask questions and get answers from dozens of successful investors. And it doesn’t cost a thing.
What else do you want to know about wholesaling? Do you have any wholesaling knowledge or advice you’d like to share?
Leave a comment below!