For today’s post, I want to address a topic for all the newbies out there. You know, there are a ton of resources on BiggerPockets about the “how” to do this or that strategy, but I wanted to provide the “what” today, especially when it comes to real estate wholesaling.
What exactly is a wholesale real estate business?
What exactly do wholesalers do every day?
It is these two questions that I want to address for you. So let’s do it!
Real Estate Wholesaling is…
When you look up the definition of the word “wholesale” in the dictionary, you get the following:
The sale of goods in quantity, as to retailers or jobbers, for resale (opposed to retail).
In real estate, we know that “retail” properties are those sold on the MLS through agents representing buyers and sellers. In opposition of that, we have “wholesale” properties that are typically sold off-market at a discount and “in quantity” to “retailers” or investors who use these properties to turn a profit.
In the retail market, it’s typical for a person to maybe buy one house every seven years or so, but when it comes to investors, it’s common for them to buy one or more per month.
So, a real estate wholesaler is someone who simply gets extremely cheap properties that are good investments for investors.
They sell the property slightly higher than what they purchased it for, while still leaving plenty of margin for the investors to make a great return.
Kind of cool, huh? You just get a cheap deal and then turn around and sell it for a quick profit. It’s that simple!
Now, there are three different “types” of wholesaling real estate. They are:
This is the most commonly known method of wholesaling in real estate, and some even think it’s the only kind!
Essentially, when you wholesale through assignments, what you do is get a property under contract, and then you go find an investor who you can sell “the rights” of that contract to.
For example, say there is a house where the seller wants $15,000 (very common price point in Indianapolis). You run your numbers and see that the comps in the area say the property could sell retail for around $60,000 and that it’ll take a $20,000 rehab — which is a pretty good deal.
You write a purchase agreement with the seller at $15,000. During your “due diligence” period, you then turn to your buyer’s list and offer to assign that contract for a fee of $5,000.
So, out the door, the investor-buyer would be getting this property for $20,000, potentially put $20,000 into it, and make $20,000 when they sell it at retail.
The pros to this is that you have very little money into the deal (if any at all), and you have little risk because you can normally find a way to back out of the deal, if needed.
However, I personally don’t like this type of wholesaling for a couple of reasons:
I feel like it’s a gray area legally.
It could be argued that you’re essentially acting as a real estate agent without a license because you’re brokering a transaction between a buyer and a seller for a fee. If you’re marketing a house for sale that isn’t yours, technically, you could run into fraud. If you have your license, then it’s cleaner, but you still could run into some trouble depending on your state legislation.
I feel like it could be perceived as dishonest.
If I’m telling a motivated seller by contract that I’m going to buy their house and then I turn around and don’t buy their house but someone else does — or worse, I back out altogether — I feel as though that could easily make people angry.
Likewise, if I tell an investor-buyer that I have a property for sale and then the motivated seller decides to back out, I’ll make the buyer angry because they were interested in this deal. I would come across as a major flake.
There are ethical ways to do assignments, using full disclosure and having it clearly spelled out in the contract that your intent is to assign. However, I strongly encourage you to have a lawyer in your market write up this type of contract for you and advise you on the best way to structure your business based on this strategy. The “strictness” of assignments varies from state to state.
It can easily become complicated.
If you assign contracts, especially if you get into the whole “wholesaling a wholesale deal” — where another wholesaler has the property under contract with the seller, and then you enter into a contract with that wholesaler and go turn around and find a buyer — it can get really confusing, fast!
The name of my company is “Simple Wholesaling” because frankly, I just like having full control of my inventory. I like to keep things as simple as possible, for myself and for my buyers. When you assign contracts, there just seems to be more hoops and hurdles involved because, frankly, there are more people to deal with!
2. The Double Close
The next type of wholesaling in real estate is called the “double close.” A double close transaction is when you purchase a property from a motivated seller, and you simultaneously sell it to another investor. At closing, you first sign all the documents with the seller and then, maybe fifteen minutes later, walk into another room and sign all the documents with the end buyer.
Related: The #1 Thing You Need to Automate Your Wholesaling Business
Sometimes the end buyer will fund the purchase of the property between you and the motivated seller, and then add your fee into the transaction between you and them. Other times, you can get “transactional lending,” where a lender will give you a loan on a one-day basis, where you can purchase the property from the seller and then turn around and in selling it, pay off your loan and make a profit with a slight increase in price.
Obviously, you really need to get your timing down in order for this to work. In the case that something goes wrong at the closing table, you can easily get in a pickle, but if done correctly, this can be a great strategy.
Again, you have very little personal investment involved in this type of wholesaling, but the risks are a little higher.
You also need to be careful how you market properties while they are still under contract. Again, marketing a property that’s not yours could potentially be considered fraud. The key is learning the most ethical way to do it for your specific market, as state laws vary.
For me, I have done quite a few double closings, but as a full-time strategy, having to plan everything just right is far too much of a headache. I’d rather just have more control of the transaction. This leads us to the third type:
3. “Traditional” Wholesaling
This is based on what’s typical across the majority of all wholesale industries. You manufacture or purchase a large quantity of product, own it as your inventory in-house, and then turn around and sell it at a “wholesale” price to retailers.
So, in like manner, as a real estate wholesaler, you purchase a property from a motivated seller for a steep discount, close on it, then market it and sell it once you fully own the property.
This is the model that I run my company on.
Now, the downside to this type of wholesaling is that it takes a lot of working capital to function at scale. (My company averages buying and selling eight to ten properties per month, and at an average of $15-35,000 a piece, you can imagine that this can get pricey!) It may take you a while to build this up.
I started with only $5,000 and within a year was operating as a full-time wholesaler, so it is definitely possible!
Why I like this type of wholesaling over the others is because I have full control of the property.
I don’t have to worry about the motivated seller backing out, the investor messing up my loan arrangements if they back out, or the law — because I’m simply selling my own houses.
Both the motivated seller and investor-buyer are treated fairly, and everything just runs so much more smoothly.
So, these are the three different types of wholesaling. Now, I want to briefly describe the different components of what you need to do every day regardless of the type that you choose.
2. All Aspects of Real Estate Wholesaling
When you are a real estate wholesaler, there are three aspects of your business:
- Getting inventory, or “acquisitions”
- Selling inventory, or “finding buyers”
- Managing transactions, or “understanding purchase agreements and closing processes”
It’s really that simple!
A few pointers on these is that for acquisitions, you need to know how to run comps and determine rehab costs for your market.
The easiest way to do that is to learn the 65% rule and then hire three to five contractors to give bids on every house you look at for your first month or so. That way, you can get an average of costs for the market for different items that you run into.
You also need to learn how to find motivated sellers. The easiest way to do that is through direct mail marketing, but there are other “cheap” ways of doing it as well.
For finding buyers, the easiest way is to post all of your inventory on Craigslist and attend local investor meet ups in your market. You simply need to find a way to get the word out. This is what I do in my business, and it works great!
Finally, when it comes to understanding and managing the transactions, the best place to start is by getting a purchase agreement and reading it through. Then you can call up a title company and ask them what to expect in the closing process and what’s needed to make things run as quickly as possible.
With time, transactions will become second nature.
With that, I hope I helped clear up what’s involved in this type of real estate strategy. Every strategy has its pros and cons, but for me, wholesaling has been a true Godsend. I love my business, and if done well, it can truly provide the life of your dreams.
Wholesalers: Which method of real estate wholesaling do you use and why?
Let me know your questions and comments below!