Wholesaling 101

There are plenty of ways to make money in the real estate business, but for most the barriers of available cash and/or credit really puts a damper on things. Wholesaling is probably the best way to get your feet wet without any real risk of cash or credit.

I personally  got my start in real estate  investing by being a landlord. Although I am still an active landlord and have bought, fixed and resold hundreds of homes, I still prefer wholesaling to any other area of the business.

 Well let's get started with the most basic of questions, what is wholesaling? Wholesaling is where you lock a property in contract, and either assign your contract for a profit, or do a simultaneous closing. Either way, you are taking control the property, and making a profit on it, without using any of your own cash or credit. 

First off, you need to create the deal. What I mean by this, it is highly unlikely that you will find a $50,000 property that doesn't need any work for $25,000 on the open market. You're much more likely to find that same home advertised for $45,000, and it is up to you to cook up the deal and get them down to where you need to be to make a profit. I know this sounds tough, but I do it all the time. Let me give you an example:

This is probably one of my favorite examples, I actually found this lady through a bandit sign. I know, I can't believe I ever used bandit signs. just for the record, I probably got more calls from city officials that I did sellers, LOL!  Anyhow, back to the story.  This was a home in a marginal area and was a three unit building. She had one of the units rented and the other two units needed some TLC.  I asked her if I gave her all cash, and closed quickly, what is the best price she could give me? She told me she could give me the property for $20,000 cash and if I close quickly she could probably do $18,000. I asked her how she arrived at this price, and she said that is just what she thought it was worth. I then asked her how much debt she had on the property, she indicated to me she only had a little in back taxes and about $3500 credit card debt that attached as a judgment lien.

I proceeded to ask her what her real motivation was for unloading this property. She told me that she was interested in clearing up her bad credit card debt and keeping the city offer back. This was exactly what I needed for my negotiations!

At this point, I looked her in the eye and asked her what her plans were if I did not buy this property. Then I asked how she was going  to pay for remodeling the property to keep the city off of her back. She told me she would probably  ultimately board the property up and walk away.

My solution to her was for her just to GIVE me the property. Believe it or not, she agreed and did a quit claim deed subject to the back taxes and the credit card liens. Within five hours I had a cash buyer for the qut As ai claim deed that brought me literally $4500 in cash to my office for that deal.

I am not telling you this to impress you, because quite honestly it is by far not my largest assignment fee on a wholesale deal, but I want you to realize that if I had  signed a contract for anywhere near $20,000 on this property, there would NOT have been a deal. I had to create the deal!

Now that you realize that you have to create the deal, let's go on to the next step. You need to put a deal together that is able to be flipped for cash. So many people come to me and tell me about a $200,000 house that they got in contract for $150,000 and want to assign it for  $160,000. The problem with this is that you will have a  bank involved that can potentially kill your wholesale deal. This is exactly why I  why to make cash offers as well as sell them to true cash buyer. I know that in my neck of the woods, $50,000 is  the threshold for pain for most investors. So I try to get homes for less than $40,000 so I can make a decent  buck on my assignment fee.

Now that you  and negotiated the best deal on the property, you need to lock it up.  I use a simple one-page purchase agreement. in the agreement I give myself 60 business days to close. This is very important because by stating business days vs. calendar days it gives you quite a bit more time. Next when I put  my name on the contract. I put and or assigns. This gives me the right to take title in a different name than what is on the original purchase agreement. If I am asked why I did this, I explain that I am not sure which entity will end up holding this property. I also put in writing on the contract that I have reasonable access to the property during the closing period to show potential partners and/or contractors. I really work hard at building a strong relationship with the seller so this is never an issue.

Finally, I put in the contract some sort of weasel clause. What I mean by this is I put a line that states this contract is subject to partners approval or to a home inspection, favorable finanicng, etc. etc...

Now that the property is locked up in contract and under your control, it is time to take it to market. Personally, I take a lot of pictures and I shoot a video with all of the pictures and description of the deal. I include how much I want for it, how much it will cost to fix it, and what it is worth on after repaired value. Usually just a simple craigslist ad will get you more than enough response, and thats free!!!

While I'm talking about what it will cost to fix it, you will have much better luck selling your deal, if you have concrete numbers on the repair cost. By blindly telling your buyer  it is around $10,000, you are leaving a lot of guesswork, and a confused mind will say no. I like to have two or three reputable contractors prepare a detailed bid that I show up to my potential buyer.

Now let's talk about after repair value. I am not a fan of all of these free websites  they give comps. I find them to be pretty inaccurate. If you're so inclined to spend a little bit of money, it will go a long way to have a subject to appraisal done by a licensed appraiser. This takes all the guesswork out of the value of the property once the the rehab is complete. If you do not want to spend the money, have a local real estate agent prepare you a package for listing the property once complete. Either one of these will put your buyer's mind at ease. 

Now that you have marketed the property correctly, you have probably found a buyer. You will need to order title work at a local title company and fill out an assignment of contract or a secondary purchase agreement with your buyer if you are performing a simultaneous close. Most title companies have an attorney on staff that will facilitate all of this paperwork for you for a couple hundred bucks. This can usually be paid from your proceeds! I even use an attorney to do all of my paperwork to this day, and I have done hundreds of these!  it is just not worth it to screw something up by missing a detail of a simple piece of paper. Plus you should be spending your time lookin for deals, not playing attorney!

I know I probably over simplified this a bit, and there are some details to go over, but this is more than enough to get you headed in the right direction. Do not get paralysis of analysis and get caught up in everything having to be perfect to get started.  What if Bill Gates had wanted to wait for Windows 7  before he introduced Windows to the public? Take some action, and perfect your system along the way. There are plenty of mentors and folks on Bigger Pockets that will help you through your deal!

What are you waiting for? get out there and make a least five offers on properties this week, you'll be amazed at the results you will get!