What no one tells you about Wholesaling Real Estate (my $.02)

Want to get started in Real Estate with no money down?

Are you trying to use the cash from Wholesaling Real Estate to start a Buy & Hold Empire?

Are you Wholesaling to gain start up money for your flipping business?

Many of the people that ask me questions about Real Estate are interested in or have started to wholesale properties as their path to financial freedom. Wholesaling seems to be the current Real Estate “Get Rich Quick” scheme, but is it all that its cracked up to be? Let me know what you think after reading this article

What is Real Estate Wholesaling?

A whole seller is a person that acts as a conduit for home owners that wish to sell their homes without the assistance of a Realtor in hopes of a cash transaction with a short closing. The sellers that a wholesaler partners with are typically in some sort of financial distress. Occasionally sellers become involved with wholesalers are on the verge of foreclosure, they could have become owners of the property as a result of a death in the family or they could be in search of a cash transaction for a myriad of reasons.

Typically a wholesaler finds a person to whom they make an offer to purchase a property at a below market value, this promise comes with the offer of a fast cash transaction (usually within 30 days) and a contract with language that states that the wholesaler has the right to assign the property to the buyer of their choosing. The wholesaler (we’ll call him John) then has 30 days to bring the buyer a to the table to purchase the property owned by the seller (we’ll call her Mary). If John is a seasoned wholesaler he limits his risk by placing a clause in the contract that allows him to walk away from the property if he can’t find a buyer by the scheduled closing date

Here’s an example of how a transaction between John and Mary could work:

John places Mary’s house “Under Contract” for $50,000. John estimates that Marys house is in need of $30,000 in repairs but it has the potential to sell to a cash buyer for and ARV (after repair value) of $100,000. John markets his newly contracted property and finds someone willing to pay $60,000. John’s money is earned when the property he placed under contract sells for more than his offer to Mary. In this case, John earns $10,000. John earns his fee without ever owning the property and no out of pocket cost. sounds easy right?

Is Wholesaling Real Estate illegal?

The answer to this question is state (and in some cases region) specific. Some states have no laws on the books to discourage Wholesaling others do. The issue of legality in regards to wholesaling properties stems from the no money down way of wholesaling in the example above we discussed a transaction between our fictitious pair John and Mary. In the example John assigned the contract to Mary’s home without owning it a violation of some laws as John brokered a Real Estate transaction without a license.

If John purchased Mary’s house and then sold the house to an investor, there would be no legal ambiguity as he would simply be selling a property that he owns. Check your local laws to ensure that you dont recieve hefty fines from your state for wholesaling a property

“But John just made $10,000 with no money down!”

Here is the REAL story on wholesaling, it isnt free. Low cost, maybe, but definitely not free. As a wholesaler you can expect to pay for the following:

• Lists- Some people purchase them, some don’t but expect to be charged for lists of leads to whom you will market your services

• Direct mail campaigns-Go big or go home, many successful wholesalers send out 500-1,000 direct mail pieces per month (sometimes more), expect to do the same to keep your pipeline full

• Marketing materials- Flyers, Letters, Logos, Car Decals, Business cards etc all on your dime

• Time- The only thing you can spend, but cant make back. Some wholesalers get lucky with their first lists most don’t and wether it takes you 1 mail cycle or 10 calculate the time it takes for you to drive for dollars, market, make offers and close deals then ask yourself about the true cost of Wholesaling

Other Alternatives

I’m not saying that you shouldn’t wholesale properties, on the contrary, Im saying that if you choose to Wholesale do so, but do so knowing the true cost and the potential liability of your actions. If you wan to get started in Real Estate and work toward financial freedom (or just get out of that job you hate) here are a few options you should consider:

• Get a new job: There are several Real Estate related jobs that can help you to learn the business while earning money to invest, some of these jobs are commission based and offer unlimited earning potential

• Get a second job: Find a second stream of income to fund your real estate dreams, see the bullet point above

• Joint Ventures: Find a person or a few people that have the same aspirations as you, partner with them on a deal. This will help you to mitigate risk this will also keep your costs lower than if you invested on your own.

• Private Money: Find a person that wants to invest in Real Estate but doesnt want to manage the process, they have the money, you have the know how, its a match made in heaven.

• Wait- Thats right, I said it. Youre all fired up and gung ho to get started and thats great, really it is, but maybe its not the right time. Sit down and put together a detailed plan of attack to save the money that you need for start up costs, then, when the time is right, launch your investing empire.

Wholesaling is on fire right now and its the bright shiny object of the moment but consider this, there are no magic pills and no shortcuts to your goal. In order to get to where you want to be you need to be diligent, methodical and unrelenting. Don’t believe me? Ask people who purchased Swamp Land in Florida or any of the countless Real Estate Investing “Systems” how well those shortcuts worked for them.

IJS