In Part 2 of this series I discussed many of the most popular approaches to finding deals. I spent some time in this series discussing the “art of finding deals” because all too often I see gurus teaching how to use their methods to find deals, but they don’t, in my opinion, spend enough time on how you monetize a deal once you have it under contract.
And that is going to be the focus of this and the next two articles… approaches to turning your deals into cash profits.
The first approach or strategy for turning deals and at least a portion of their equity into cash is the one so many beginning investors seem to start with. And for good reason. It is the approach that requires little to no cash to execute and the paydays can happen quickly.
The approach I am speaking of is WHOLESALING!
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The Basics of Real Estate Wholesaling
Wholesaling a property entails nothing more than gaining control of a property through a contractual agreement and then selling (assigning) your beneficial interest in that contract to a third party (investor buyer) for a profit.
Sounds simple doesn’t it?
For the most part it is… but there are lot of moving parts and more than a handful of regulations. Your job is to be able to successfully navigate the entire scenario and claim your profits.
Lets take a closer look at what wholesaling really entails.
The process of wholesaling can be broken down into three separate and distinct activities… and you need to master each one of them.
The Wholesaling Process
Finding deals. This activity was discussed in Part 2 of this series. Obviously, if you don’t have a deal or contract to assign nothing else matters. Right!
I would add, that embedded within all of those processes for finding deals are additional skills such as the ability to, (1) determine the value of the subject property after it has been renovated, (2) estimate repairs, and (3) negotiate to put the property under contract at a price which will allow you to assign it to a third party; which must be mastered. Without these skills a wholesaler runs the risk of obligating themselves to purchase a property that they may not have the financial capacity to execute.
Finding the end buyer. There are many experienced wholesalers who would argue that this is the most critical part for a wholesaler. And I agree! Think about it, it is one thing to find a solid deal but if you don’t have an end buyer, and you don’t have the funds to purchase the deal yourself, your options are severely limited! In fact, as I will explain in just a minute, your ability to effectively negotiate and get a deal under contract is directly affected by your confidence level in being able to assign that contract to another investor.
Let me explain. As I mentioned above, many beginning investors start out as wholesalers because they either don’t have sufficient funds to purchase the property or they have poor credit and couldn’t qualify for funding. So… they are forced to negotiate knowing that they could not take down the deal themselves and must get the contract assigned or they may have a problem. (I realize there are methods for avoiding this situation, but I won’t get into them here). Since the wholesaler knows they can’t take the deal down and they don’t have a perspective buyer in the wings, psychologically this puts the wholesaler at a disadvantage in the negotiations. With the net result being that the wholesaler either sabotages the deal or their offer is too low to compete.
The key here is to create that buyers list. If you are unsure how to create that list there is a wealth of information available on the BiggerPockets forums, blogs and newsletter that will be immensely helpful to you.
Getting the deal closed. OK… so you have a buyer and you have a contract which you have assigned to that buyer… the next step is to make sure that the investor who you assigned the contract to gets it to closing.
While it may seem like a simple thing to get an assigned contract to closing, there are a few actions which I believe you must take as a wholesaler to ensure your deal gets done.
First amongst those actions is selecting a title company/attorney who understands what you are doing, is willing to conduct the transaction and even better help guide you through the process to ensure it is done correctly.
The second action is ensuring that your investor buyer can obtain the funds to close the deal. In many cases this will require that you create relationships with hard money lenders and require that your investor buyers either come to closing with cash or that they use your lender.
The last action is simple… you need to stay on top of every step of the closing process. Don’t let more then a couple days go by without being in contact with the investor buyer, seller, title company and even their lender. You want to know as quickly as possible when an issue crops up and get it taken care of immediately. There is nothing more frustrating or terrifying then finding out 2 days prior to closing that your deal won’t happen.
A quick disclaimer… the process just described was intended to be generic. There are different approaches regarding to how a deal is assigned, how it may be funded, whether the wholesaler actually purchases the deal for a day or to, that are all applicable in the right circumstances. My intent here is to explain the major steps in the process to create greater awareness.
With that being said… I would like to go over what I believe are the Pros and Cons of wholesaling in an effort to assist new investors to better make an informed decision regarding whether wholesaling is the place to start their real estate investing career.
Pros to becoming a real estate wholesaler
- Little out of pocket cash is required to get started.
- Paydays can be obtained within a short period of time (from contract signing to closing… 10 to 30 days)
- Assignment fees can range from just a couple thousand dollars to ten and twenty thousand depending on the quality of the deal.
- There is little risk that the market will shift in the time between contract signing and assignment/closing.
- All of the risk of improving the property and either selling or renting it is the responsibility of the investor buyer, not the wholesaler.
- Lends itself to conventional marketing (Part 2 of this series) because many investors are searching on the MLS or pursuing short-sales.
Cons to becoming a real estate wholesaler
- The wholesaler must learn how to negotiate, determine after repair values, and reasonably estimate repairs.
- Finding a buyer may be a challenge increasing the risk that the wholesaler has to either purchase the deal or default (not a great place to find oneself).
- The psychology involved in negotiating a deal knowing that the funds are not there to purchase it can have a significant negative effect on how successful a wholesaler is in getting a deal under contract.
- Since most wholesalers are cash strapped, attempting to find deals on the MLS puts them at a disadvantage due to the current trend of all cash offers, no contingencies and high non-refundable earnest money deposits.
- The rules and regulations are constantly shifting regarding “assignments”. In most cases the only way to take down an REO is through a simultaneous close or assignment of LLC ownership rights… adding yet another layer of complexity to the process.
The bottom line is that wholesaling can be a great strategy for anyone to get started in this business. However, as I mentioned above, there are many moving parts and your job as a wholesaler is to learn what they are so that you can master the process.
And let me tell you, there is nothing sweeter then walking out of closing carrying a check for $5K or $10K for doing 10 – 20 hours of work or less.
Best of luck!