“If you want to play, you have to pay!”
If there ever were a set of words that hold true for wholesaling properties, then that’s what these are. Money has a tendency of making more money. So, if you really, genuinely and most importantly legally want to get into wholesaling properties, then the only way to do so is by spending some of that hard earned cash. This is key, although you might think otherwise after reading through the many posts that tell you all about how you don’t really need to put in any money at all. But the fact is, if you don’t have the money to close the deal yourself, it’s better not to get into wholesaling at all. It’s always better to first buy the property and then sell it.
Wholesaling real estate essentially means that you buy a property, get the paperwork done, and then sell it off to an investor or a buyer as soon as possible. And profit in wholesaling only comes when you’re able to buy a property for a low value and then sell it for a higher value. However, today, there are many investors who instead of buying properties, tend to get homes assigned on contract or do a double close.
Wholesaling by contract simply means you get a contract stating you can sell the home to another buyer without the seller’s permission. While this sounds like a great way of investing without putting your money down up front, it isn’t necessarily the best way. In fact, there’s a big downside attached to this way of investing. When the buyer doesn’t show up or pay up on the day of the contract, you’re toast.
This makes the wholesaler lose his/her credibility, and as you know, in the real estate market, that credibility really matters a lot. Don’t forget that when you don’t have funds to buy the house yourself, you’re basically completely dependent on someone who does have the money, but can simply decide to back off whenever they wish. You can minimize your risk in many situations by having better control of them.
Another reason why getting a home assigned on contract isn’t recommended is because of the way contracts like this are typically phrased. The way most people do it is actually illegal. And finally, many states even consider the practice illegal. So if you try to market the property in any way, say, using advertising or placing signs in the front yard, without actually owning the house, you’d be breaking the law.
Some investors also do a double close, where the funds from the transaction with the buyer are used to pay off the seller. Commonly referred to as the “A to B and B to C” strategy, here you do make money, but have a double set of closing costs as well. Also, just like the other technique, if you lack funds of your own and Mr. C backs off for some unexpected reason, you’re in trouble. Thirdly, this too is illegal in certain states, and you need to make sure to look up the laws on the subject.
While both of these are strategies that are commonly used, they aren’t always the best, and I’d recommend the following steps instead for wholesaling real estate.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Keeping the current resources that you have in mind, draft a plan for when you want to start your wholesaling endeavor. Keep tabs on how much you would need approximately and how you would get it. Break down that plan into short term and long term goals that make it easier to achieve targets.
Learn about the market as much as you can, especially if you are new to real estate. Steer clear from the “get rich without any money” scams — because nothing comes from nothing. You need money to make money, just as I explain in this blog here: “Why Investing With No Money Down Might Be a Terrible Idea (& What You Should Do Instead).”
Work hard and build a decent amount of personal funds. Your day job is perhaps the best way to keep you earning enough money, so stick to it until you have enough money in your pockets. At that point, you can use that to buy the home you want to wholesale. If anyone tells you that you don’t need to work and you can get rich quickly, don’t trust them. You can ever consider flipping the property if you want more headache but also more profit.
Organize Your Funds & Budget it Out
While you don’t need to be filthy rich, having a healthy sum of money available before you wholesale your first property is pretty important. Organize yourself and check the funds you have in terms of liquid cash and even assets. If those aren’t sufficient for wholesaling, you can perhaps look at a private lender for a loan. Also, prepare a budget that includes money not just for purchasing a property, but also for closing costs, repairs, maintenance, legal fees, team fees and a margin of error.
Search for a Decent Property
You have to do a good amount of searching to locate the right kind of property. When you’re looking at listings, it’s equally important to check the off-market properties that aren’t listed because the owners were too busy to even list their houses. Try attending local meetups, sending direct mails and surfing through the relevant websites. All these things can help as well.
Many bird dogs may agree to help you find distress properties, but often the results they turn up with are the ones you already know about. So, use your own gut instincts and do your own research as much as possible. Once the right property is found, you must buy it dirt cheap. When wholesaling and with other real estate strategies, money is made on the “buy” side and not the “sell” side. Get to the lowest purchase price possible.
Buy in a Comfortable Range
Take action. Buy your property at a price range that’s comfortable for you, but don’t go into insecure neighborhoods, especially the C and D-class areas. Finding a buyer or an investor might be difficult there. Alternatively, if you spend too much on a property that is considered as an A-class property, it may be tough to find a buyer. So, depending on how deep your pockets are, pick a property in a good neighborhood, usually a B-class area, with good infrastructure and within close proximity to facilities.
Remodel and Sell
You can now choose to either sell (wholesale) immediately or remodel so that the property fetches a higher profit. Since you invested smart, you can do that within your own timeframe and without being under the constant pressure for a sale. And when the right buyer does come along, you’ll have all the paperwork ready to enable you to process the sales smoothly. If the buyer fails to perform, you will still be in good standing and under no pressure to find another buyer.
Stay Within the Bounds of the Law
Different states have different laws on what they perceive as wholesaling and what they see as brokering. There’s a very thin line between the two, so it’s important that you find out what your state has to say about these kinds of deals. Getting a property assigned under a contract is against the law in many states. Figure out if your state is one of them. Also, it’s illegal to receive a commission as a real estate wholesaler, which is only legal for real estate agents or brokers. Ohio, where I am based, is very rigorous with these laws.
Build Your Reputation by Doing the Right Things
The real estate market is all about building trust and relationships with key people, and while it takes years to build a reputation in the market, it takes seconds to lose it all. If you try to get into wholesaling without purchasing a property, you may tread on illegal ground, and that’s not where you want to be. As an investor, your reputation matters, and just because of one simple deal, you could end up losing it. It could also happen that you don’t find a buyer for your wholesale property, which means that you need to back out of the contract because you don’t have money to buy it yourself.
Wholesaling can teach an investor a lot about the market. You learn to find good deals, negotiate contracts, and build relationships with other investors in the business. However, if you think that wholesaling is a great way of earning passive income without having to do any work, then think again — because it requires a lot of patience, effort, time and energy, not to mention funds!
Having said that, the toughest part is buying your first property. Once you’ve bought that first one and sold it, you’ll have a more substantial amount of money to work with and the experience needed to make the process of wholesaling both more lucrative and fun. Future deals will become easier to handle, and as you grow, you’ll improve your credibility in the market as well.
Good times ahead and keep the dream alive!
Investors: If you wholesale, how do you go about the process? Is there anything you’d add to this list?
I’d love to hear from you! Leave a comment below.