When you hear the term “real estate wholesaling,” what automatically comes to mind?
Yep. You’ve guessed it — assigning contracts.
Assigning contracts is the most popular method in real estate wholesaling, and some even think it’s the only form of wholesaling. But did you know that’s only one of the many real estate wholesaling strategies out there?
Today, I wanted to take the opportunity in this post to dive into all that real estate wholesaling is and what different types are available. So let’s jump into it!
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
What is Real Estate Wholesaling?
Wholesalers are essentially “match-makers” in real estate. They are the middleman between a motivated seller and an investor-buyer.
Here’s how it works.
Wholesalers find a cheap property and sell it to real estate investors at a steep discount.
The most important aspect in this is finding an “off-market” property, which is a property not listed on the MLS. Then once you’ve found a property, you sell it at a discount to an investor, leaving enough margin for the investor to make a nice return.
So, guys, your ultimate job is to serve others!
You serve motivated sellers by helping them sell their property during a catastrophic event that has taken place in their life, and you serve investor-buyers by feeding them off-market deals.
It’s that simple!
Now let’s discuss the different types of real estate wholesaling methods out there.
The 3 Ways to Wholesale Real Estate
There’s a reason why assigning contracts are the first thing that comes to mind when you think of real estate wholesaling. It’s the most common practice, it’s the easiest way to break into wholesaling, and it doesn’t cost you a penny!
This method is quite simple — you get the property under contract with the motivated seller and then sell “rights” of the contract to an investor.
Take a look at this scenario:
You find a motivated seller who’s desperate and willing to sell their home for $20,000. After analyzing the deal and running the comps in the area, you determine the property will need $20,000 in rehab costs and has the potential to sell for $90,000 at retail price, leaving the investor with a $50,000 profit margin.
So, you draft a purchase agreement with the seller for $20,000, once you find a buyer, you offer the buyer rights to your contract for a fee of $5,000.
In return, you pocket the $5,000 earned from the contract fee and that’s it!
Sounds pretty simple, doesn’t it?
Now, although this method sounds easy, affordable, and simple, I personally dislike using this method for these reasons:
1. You’re on thin ice legally!
There’s been a lot of debate on whether assigning contracts is illegal or not. The debate stems from the fact that you are marketing a property you don’t technically own, and you’re acting like a real estate agent by overseeing a transaction between the seller and the investor, which could potentially lead you into some legal trouble.
2. There’s too much room for dishonesty.
Guys, let’s be honest — when assigning contracts, some wholesalers are not fully honest about who’s really purchasing the property. If you enter into a purchase agreement under the impression that you’re buying the property but the contract is actually for someone else to purchase it, that sounds a bit dishonest to me.
I would highly recommend seeking legal advice to ensure you’re going about assigning contracts the right way.
The double close method is used when you purchase a property and then sell it to an investor immediately — within minutes!
So at closing, you first sign the documents with the motivated seller, and then a few minutes later, you meet with the buyer and then sign the closing documents with them.
In terms of funding, you can use your own funds to first buy the property, or you could use a transactional lender who provides a one-day-only loan, just to cover the purchase. Another way is to have the end buyer pay for the closing with the motivated seller, as well as include an extra “fee” for you.
The success of double closing ultimately depends on timing! The biggest risk using this method is that you have no control of the transaction.
So if either the motivated seller or the buyer pulls a no show, then things could get hectic and your reputation could suffer.
Buying and Then Selling
This is the method used by my company. In my opinion, it’s legally the most safe and the easiest way to wholesale real estate!
You don’t have to worry about breaking any laws, you fully own the property so you can market it however you want, and you have full control of the transaction so the fate of the deal doesn’t depend on anyone else.
In this method, all I am doing is simply selling a property I own, and everything just runs a lot more smoothly because of it.
Now, on the downside, buying and selling requires a lot of working capital, which can become quite expensive if you’re looking to wholesale full-time.
For instance, my company buys roughly 12 to 15 properties a month at $15,000-$30,000 per property. As you can see, this can be quite expensive!
These are the basics of real estate of wholesaling!
I hope this blog post encourages and provides some insight on the ins and outs of real estate wholesaling.
Which method do you use to wholesale properties? Why do you prefer this strategy?
Let me know your thoughts with a comment.