Wholesaling: How Does It Work?

The new year is here! You might be making plans to take your real estate business to the next level or maybe you’re new to the game and are looking to get your feet wet. A great way for new and experienced real estate investors to get more involved and explore new markets for expansion is through wholesaling deals. What exactly do I mean?

Let’s dive into that a little further and you can decide if this is going to be your niche in 2018 and for years to come.
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What is wholesaling?

Wholesaling can be described as real estate "day trading". However, in the case of wholesaling in real estate you’re not trading stocks. It is a system where you can grow your cash holdings tremendously over time, build wealth, and generate huge gains by acquiring the rights to resell property. Wholesaling involves you, the wholesaler, putting a property under contract and then assigning the contract to another interested party, usually an investor.

How do you do it?

  1. Locate a property with a price well below market value.
  2. Submit an offer to the seller.
  3. Get a contract (Purchase & Sale Agreement) with an assignment clause signed with the seller.
  4. At closing, assign the contract to an investor buyer for a profit.
  5. Done.

Basically, that’s what wholesaling entails, but is it really that easy? Of course not! There’s a little more to it which we’ll get to.

Is wholesaling for you?

Well, that really depends. Wholesaling demands above-average negotiation skills. You only make money in wholesaling when you negotiate a great investment opportunity with a seller and most times, it will be a seller in distress.

When you think of a distressed house seller you want to think of homeowners in financial trouble, people who have lost a loved one, and don’t need (or can't afford) the house. A few examples of things to look for when looking for these properties are often:

  • un-cared for lawns
  • garbage littering the house
  • and piled up newspapers

These are by no means the only things to look for, but are definitely are quick clues. After you’ve identified the house you then flip the property (assign the contract) for a profit to an investor buyer who is already in place.

This means that being personable and knowing the art of networking are invaluable. If you shudder at the thought of having to negotiate and presenting your deal to prospective buyers, then wholesaling might not be for you! Don't forget, unless you have your own financial resources, it is essential that you have an exit strategy aligned before negotiating any possibility of a wholesale transaction.

If I want to be an investor, or I am one, is it worth it to wholesale? Of course!

Real estate investors who wholesale properties, consider following this strategy:

  1. Deposit profits from a wholesale transaction into the bank
  2. Complete another wholesale transaction and deposit profits earned
  3. Profit from a third wholesale transaction and make the deposit
  4. Now that the profit is sizable, take a large chunk of your profits and buy a property to hold. Or, if you're already buying rental portfolios use this income to keep building your portfolio. Profit from the appreciation and cash flow of the property.

I’ll talk further on the benefits of buy and hold in a blog post to come. In the meantime, reach out to me here with any questions! If you're already in the real estate space then you already know the ropes of what investors are looking for with their investment properties. Use this to your advantage! This allows you to make money on the side while also growing your real estate network and house hunting for your next property as well. Win Win!

Since wholesaling, like day trading, is essentially a job. Just about every transaction is its personal paycheck. Invest lower, sell larger, move on. Having said that, you almost certainly don't want to trade your regular job for a job flipping residences unless you are really experienced with the trade. Like any other line of work there are pros and cons. Let’s discuss what you should consider on both ends of the spectrum before getting into wholesaling real estate.

Pros of Wholesaling

  • You can make money quickly: If you’ve found a deal and matched it up to a buyer you can have everything closed in no time. The key here is to make sure you’ve done your due diligence before you close. A lot of time your wholesale properties are people who are looking to sell quickly. In those cases they will be just as eager to close as you are, so make sure you have everything in line with your buyer and you'll get that money into your pocket in no time.
  • Little to no personal financing needed: When you find your house and are ready to put it under contract you can put as little as $10 down. This eliminates your risk if something goes wrong. One of the major worries have when they think about investing in real estate property is the cost. Wholesaling is a great option to get involved in real estate without yet getting your personal finances involved.
  • No credit necessary: This is huge! Low credit scores/no credit scores definitely deter many people from buying a property because they are worried they won't get approved or will with huge interest rates. Don’t let this stop you. As the wholesaler, you are not required to have a certain credit score as the eventual buyer will be the one who needs to go through a credit check.
  • Knowledge of real estate: In my opinion, this may be the biggest advantage of them all. When you look at the reasons above you can see that wholesaling is something everyone can do. Furthermore though it is giving you knowledge and experience in the real estate business with little risk on your end. And of course, you can't forget about the network of people you are connecting with! These connections are invaluable and believe it or not some of these people are going to help you take your business to the next level.
Read   How to Use Your HELOC to Pay Off Your Home Loan Super Fast and Invest In Real Estate

Cons of Wholesaling:

  • You can’t control the market: Housing markets go in cycles just like the rest of the economy. In some markets you will find an excess inventory but this can change quickly. Making sure you know your market and what comparable sales are in your area is crucial. Like I talked about above, wholesaling is usually not what you want to be doing as your sole income because of this.
  • Inability to find a buyer: Having buyers is imperative to being a successful wholesaler. After all, no buyer means no deal. As you gain experience this list will grow but when you’re new to the game you want to make sure you are doing everything you can to find buyers. Think, going to local real estate investment association meetings. This will increase your odds of finding a buyer or being in the same room as someone who knows a buyer.
  • No guaranteed income: This is perhaps the biggest con of all. Because of the fact that you cannot control the market or guarantee you will be able to find a buyer you will not always have income coming in. This is why starting off in wholesaling on the side is a great idea. This allows you to build your book of buyers while not needing these deals for your income.

Wrapping It Up:

Wholesaling is when you put a property under contract and then sell it to a buyer who is usually looking to flip the house or buy and hold. Wholesaling is for you if you're a go getter who knows how to bargain. It requires you to seek out homes that many people wouldn't. Hence, where you get your profits.

The five steps to success as a wholesaler, regardless of the method you use, are:

  1. Find the property
  2. Negotiate price with seller
  3. Sign a purchase and sale agreement which includes an assignment contract
  4. Find a buyer
  5. Assign the contract to the buyer
Like many things, there are pros and cons when it comes to wholesaling. Wholesaling gives you a wealth of knowledge in the real estate industry for free. You don't need a certain credit score to do it and you don't need to have strong personal finances. Lastly, you get your money. Who doesn't want that, right? Something to always keep in mind,unless you have your own financial resources, it is essential that you have a call or exit strategy aligned before negotiating any possibility of a wholesale transaction.

The downsides to wholesaling are that you have no guaranteed income, you can't control the market, and you might not always be able to find a buyer. Therefore, if you're looking to get started in real estate wholesaling is a great option that you can do part time till you really feel confident. Then if you'd like to get started flipping or buying rental properties you'll already have contacts and best practices. Wholesaling is really only a con if you don't know what you're getting into. Reading this article is a great start to increasing your knowledge! Keep it up and, as always, give me a shout with how I can help!

What You Will Learn

  • What is wholesaling?
  • How do you do it?
  • Is wholesaling for you?
  • Why wholesaling works for everyone
  • Pros & Cons of Wholesaling
  • Wrapping It Up