Wholesaling Real Estate - The Basic Idea
By Steve Gillman - 2007
Why should you consider wholesaling real estate? To start
with, it can be a great way to get into real estate investing
without much capital. Wholesaling is also low-risk when done
properly. However, you can't necessarily do it anywhere you want.
This works best when there are investors ready to buy those wholesale
properties you find, so it works best in larger towns and cities.
Let's look at what it means to wholesale real estate. It is
essentially just buying cheap to sell for a profit to another
investor. It is the other investor who will then retail the property.
Of course, if you actually buy and close on a house or other
real estate, you have transactions costs. Then there are more
costs when you sell to the next investor, and even more transaction
costs when he sells the property. These costs would mean that
you have to buy really cheap to leave room for a profit for you
and the next investor.
Let's say you have a seller who really wants to sell fast,
with a house worth $190,000. You close, hold the property for
some time, and sell, paying as much as $8,000 in various expenses.
Suppose the other investor uses a real estate broker to sell,
so his costs total $12,000. In this case, for you to make $5,000,
and the other investor to make $10,000, you would have to get
the house for $155,000 (subtract all the costs and profit from
the eventually sales price of $190,000).
Let's face it: you won't find many deals like that. The owner
can probably sell it fast just by dropping the price to $175,000,
so why sell to you for $155,000? But then, this isn't how real
estate wholesaling is typically accomplished.
To begin with, you don't want to close on a property. You
sell the contract to the next investor instead, to avoid all
the costs associated with your buying and selling it. Also, wholesaling
real estate works best with fixer-upper homes. Owners can't easily
sell these without doing the necessary repairs, so they are often
willing to sell cheap "as is" to get rid of their headache.
Keeping these two things in mind, lets look at a more realistic
example of wholesaling.
An Example of Wholesaling Real Estate
First you look at the market, do some research and decide
that you may be able to wholesale properties in your town. At
the local real estate investor's club you get to know some investors.
You get the names and phone numbers of at least several who can
make a decision quickly and want to buy fixer-upper properties.
Make a note as to the type of properties each is interested in
and how much profit they each expect to make on a deal.
With this preparation completed, you go out to look at houses.
You find a motivated seller who is asking $190,000 for a dirty
house that needs work. Comparing it to others in the area, you
determine it will be worth about $235,000 when it is cleaned
and ready. The house needs about $15,000 worth of work, and other
costs, including a low-cost real estate broker, will run about
$15,000, based on a holding time of about three months before
it is sold and closed on.
You decide you want $5,000 for your time. According to your
notes, your most likely investor wants around $20,000 profit
for a project. You subtract these and the costs, to arrive at
$180,000 ($235,000 - $15,000 - $15,000 - $5,000 - $20,000 = $180,000).
That is the most you can offer for the house, so you start with
an offer of $173,000. Eventually the seller agrees to $177,000.
In the offer, after your name as the buyer, you put the words
"or assigns" or something similar (ask a real estate
lawyer or agent for the language that is usually used). It gives
you the right to assign the contract to another investor - the
one who will take your place and actually close the deal. Tell
the seller that this is so you can bring in a partner if necessary,
to be sure that the deal closes. In other words, you want to
make this a good point rather than something that scares the
Have a financing contingency with specific terms, like "This
offer subject to buyer obtaining a fixed-rate 30-year mortgage
loan at 7.5% annual interest or less." You might also have
a clause that requires the approval of your "partner"
or some other clause that lets you cancel the contract if necessary.
You can also include a clause that makes your deposit "liquidated
damages," meaning this is all the buyer gets if you back
out for any reason (ask an attorney for the wording). Proper
clauses mean that all you risk is your time, and perhaps a $500
good faith deposit.
You call an investor who will take your place, complete the
repairs and retail the house. He agrees to pay $7,000 for you
to assign the contract to him, but will only pay you when the
deal closes, which sounds fair to you. Eventually, he sells the
renovated property for $240,000, for a profit of $25,000. This
is good news. Remember that the more he makes, the more likely
it is that you can wholesale real estate to him again. You make
a $7,000 profit, which requires very little investment or risk.
When wholesaling real estate, speed matters. Your offer probably
allows for only a few days or a week to find an investor. Also,
the investor needs a property that sells fast to avoid holding
costs and market risk. This is why you need a list of investors
before you start looking for houses, and why you should focus
on the houses that are selling fastest - most likely those that
are near the median price where you are.
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