Updated: Mar 5, 2021
This blog is written by Jen Josey, Real Estate Investor, and REIGN Coach. She is not a professional writer and writes as she talks so put your red pen away. Jen is extremely opinionated but reserves the right to change her opinion at any time because, well, that's the way she rolls. She may also use colorful language so don't be offended. Jen does not claim to be an expert, she is just sharing her personal thoughts and adding a perspective on investor topics that may benefit her readers. Jen also finds it strange to write in the third person. Enjoy!
What in the World is Wholesaling, Anyway?
In the truest definition, wholesaling is the sale of goods in bulk to anyone other than a standard consumer. Think of your Costco or BJs. You buy items in bulk at a discounted rate to save on the cost if you were to purchase items individually. Who doesn't need 5000 paper plates? You never know when you may have an unlimited number of guests coming over for a BBQ...
In real estate, wholesaling takes on a different meaning. Basically, it's a short-term strategy where an investor gets a property under contract, typically below market value, and then sells that contract to another investor for a profit. This can be done as an assignment of the contract or through a double closing.
Let Me Break it Down for You...
Paul is just starting in real estate, has horrible credit, and has not established relationships with any lenders. What he does have is time. Paul drives around neighborhoods and locates distressed properties and even some that are possibly vacant. He looks up the owners online and sends them a letter letting them know that he's looking to purchase homes in that neighborhood. A few homeowners call him and one, Charles, agrees to meet with him on-site to discuss selling his home. Paul sees that the most recent renter was quite destructive and offers Charles $95,000. Charles is relieved to not have to deal with the repairs and agrees that is a fair offer. The property is now under contract, well below market value.
Paul then reaches out to his network of real estate investors and lets them know he has a property under contract and would like to wholesale it for $100,000. Beth, an established investor with great credit and has a team of lenders, is lacking what Paul has plenty of...time. Beth is quite familiar with the neighborhood this house is located and jumps on the deal knowing the potential for a large profit once renovated. Paul assigns the contract to Beth and they close on the property three weeks later. Charles, the seller, gets his $95,000, Paul keeps the difference of $5,000, and Beth, the buyer, begins her new rehab. All parties are happy!
On occasion, we have too many leads coming in so if the numbers work, we will wholesale a property. Other times, the property may be too far away for our contractors so we will find a flipper in that area and pass the deal on to them. If a seller is reaching out to us because they need to sell a distressed property, by wholesaling it, we can still help that homeowner out of a difficult situation while making a small profit.
For people just starting, wholesaling is a great way to get experience negotiating with sellers. It also helps you to build relationships with other real estate investors. A common misconception is that it doesn't cost a lot to be a wholesaler. You will need to pay for marketing to find the off-market deals unless you are door knocking or driving for dollars and even that costs money.
Lastly, it's a great way to make some quick cash without the headache of doing the renovation. I have known some investors that refuse to work with wholesalers because they feel the wholesaler is taking too much of the profit margin. I totally disagree! If you are a wholesaler and can get a property under contract well below market value, you absolutely deserve to sell that contract at whatever rate you choose. If you sell that contract with enough meat on the bones for the investor and can profit $20k, $30k, or even $50k, well then bravo to you!!
How to Kick Ass at Wholesaling
The best wholesalers I know do a LOT of the due diligence upfront. They do a thorough walk-thru of the property and take a ton of photos, warts and all. Others go a step further and pay a professional home inspector to do a report that is passed on to the prospective buyer of the contract. They are knowledgeable of the area and research the comps so they know what a rehabbed project will sell for in the end. They keep that number in mind for when they decide how much to sell that contract leaving a nice profit margin.
Great wholesalers list repairs needed and provide ACCURATE repair costs. I can't tell you how many times a wholesaler has presented me with an assignable contract where they state the project needs a new roof, new HVAC, new windows and should cost $5,000. On what planet??
If you want to build your referral base, you must take care of the sellers. If it's a homeowner that has fallen on tough times, you may want to help them with a deposit for a new place. If the home is occupied by a tenant who is being forced to leave because the landlord is over it, offer to help pay for the move. This will make the tenants think twice about trashing the place before they leave. Whatever the situation is, by providing some financial assistance, they will share with everyone they know how great you are to work with. You can even offer them a referral fee for each prospective seller they bring you.
Working with Wholesalers
Finding wholesalers is pretty easy. There are meetup groups all over the place where wholesalers can get up in front of a room of investors and present their deals. Many investors attend these events, listen to the deals, and if none work, they simply leave. I learned early on that once the room clears out a bit, I approach the most active wholesalers and tell them specifically what I'd like to buy. For example, I love a condo or townhome built in the 80s or 90s that has an ARV of around $200k. Many times, wholesalers will pass up the little projects, thinking no one will buy the contract. By sharing my criteria with them, they now know they will have a buyer immediately.
Facebook has hundreds of wholesaling groups where you can shop for projects from the comfort of your home. Many times, you can ask to be added to their email list and then the leads start to flood your inbox. Another way to find wholesalers is to call the bandit signs you see at busy intersections. Anyone that posts a, "We Buy Ugly Houses" sign is sure to get some properties they are willing to pass on to another investor.
In conclusion, working with wholesalers can be quite beneficial when you find good ones. It shouldn't matter how much they are making when the numbers work for you. One of the biggest battles as an investor is finding quality leads. When you have experienced wholesalers on your team, those leads are handed to you, saving you time and money.
Now go out there are hug a wholesaler today...
If you would like to listen to some blogs narrated by Jen herself, search for "Real Estate Investor Growth Network" anywhere you listen to podcasts.
Now go out there and make it a great day!