Wholesaling Real Estate 101: What Is Wholesaling Real Estate & How To Do it
What if I told you there was a way to profit from real estate, without using any of your own credit, any of your own cash and the best part, you didn't have to invest a single second into fixing up the property? What if I also told you that you could flip these opportunities quickly, typically within 14 days or less, and make thousands of dollars in the process? This, is wholesaling real estate. Intrigued? Let's dive in...
Quick Disclaimer: You should NOT attempt wholesale real estate after reading a blog post or watching a video if you have zero real estate experience. I would highly encourage you to invest in a course and hire a coach or mentor first. Even though wholesaling can be a great way to make money from real estate with little to no risk, the Sellers' situations can be delicate, and you must know what you are doing. The information provided in this post is strictly for informational purposes and should not be viewed as legal advice.
What Is Wholesaling Real Estate?
Wholesaling Real Estate in its simplest form is finding a property at a discount, with the intent of flipping it for a profit. This is typically done within a short period of time, usually 14 days or less. The owners of these properties are typically distressed because they are facing a multitude of urgent situations or financial pressures that cause them to need to sell quickly.
I have found that most of the reasons for selling can be summed up with the 4 Ds:
1.) Death - the property owner passing away and the family inheriting the property.
2.) Disease - the owner of the property getting sick and unable to keep up with the house.
3.) Divorce - the owners decide to split and sell quickly
4.) Debt - the owner cannot afford to live in the property anymore due to job loss, repairs, or other financial pressures
A seller might want to offload their property at a discount for 1 or a combination of the reasons above, but overall these are the core reasons behind why people sell.
How Wholesaling Real Estate Works
The most common goal of a wholesaler is to get control of a property using a standard purchase agreement and then assign their position in that contract to an end buyer for a fee. The Wholesaler's control comes from having "equitable interest" in the property by way of an agreed-up earnest money deposit, which makes the contract binding. The earnest money deposit is then held in escrow by a title company or real estate attorney once the purchase agreement is signed between the seller and wholesaler.
The wholesaler makes his profit from being a "middleman" using a contract called an assignment. Wholesalers typically do not want to close on properties they place under contract and would rather generate an income "passing the opportunity" to an end buyer they bring to the table. When a wholesaler places property under contract with the Seller they typically already have a buyer lined up for that property. Since the buyers are usually paying cash these transactions can close much faster than a standard sale, which can be a big benefit to the Seller.
Here are the 2 contracts you need in order to wholesale real estate:
1. ) AS-IS Purchase Agreement
2.) Assignment of Contract
Important to note that when wholesaling you are not actually buying a property or selling a property. Instead, you are contracting an opportunity and selling your position in the contract to an end buyer for a fee.
Here's how it works:
John Seller needs to sell his house quickly so one day he comes across Steve Wholesaler. Steve Wholesaler and John Seller agree on a purchase price of $150,000 for his property, so Steve Wholesaler has John Seller sign a purchase contract to finalize the agreement.
Steve Wholesaler sends the paperwork to a title company or real estate attorney along with an earnest money deposit.
Steve Wholesaler, then presents the opportunity to a cash buyer that he knows. Steves's buyer likes the property and decides to buy it for $160,000.
Steve Wholesaler then assigns his purchase contract with John Seller to a buyer and on the day of closing, Steve wholesaler's buyer brings the funds to close on the property. Once the property closes, John Seller gets the amount agreed upon with Steve Wholesaler, the buyer gets the property and Steve Wholesaler walks away with a check for $10,000...everyone wins.
The $10,000 was the difference between the property sales price on the purchase contract and the cash buyers' purchase price on the assignment contract.
Where to Find Buyers For Wholesale Real Estate
Finding a buyer is critical for this whole process to work. That's why I recommend finding your buyer first. You can find buyers on Social media fairly easily by looking in online groups, local real estate investor association meet-ups (REIA's), online forums and by networking with other wholesalers and Realtors. This is a relationship business, so a big key to your success will be networking.
How To Calculate Wholesale Real Estate Price
The formula most wholesalers use to calculate the "buy" price with the Seller is usually ARV X 75% - Property Repairs - Assignment Fee.
ARV stands for "After Repair Value" which is the estimated value of the property after the property is fully renovated. You can find the after-repaired value of a home by looking at sold listings for similar properties to yours on sites like Zillow or, if you are a Realtor or know a Realtor, the Multiple Listing Service or MLS.
You will want to get 3 sold comparable listings that are similar in sq footage and close to your subject property, but no more than 1 mile. The closer to your property the better. Next, take the average sales price and that becomes your ARV.
Not contracting experience? You can check out average repair costs for different websites like homewyse.com. On this website always use the number at the bottom end of the range for "investor rates" on repairs.
So, if you have an ARV of $350,000 and you have established the property needs $20,000 in repairs we can now put this formula to work.
($350,000 X 75%) - $20,000 = $242,500
The Sales Price
$242,500 now becomes our selling price to our end buyer. However much we negotiate beneath that price with the seller now becomes our Assignment Fee.
So, if the Seller agrees to $230,0000 and our buyer agrees to $242,500, then our Assignment Fee would be the difference between the two numbers, or $12,500.
Now, remember in the beginning we talked about putting down an earnest money deposit with the seller. The same will be true with your buyer, only this time the Buyer's EMD is non-refundable, so if the buyer backs out of the transaction for any reason, you're protected and their deposit becomes yours.
While wholesaling does involve some risk, it can be an incredibly lucrative opportunity and I would recommend getting started right away. In the current market, opportunity is all around, as there are more buyers looking for a property than there are homes available for sale. That being said, Wholesalers fill a vital need as a provider of off-market opportunities for investors looking to flip properties or build a portfolio of rentals.
To Your Success,
- Chris Logan
P.S. By the way, if you would like to take this strategy to the next level, then you'll want to join me as I host a FREE online web class called Instant Deal Secrets. You can register here => FREE Webclass
P.S.S Do you know someone who needs to read this post? Be a go-giver! Click the share button below now to share this with a friend.