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If you’re familiar with the word “wholesale,” then you’re halfway to understanding what real estate wholesaling is. A real estate wholesaler is someone who looks to buy a home directly from the owner then turns around and sells it to an investor for a slightly higher cost, pocketing the difference as the wholesale fee.
For example, let’s say Jenny is approached by a wholesaler who offers to buy her home for $55,000. She is looking to sell the property quickly and seamlessly, so she agrees. The wholesaler and Jenny sign a contract agreeing to the price and terms. The wholesaler then turns to a found investor who flips houses. The investor agrees that it’s a profitable property and proceed to buy it for $60,000.
Jenny sold her home quickly and pocketed $55,000, thei nvestor bought a profitable fix and flip property for $60,000, and the wholesaler pocketed the $5,000 difference as the wholesale fee.
In a nutshell, this is what real estate wholesaling looks like in action (without the wholesale sausage making in the background).
In short, think of the wholesaler as the middleman between seller and investor. Real estate wholesaling a very short-term investing strategy, often with distressed or on-the-verge-of-foreclosure homes that owners are looking to sell quickly and effortlessly.
What properties are ideal for real estate wholesalers?How Do I find them?
Since part of the appeal of real estate wholesaling is the low capital requirements, wholesalers often look to properties that are already distressed, giving homeowners an incentive to sell their homes below market value.
To be a successful wholesaler, you need to network, network, and network some more. The more industry contacts you have, the more meetings and events you attend, the more likely you are to not only discover properties, but have access to buyers, too.
Organized meetings between local real estate professionals and investors are opportune moments for new wholesalers looking to make connections with agents, contractors, and appraisers. These meetings often result in e-blasts or newsletters going out to mailing lists, highlighting available properties for sale.
Common methods for connecting with sellers are putting up bandit signs, mailing flyers, and working with real estate agents who specialize in investment properties. Searching through probate court documents is also an effective way to scope out potential properties. By accessing the documents, you can use more targeted marketing efforts to send flyers or letters to homeowners proposing to buy their property.
It’s also important that as a wholesaler, you have a title company, contractor, and appraiser on your team to help finalize the sale and make it a more seamless process. Getting an appraisal on the property ensures that you are paying the right price for it and will have room to resell and make a profit. The title company runs a search on the property to confirm that it’s a legitimate piece of real estate, and the contractor can look through the property and draw up an estimate of repairs—a critical detail for when the time comes to find a buyer.
Just as important—if not more so—is a wholesaler’s math capabilities, and the longer you’ve been a wholesaler with a successful track record, the easier the math becomes. Knowing what to offer a seller really begins with the ending, meaning, you’ll have to work backwards to come up with an appropriate number that benefits the seller, you as the wholesaler, and the investor who will flip the property.
Key numbers that will help you decide the best Maximum Allowable Offer (MAO)—or the price you end up paying for the property—include:
· The flipper’s profit (have you found a flipper, and if so, how much do they want to make off the property?)
· After repair value, or ARV (the final price the house flipper is going to sell the property for)
· Repair costs (how much will it cost to fix up the property?)
· Fixed costs (how much is the deal going to cost the flipper?)
· The wholesale profit (how much do you, the wholesaler, want to make?)
As is the case with most things, experience and success make it easier to put a price to these points, resulting in a quicker and easier process with each successful property purchase you make.
What are the risks associated with becoming a real estate wholesaler?
While the practice in and of itself is legal, there has been controversy surrounding wholesaling on the basis that it’s essentially brokering real estate without the license to do so. However, laws around brokering vary widely from state to state, leaving room for interpretation.
As the middleman, wholesalers aren’t looking to actually settle on the property, they merely assign the contract to another investor. Ultimately, a newcomer to the world of real estate might find wholesaling an appealing route since it requires minimal capital to make a profit.
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