Wholesaling is one way to invest in real estate if you don’t have a lot of money and want to avoid the risks involved in house flipping. You can earn a solid return on a real estate investment without actually owning the property. Wholesaling involves specific strategies, knowledge of the market and optimum timing. Once you’ve mastered the art of real estate wholesaling, you can earn a quick return on a property.
What Does Wholesaling Involve?
A wholesaling deal involves three main players:
- Â Â Â Â Â Â Â Â The seller
- Â Â Â Â Â Â Â Â The wholesaler
- Â Â Â Â Â Â Â Â The buyer
Wholesaling is similar to the concept of flipping a home—buying property that needs work and selling it for a higher price—but the wholesaler doesn’t need to fix up the property or even purchase it. Real estate wholesaling involves a contract between the wholesaler and the seller. The wholesaler markets the property and transfers the contract to the buyer. The profit the wholesaler makes is the difference between the amount of money paid to the buyer and the amount the seller pays for it.
On the surface, real estate wholesaling seems to involve less risk than house flipping.The wholesaler doesn’t have to actually purchase the home and is not responsible for making repairs. The trick is to find a buyer before the contract runs out. To avoid being stuck without a buyer, many wholesalers insist on adding a contingency clause to the contract that allows the wholesaler to back out of the deal if a buyer is not found.
The Trick Behind Wholesaling
Real estate wholesaling may seem easier at first glance than house flipping and regular investments, but it can be trickier in the sense that you have to find better deals and higher quality property than you would if you can fully renovate the home and flip it. Wholesalers have to convince buyers to take the property as is, which can be a challenging proposition if the property’s potential is not obvious and if you are just getting to know the market.
Wholesaling is often a concept that is meant to attract novice investors, but in reality, it takes knowledge of the market and sales savvy to succeed in wholesaling. Researching the market and having some experience marketing and selling real estate is helpful before considering wholesaling. In addition, it helps if your prospective buyers have participated in similar deals in the past, and can look at a property and be able to see its true value and potential.
Questions to Ask
Researching the market is an essential first step for any wholesaler. You should ask the following questions before you find a property for your investment:
- Â Â Â Â Â Â Â Â What are investors buying in the neighborhood?
- Â Â Â Â Â Â Â Â How much will the fix up cost?
- Â Â Â Â Â Â Â Â What will investors be willing to pay for the property before renovating it?
You will want to talk to real estate agents about the deals they have done in the area in the last year as well as potential investors about the kinds of deals that they may be interested in.
Pounding the Pavement
It is helpful to look at listings, but for successful real estate wholesaling, it is important to go to the neighborhood you are thinking of buying in and have a look around. Listings, even those you see on the internet with vivid photographs, can’t give you a precise idea of the property, and every potential investment is worth an actual visit by car or foot.
Reaching out to Owners
Even if there isn’t yet a For Sale sign in the yard, you can get information about the owner and make an offer to buy the house. If the house is run-down, it is likely the owner may be willing to make a deal and find a seller. Contact the owner by a letter indicating that you are interested in finding a buyer for the house. Leave the letter in the mailbox or find other ways to contact the owner. Letters may seem old-fashioned, but it can seem less invasive than calling or contacting the owner through social media. You may have to try several times before you find someone who is willing to make a contract, so invest some time and capital in these marketing methods.
Partnering Up
If you are in between real estate wholesaling deals or are getting started, consider selling leads to a wholesaler in your area. Look through listings, do the footwork, knock on doors and send letters to owners and generate a few leads. You can then sell these leads to wholesalers and won’t have to deal with the contract or finding a buyer yourself. This may be a good way to get warmed up for your own wholesaling deal.
It is also helpful to have a real estate agent who can find listings few others have access to. It is a good idea to work with a beginning investor who won’t ask for too much money, but will provide listings of properties for real estate wholesaling.
Making an Offer                           Â
You will want to have everything you need to jump on a deal once you have found the right one. This means to have the funds available to put down on the investment as well as a POF or a proof of funds letter. However, don’t be too hasty to say “yes” but do research on the property, the market, the fix-up value and the likelihood of finding a buyer.
Get Ready to Invest
Wholesaling may seem like a “hands off” way of investing in real estate, but it involves its own rules and strategies. You may need an even more in-depth knowledge of the market than a house flipper and may need to do a lot of footwork and mailing before you land your first deal. However, not having to fix up the property or take large financial risks is an advantage of real estate wholesaling that attracts many investors. If you have special knowledge of a specific real estate market, start looking for properties that are ideal for a wholesale deal.