The whole idea of wholesaling real estate can be hard for first-timers to get their heads around. It's a process that's unlike any other kind of wholesaling deal. When you wholesale candy or sweaters or books, you’re just aggregating volumes of goods. When you wholesale real estate, you’re doing a LOT of paperwork, wearing a lot of hats, and learning on the job.
Wholesaling houses involves a savvy investor who wants to make money from properties without actually buying them.
How does that work? Essentially, the wholesaler will make a deal with a seller, often for a discount. He or she will then contact buyers and find a buyer who is willing to offer a larger amount of money for the property than the amount that is contracted with the seller. The wholesaler pockets the difference when the deal is done. Simple, right? Wrong!
Real estate wholesaling isn’t for everybody. There are a lot of moving parts. Being a successful real estate wholesaler takes tenacity, organization, determination, and drive. It’s a process where many things have to come together to get the right result.
Making Wholesale Deals Work: What You Need
In order to successfully wholesale real estate, it's necessary to have a few key factors in place:
- The first one is a buyer network – you generally can't wholesale real estate unless you have an active list of buyers already in hand. That's because the time frame for finding a buyer is short, and if you don't find a buyer, you won't have a deal. The better a real estate wholesaler sets up a buyer list, the better results he or she will usually have.
- Another key aspect of real estate wholesaling is to be able to find distressed properties or properties at a discount. Some experts typically talk about real estate wholesaling as only applied to distressed properties. That's because you need that wiggle room between the low selling price and the higher buying price in order to make money wholesaling real estate. Just “churning” deals with low profit margin is a great way to get overworked, stressed out, and discouraged.
- A third necessity is a title company that will work with you and your wholesaling practice. The legal vehicle for actually making wholesale deals is something called a wholesaler contingency or a title clause.
Setting up a title the right way gives the real estate wholesaler the ability to walk away from the deal if a buyer is not found.
In order to explain why the wholesale contingency is necessary, let's talk about how the deal is essentially structured.
The Guts of a Real Estate Wholesaling Deal
First, the wholesaler finds the discount property and makes a deal with the seller. Again, that deal will include the contingency that if a buyer is not found, the deal does not get done.
The wholesaler then has time to contact the seller and find someone to invest in the property and pay the seller.
Typically, the title company handles that transaction, and the wholesaler never has to put money into the deal. However, a wholesaler will be responsible for earnest money up front. Earnest money is in some small percentage of a property value that secures a deal. While you may hear about real estate wholesalers trying to “wholesale with no money down,” putting in earnest money typically adds a range of possibilities to the wholesaler’s portfolio – and that’s important!
Your Wholesaler Resources
As a real estate wholesaler, your biggest resources are time and money.
The money is used for earnest money, networking tools, software, and other expenses. However, the time that goes into real estate wholesaling is generally the biggest cost in terms of what it takes to operate this kind of investment strategy.
That's because it can be very difficult to find the discount properties in question. Real estate is a competitive enterprise. Everyone wants the lowest price, and every seller wants the highest price possible. So deals where you can make $10,000 or $20,000 wholesaling are somewhat few and far between.
Add this to the general frustration of trying to transition into a real estate strategy, and you can find real estate wholesaling to be pretty difficult. That's especially true if you're using a conventional agent, because it puts one more communicating party into the mix and can potentially slow down deals.
Privy is a cutting-edge real estate platform that can help real estate wholesalers to locate the deals they need, cut down on their time investment, and make their communications more efficient. This can do to big things for their strategy – it will maximize return on investment, but it will also allow them to jump on deals earlier, and should have a significant effect on their success rate.
From the moment a person decides to sell any property, the clock is ticking. And as real estate is competitive in terms of property prices, it's also competitive in that the early bird gets the worm.
In addition to competitive pressure, many real estate wholesalers tend to get burned out with the intense process requirements of finding deals, making deals and documenting their business activity to achieve tax and bookkeeping compliance.
Next-generation tools like Privy can release real estate beginners from those burdens and allow a wholesaler to become more competitive in his or her local markets.
If you're interested in taking the next step to find an REI tool that helps you find better properties, faster--then this free guide is for you: