Are you a good negotiator and want to invest in real estate? Well, the good news is that you don’t need to have a huge capital to get started. In this guide, we’ve got you covered with basics to get started in wholesale real estate. Wholesaling real estate is one of the quickest and most rewarding forms of investment. Here, you’ll find all you need to know about why most real estate investors opt for wholesaling. Read on to learn more.
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What is Wholesaling Real Estate and its Process?
Wholesaling real estate refers to the process whereby one person acts as a middleman between the seller and the investor. Usually, the wholesaler signs a contract with the seller at a specified amount. Then, the wholesaler passes on the same contract to an investor at a slightly higher value. The middleman earns the difference in pricing as a profit.
Can you Wholesale with No Money?
If you’re a beginner and want to invest in real estate, then wholesaling is the best entry strategy. As a wholesaler, you aren’t expected to repair the houses you identify for sale. Instead, the investor who buys from you incurs the cost of renovations for resale.
The work of a wholesaler is to identify a property for sale under the market value and sign a contract with the seller. Finally, match the property with an interested buyer. Here is a breakdown of how a wholesaler earns a profit.
For example, if a homeowner wants to sell a property at an agreed amount of $ 320,000, the wholesaler then finds a buyer, often an investor who decides to buy at $ 350,000. The wholesaler earns $ 30,000 from the transaction without having to spend any money on the deal.
How to Legally Wholesale Real Estate
Most people tend to think that wholesale real estate is illegal. On the contrary, wholesaling is legal in most states. However, you have to ensure that you conform to the rules and regulations that govern real estate in your area. Either way, here are some of the guidelines that you should follow as a wholesaler.
Always Disclose your Position
You aren’t required to be a licensed realtor to become a wholesaler. However, if you are licensed, you should reveal to the original seller of the house and to the investor. Transparency is essential to succeed as a wholesaler.
Always act as the Principal Buyer or Seller
The law requires that the wholesaler positions as the primary buyer when dealing with the homeowner. The same is also expected from the investor when selling to the final homeowner.
Purchase and Sale Agreements
Wholesale real estate is valid, just like any other investment strategy. The law requires that investors draft valid sale and purchase contracts to be signed by relevant parties. A good example would be the use of the California Association of Realtors form called the Residential Purchase Agreement, also known as the RPA.
Who buys Wholesale Properties?
Ideally, to succeed in wholesaling real estate, you have to know potential investors, their needs, budget, and areas of interest. That way, it becomes easy to find properties that match your buyers needs. Otherwise, it can be a daunting task to have many properties without anyone to buy them. But then, how do you know or identify potential buyers? Let’s take a look on how to source your investors.
Some of the people who buy properties that are sold at a lower value include other real estate investors, buy and hold owners, rehabbers, fix and flip investors, or a final consumer with enough cash to conduct repairs. However, as a wholesaler, its advisable to avoid dealing with the final type of buyer because it could incur some transactional costs and commissions.
What are the Best Properties for Real Estate Wholesaling?
Probably you are now wondering where you can get the properties to wholesale. Well, worry no more because here is a list of the best ways to acquire such properties.
- Bank/government auctions
- Abandoned homes
- MLS Listings
- Distressed Homes
How to Find Wholesale Properties
It’s easy to find wholesale properties through many available online networks. You can utilize many of the free online access to properties currently listed for sale. You can pinpoint specific market areas of interest and find homes that are below market value. Accessing the MLS will provide more accurate and up to date information on properties for sale.
In both of these options you can narrow your searches to keywords that can help filter your search to include only property descriptions that include a specific term. For example you may use the following terms to find potential wholesale properties:
Alternatively, there are other methods of finding homes that can be potential wholesale properties. You can consider reaching out to other real estate agents about the types of properties you are looking for. This in a sense puts other real estate professionals to work on finding those desired properties.
How much should you Offer for a Property?
You need to conduct due diligence after identifying a property so that you come up with a price that favors you. Ideally, you should know the cost of such properties in the market. Then, subtract the costs of repairs and also determine the price to quote to a potential investor. Otherwise, you may end up underquoting or over-quoting, which may work to your disadvantage.
There is no set figure that you can quote because the price is determined by factors such as location, condition of the property, and how much an investor is willing to pay. That said, let’s take a look at the next question that outlines a calculation that many successful wholesalers use when pricing their offers.
What is the ARV and How to Calculate it?
ARV stands for after repair value and implies the estimated property value after all repairs and other renovations have been completed. A wholesaler should be in a position to calculate the ARV before determining a price to buy a property from the original seller.
There is always a thin line between making a profit or a loss for the wholesaler. This is because you have to strike a deal that earns you profit and also favors the investor. The formula for calculating ARV is simple. Simply take the property’s current value and add the value of the renovations being made.
Now that you have the ARV, you have a good idea what might the property sell for when the property sells. The next step that most wholesalers use is the 70 percent rule. The 70 percent rule calculation is taking the ARV and multiplying it by 70% then minus the cost of repairs and renovations.
To see this in action, let’s say you found a home that is under market value. You determine the ARV of the home would be $500,000 with about $25,000 in minor repairs needed. You then calculate the following:
After finding the target offer price you can begin the process of putting your offer together. The only thing left to do as a wholesaler is add your fee to the contracted price and reach out to your potential buyers.
Truth be told, if you’re a beginner, you need to put in a lot of work to understand the market values within your area. Alternatively, you could liaise with a realtor to help you compare prices of different homes. The MLS website is also beneficial in determining costs. It enables you to compare such properties and their worth after renovations.
Risks of Wholesaling
If you are an experienced wholesaler, you know that deals can go south anytime. For instance, a potential buyer can back out at the last minute.
Failure could also be in the form of a wholesaler failing to get a buyer within the stipulated time. If a contract expires before a wholesaler finds a buyer, it means missed income.
Fluctuation of Prices
Property prices could rise and fall drastically. This implies that a fall could lead to losses while a rise could mean foregone profits.
Inconsistency of Income
As a wholesaler, you really cannot tell when you’ll earn your next profit. You, therefore, need to have a backup plan in the event of an emergency.
Advantages of Wholesaling Real Estate
No Capital Required
Anyone can invest in wholesaling even with a bad credit score or low income. In wholesaling, you don’t buy a property but instead acquire the rights to the ownership of the property via a purchase contract then transfer it to an investor.
Money in a Short Period
Wholesaling real estate is one of the methods of investment where you can make a lot of money within a short time.
Good Learning Platform
If you’re a beginner in real estate, wholesaling opens up channels for you to learn the industry. You also get to create networks with other realtors and investors.
In summary, wholesaling real estate is the best way to invest if you don’t have a lot of capital. The strategy allows you to make substantial income within a short time. All you need to do is identify a seller and act as a middleman between them and an investor. Wholesale real estate is legal, but each state has its own laws that govern wholesaling.
Let us not forget that you can even hire a transaction coordinator to help with all the needed documentation too!