Real estate wholesaling is one of the fastest-growing types of real estate investment. Unfortunately, few people really understand what wholesale real estate is or how it works. Fortunately, we’ve put together this step-by-step real estate wholesaling checklist to guide you through this exciting and potentially lucrative process.
Wholesaling is the process of securing contracts to purchase houses, then selling those contracts to a buyer. Wholesalers rarely complete the purchase of property themselves, but rather act as an intermediary between sellers and buyers.
A wholesaler will usually work to find potential motivated sellers, then negotiate with them to determine a selling price for their home. The wholesaler will then look for a buyer for the property. Depending on the properties that the wholesaler has access to, it may be possible to sell a package of multiple properties to a single buyer, or purchase a package of multiple properties from a seller and divide them between multiple buyers.
Wholesalers make money by facilitating these sales, not by actually buying the properties. Wholesaling is often confused with flipping houses, but the two investment strategies are actually quite different. Wholesaling does not require the investor to make any type of repairs to the property, only to facilitate the buying and selling of properties.
Virtually no money from the wholesale investor is put into these properties; the investor doesn’t even own the properties, but rather only has an equitable interest in a purchase contract for their wholesale deals. This allows wholesalers to enter the real estate market with relatively low capital.
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Due diligence is the process of checking out a property to determine what problems or issues it may present to a potential buyer. Unfortunately, one of the most common mistakes new real estate wholesalers make is assuming that if they don’t look for problems, they can legally transfer a property to a buyer and then claim ignorance if something goes wrong. This is rarely the case, however, and claiming willful ignorance of a property’s problems will make your company look unprofessional.
The truth is that a lot of the properties that wholesalers encounter have a homeowner who truly doesn't know a lot about the condition of the property. Properties that are being sold to wholesalers have been in disrepair for a while, or they may have been newly inherited by out-of-town owners who have no idea what problems their relatives were dealing with. In the case of foreclosures, it is entirely possible that no one knows what the true issues with the property are. While you can insist that they disclose everything they know, the responsibility is on the wholesaler to determine the property’s actual condition.
If the sellers don’t know a lot about the structural issues of their property, they usually know even less about its legal issues. When the due diligence process turns up information such as utility easements, restrictive covenants, or title liens, it usually comes as a surprise to both the seller and the wholesaler.
Not uncovering these problems may save a bit of money upfront, but the problems with the property will come out when it’s time to find a buyer. Most states require title company officers to perform property history searches in order to look for liens and easements, and just about every buyer will want to get an inspection done before signing a purchase agreement.
Simply trusting that an investment property “looks alright so it must be ok” is a recipe for disaster. These types of issues have the potential to sink a real estate deal. While some issues can be cleared up fairly quickly, others can become legal quagmires that can potentially take years to settle. Taking a few extra days or a few hundred dollars to run the proper checks is worth it to save the wholesaler thousands of dollars down the road.
One of the most common mistakes that first-time wholesalers make is assuming that they can work with any type of property. While there are experienced wholesalers who do this, it’s a good idea to start with the type of properties you’re most familiar with.
For new real estate wholesalers, the best market to start wholesaling is in their local backyard marketplace. Most real estate entrepreneurs choose to start with single-family properties because they are most familiar with them, but there are also investors who specialize in condos, distressed properties, commercial buildings, or raw land. New investors may choose to limit their deals to properties that cost less than a predetermined amount of money.
Each market will have its own nuances, which can take a new investor a while to learn. Sticking to a specific type of market will allow you to tailor your marketing materials, and build a buyer’s list of parties who are interested in the type of properties you’re selling. As the business grows, you’ll develop relationships with real estate lawyers and realtors who know to reach out to you when a particular type of property hits the market.
Before you begin to find properties to purchase, have a good idea of who you could sell them to. Real estate investors are constantly on the lookout for new properties, but you have to know who they are in order to be successful at wholesaling.
To start, form good relationships with local realtors, brokers, and other real estate professionals who can help you to meet the right people and market your properties. At first, you will heavily rely on these connections to develop a list of end buyers. Each of these people is working for you; expect to compensate them for their time.
The trickiest part of developing a cash buyer list is developing this list. Don’t just stop at real estate agents, who are often reluctant to give away the names of their best clients. Make connections with local business people who are considering adding real estate to their investment portfolio. Some of the best buyers are actually new real estate investors who are looking to expand.
One fantastic source of new home buyers is local landlords. Many of these smaller entrepreneurs have already had success with one or more rental properties, but they don’t have the time to go looking for bargains on new properties. By looking for properties that they can make money off of, it’s possible to find buyers who want to work with you.
Also, check out this quick video that talks about how you can find cash buyers for free!
Once you have an idea of who to sell to, it’s time to start looking for the properties that they want to buy. You’ll want to start with properties that have been on the market for a while. These properties can be in disrepair or be overpriced for the market they’re in. It’s your job as a wholesaler to determine what the actual value of the property is and which buyer you could assign the contract to.
The problem is that there are likely a lot of investors who are trying to convince the owners of these properties to sell for less than they thought they could get. While it is possible to find properties using this method, competition can be fierce, and many sellers are overwhelmed by the number of low-ball offers they get on these properties. In fact, some sellers will see the sudden interest in their property as “proof” that the property is actually worth more than what they’re being offered.
While you can choose to jump into the fray and hope your offer gets picked (and there are plenty of wholesalers who are very successful at this), it usually makes more sense to look for new sellers. Again, you’ll need to get creative. For example, several highly successful investors use their county’s property records search feature to get the contact information or phone number for homes that have been owned for many years. The owners of these houses may be considering a move, or their family members may be encouraging them to move. An offer from a wholesaler (that won’t involve them making repairs or dealing with a lot of paperwork) might just be the push they need to sell the property.
One place to think about that few investors explore is estate sales. Look at estate sales for properties that are about to come on the market. If you can make an offer before a family contacts a realtor, you’ll usually find highly motivated sellers who just want to be rid of a property.
Keep track of the potential sellers you’ve contacted, and follow up with them every month or so. Often, potential sellers will reconsider your offer after they discover on their own how much work they will need to put into a property to get top dollar in today’s real estate market. Make it easy for people to contact you; keep up a regular professional presence on social media, and ensure that your contact information (including a working phone number) is on every piece of direct mail you produce.
Eventually, you may also want to consider making offers on bundles of properties from investors who want to sell their portfolio in an area. These investors may have decided to leave a certain sector of the market (they may be selling all of their commercial properties, for example), or they may have just decided it’s time to cash out and retire to Hawaii. Often, these sellers come from the same list of buyers that you have developed over years. They know that by handing the properties over to you, you’ll get them a fair price for the entire portfolio and can sell with relatively no hassles.
Once you have a seller who has agreed to a purchase price for their property, it’s time to put the property under contract. Unless you have a lot of experience in this area, make the investment in a real estate attorney for this part. You’ll want a wholesale contract that protects you but is also fair to the seller and buyer.
Relying on internet forms can seem like a good way to save money upfront, but it can lead to much bigger problems down the road. Remember that few people will really understand the services you’re providing, and without a properly written contract, you run the risk of them backing out of the deal.
A good real estate contract will include contingencies in the event that either party wants to back out. There will also be contingencies for special events, such as property not passing an inspection or being damaged between the time the contract is signed and the house is actually sold. Be aware that this may require you and the seller to provide an escrow account for an earnest money deposit.
Once you have contracts on a few wholesale properties (or just one), it’s time to start looking for a new buyer. Ideally, you should already have a list of potential buyers to call.
Before going on, let’s take a moment to discuss another common mistake that many new investors make with their real estate business. It can be very tempting to start contacting potential buyers before you have completed a purchase contract on a property. Many new real estate wholesalers make the mistake of wanting to line up a buyer before they buy the contract.
Realize, however, that there is virtually nothing stopping another investor from picking up the property once you tip them off to it and avoid paying you an assignment fee. Too many new wholesalers have made this mistake and been cut out of the deal. Protect yourself by keeping potential purchases under wraps until you have them under contract.
Finding the right buyer will usually require some effort in marketing. It is rare that you have a buyer who will purchase anything that you put in front of him or her. As you market the properties, be careful with how you embellish them. Do not try to hide damage or known structural issues. Nearly every investor you work with will eventually determine that there is a problem with the property. When this happens, your professional reputation will be ruined, and it is very likely that the investor will take you to court.
Instead, focus on the positive aspects of a property. Don’t be afraid to point out comparable properties in the area that have sold for more than what you’re offering. You may also want to consider showcasing what current rental rates are for similar properties and even include a basic cash flow analysis to show how much money a potential investor could make.
Read Also: Real Estate Comps: The (ULTIMATE) Guide
Once you get a potential buyer to the point that they’re willing to make an offer, it’s time to assign the contract. Make sure that both you and the buyer have done proper due diligence, and consult with your attorney to get all of the paperwork correct.
Once the contract has been assigned, all that’s left to do is wait for the deal to close. During this time, be available to all parties in the deal in case they need more information. Don’t be surprised if some type of small issue comes up, even the best wholesaling due diligence won’t catch everything every time. While you wait, start looking for your next properties to wholesale!
Be ready for any property that comes along by having templates for these documents ready to go. Of course, go over every document with your lawyer before signing it.
Before you agree to take on a property, make sure that you have it thoroughly inspected. This protects you, the seller, and the wholesale buyer from any surprises that could come up later. Be sure to look for the following:
Proof of funds is almost always required by the seller of a property. Essentially, this provides proof to the seller that the wholesaler is capable of meeting their contractual obligations. Fortunately, a proof of funds letter can be based on your total assets and/or the credit line that you have available. Your hard money lender should be able to provide this letter to you and the seller.
Make sure that you have your proof of funds together before you put in offers on properties.
Wholesaling real estate can be a tricky business to learn, but once you have the basics down it truly does have the potential to make a lot of money. While many investors use wholesaling as a sideline, it can easily be built into a full-time business for the right entrepreneurs. Using a real estate wholesaling checklist helps ensure you don't miss anything when doing deals.
If you’re looking for a step-by-step process to help you start and grow your wholesaling business without spending a dollar in marketing, check out our brand-new free training and start scaling your real estate business today!
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