The world witnessed many challenges in 2020. Igniting fear and uncertainty, COVID-19 affected spending behavior among consumers across the globe. Average annual expenditures saw a 2.7 percent decrease from 2019 as housing expenditures increased by 3.5 percent. While these changes signaled danger to many, others capitalized on challenges.
While stay-at-home orders ruled our lives, every genre of reality television emerged. These shows helped us escape the real world and virtually jump into the real estate business.
Everything from finding dream vacation homes to rehabbing distressed properties, a reality television niche appeared for everyone. While some watched TV screens, others launched successful wholesaling real estate careers.
If you’re passionate about learning how you too can hop on this exciting train of opportunity, stick with us as we discover how to start wholesaling real estate for beginners.
In many ways, wholesaling real estate is like flipping houses. Both acquire property for the sole purpose of earning a profit. Still, to understand more about wholesaling real estate for beginners, there are a few nuances to consider.
Instead of buying and holding property to turn into a rental property or sell as an investment property, wholesaling real estate is a short-term strategy that allows one to accumulate capital.
Serving as an intermediary, or middleman, motivated sellers allow wholesalers the right to conduct a sales transaction with end buyers. Before closing, the wholesaler assigns the purchase contract between motivated sellers and end buyers for the rights to purchase the property.
Often, no money exchanges hands between wholesaler and seller as the wholesaler does not actually purchase the property. The professional effort of connecting seller with end buyer affords the wholesaler a portion of the sale proceeds as their profit, also known as the assignment fee.
For those who understand people, are passionate about marketing, and possess a bit of patience, wholesaling houses is a brilliant way to enter the world of real estate without the substantial risk associated with a traditional real estate investing strategy.
Unlike the myriad of reality television shows glamourizing flippers, let’s grasp the difference as we consider wholesaling real estate for beginners.
The time frame associated with wholesaling real estate is short-term compared to flipping.
In a wholesale real estate transaction, your role is to find a great deal, typically on a distressed property. Determine the best offer that will meet the needs of the seller while acting as a middleman in connecting the seller with an ideal end buyer.
Because the wholesaler is not holding the property for repairs or renovations, the level of risk associated with wholesaling is greatly reduced. Also, wholesalers don’t have the costs traditionally associated with a flip (i.e.., mortgage, property taxes, insurance, repairs, etc.)
To understand more about wholesaling real estate for beginners, let’s look at an example.
Beginner wholesaler Tyler found a property that he estimates the Actual Repair Value (ARV) to be $585,000.
To make a decent profit and allow his end buyer to do the same, he needs to purchase the property at a substantially reduced price, typically below market value.
This means looking for distressed properties, motivated sellers, or MLS listings that have hidden value.
When property owners find themselves in difficult financial situations, like foreclosure, they often don’t see a way to resolve their challenges. Often, they continue to stay in the home or hold onto the vacant lot while their situation continues to decline.
In these situations, homeowners are more likely to be open to wholesalers and cash investors who can help them find a solution to their problem.
Tyler approached these homeowners with an offer of $400,000 and they agreed to put the house under contract.
Jumping into action, Tyler simultaneously scoured his network of new real estate investors in order to assign the purchase contract to someone willing to absorb the expected budget of $80,000 needed to rehab this massive fixer-upper.
Upon solidifying the real estate contract, the end buyer pays $400,000 to the homeowner at closing. Without ever owning the house, Tyler received his $6,500 assignment fee and the end buyer was free to fix and flip to earn their expected profit of $40,000.
In Tyler’s example of wholesaling real estate for beginners, you find a formula for success to thrust you into a thriving real estate business.
As a beginner investor doing your due diligence on the industry, you'll want to understand the benefits and pitfalls of wholesaling real estate. With all the real estate investment strategies available today, you want to make sure you're choosing the right place to start your career.
Consider some of the advantages and disadvantages of wholesaling below:
As you begin to understand wholesaling real estate, you’ll learn that anyone can win with the right strategy. Unlike other business models within real estate, starting your wholesaling business is very straightforward and does not require much overhead like an office, employees, or lots of wholesaling software.
By starting in wholesaling, you'll learn many of the necessary real estate skills needed to be successful with other strategies, such as networking, deal analysis, negotiation, real estate contracts, and more.
The key to success as a beginner wholesaler is having a step-by-step process to follow, an experienced mentor to shadow, and a community of like-minded professionals to hold you accountable.
One of the most appealing aspects of wholesaling real estate for beginners is the fact that you can wholesale real estate without any of your own money! While this concept absolutely true and indeed can skyrocket your investment returns, it does not come without challenges.
Compared with a fix and flip, or buy and hold strategy, a wholesaler may actually profit before a deal is closed! Typically wholesalers are paid at closing when the end buyer funds the deal. However, we teach our students methods on how to get paid regardless of the deal closing.
Wholesaling is hands down the fastest way to make money in real estate.
“Risk comes from not knowing what you're doing.” - Warren Buffet, Billionaire Investor
Wholesaling is considered one of the most risk-averse monetization strategies available in real estate. Since you, as a wholesaler, do not fund the purchase of the real estate, you won't have any downside exposure to the deal.
Unlike renting out properties or buying and selling, wholesaling does not require you to invest in the properties that you are working on.
Within the current seller's market we are in, it’s more challenging to find properties that are great bargains. This simply means there's more demand than supply, causing record-breaking year-over-year price appreciation in the last 12-24 months.
With the massive amounts of cheap debt and capital floating around since the pandemic, paired with concerns of inflation in the USA, it's no wonder that everyone wants a piece of the real estate market.
On the flip side, with all this demand from investors, you can easily command larger wholesale fees since you will have a ton of interest in your deals when you have a property under contract.
As you saw in Tyler’s example, wholesaling success has a lot more to do with understanding local market conditions, knowing your numbers, and having excellent people skills so you can make the connections between buyers and sellers.
Wholesaling real estate for beginners opens the door for fantasies related to expected profit margins. With flashy images of checks, Lamborghinis, and luxury lifestyles all over social media, it's easy to forget about the hard work involved to become successful in wholesaling real estate.
New real estate investors who anticipate earning $100,000 or more on their first deal may need a reality check. Have a long-term outlook on your development as a real estate professional and you'll be in a better mindset to crush it.
Naturally, one of the first questions many ask about wholesaling real estate for beginners is “How can wholesaling be legal?”
We’ve all been warned about things that sound too good to be true.
Rest assured, wholesaling real estate is perfectly legal. You can learn more about the nuances of taking part in this investment strategy regardless of where you live and plan to transact your wholesaling business.
It’s wise to consider how rules and regulations vary depending on which state you live in, so take a peek at our blog to learn more about the specifics of each state.
Because the seller is typically in a difficult situation, it’s very important to make sure to avoid any language that may be misconstrued in both verbal and direct mail marketing.
For this reason, it’s smart to consult a real estate attorney to ensure you are acting within the rule of law and avoiding any of the missteps commonly made in this industry.
Because there is no standard federal regulation to require wholesalers to maintain a real estate license, it’s important to understand individual state requirements. While not required in most states, many new wholesalers consider the possibility of getting a real estate license when building their wholesaling business.
When deciding whether to pursue your real estate license, keep in mind that wholesalers aren’t selling property. Instead, they are marketing the “rights to buy a property” which amounts to the “contractual interest” in a purchase and sale agreement.
As such, no license is required.
Still, some wonder if they can gain access to professional networks, contractual documents, databases, or other programs that Realtors may be able to access easier than laypersons.
At a minimum, you’ll want to build excellent relationships with real estate agents in the area(s) you plan to conduct business with. You can learn more about how to capitalize on those relationships through wholesaling coaching programs like the Pro Wholesaler VIP Program we offer here at Real Estate Skills.
Some wholesalers start their businesses as side hustles before they can break away from the daily grind and jump into full-time wholesaling. This can have a tremendous impact on the earning potential in the real estate industry.
Consider that the typical assignment fee falls between $5,000-$10,000 per transaction.
If you hope to earn $100,000/year, the math simply states you will need to close 20 deals per year. Not bad for part-time work, eh?
But there’s more to learn about wholesaling real estate for beginners.
Most often, your fees are likely to increase as you strengthen your negotiating, networking, and marketing skills.
Since it is not unusual to earn a $30,000-$40,000 assignment fee through one wholesale deal, with the ability to increase your time, commitment, and patience, your potential to earn is virtually limitless. Take the following examples into consideration:
According to Ryan Zomorodi, fellow Real Estate Investor & Chief Operating Officer at RealEstateSkills.com, “You can quickly wholesale a house below market value to someone who actually wants to renovate it and live in the property at about 85-95% of the market value. This alone can give you a wholesale profit margin of anywhere between 5-10% ($15,000 to $40,000) on a home priced in the range of $300k to $400k.”
The most important thing you need to work on in order to wholesale real estate with no money is your educational foundation. Focus on learning the following skills:
You need to understand the language of real estate investing. Study our free educational blog at Real Estate Skills to thoroughly understand topics such as:
Find and vet investors in your market to start building your buyers list as a beginner wholesaler. Aim for quality relationships over quantity.
Learn about their buying criteria and get extremely familiar with their decision-making process.
The best method for finding distressed properties on a consistent basis without spending a dollar in marketing is by far the Multiple Listing Service (MLS). Check out our brand new free training to learn how we help our community of investors across the country crush it with wholesaling deals on the MLS!
Additional strategies to find distressed properties for free include:
Once you're able to find a property using a cost-effective approach, you put the property under contract. When you're in control of the property, you can execute the following strategies to close your first wholesale deal and make some money!
As mentioned earlier, it’s possible to begin wholesaling without any hard money. In some cases, you can do this with no money at all.
While some plan to funnel funds into marketing strategies, others align with pros who can teach you how to make use of the MLS and other existing networks.
Most of the time, wholesalers seek cash buyers as investors. Because wholesalers aren’t spending time securing financing on the sale, you won’t have to find lenders or scrounge up funds for a down payment.
Most often, a wholesaler doesn’t bring a lot of money to the table aside from earnest money. And that can be negotiated with the seller to amount to virtually nothing.
Even if you have a larger amount of earnest money involved in the deal, as you learn the strategies of effective negotiation, you’ll decrease your risk of losing earnest money if the deal doesn’t close.
While wholesaling strategies can differ due to a number of factors, it’s good to keep things simple by looking at some of the common steps needed to succeed in wholesaling real estate for beginners.
New wholesalers can get excited about the income potential and fail to spend the right amount of time researching local market conditions where they plan to transact business.
Without due diligence, this can result in dramatic mistakes in terms of numbers as you consider wholesaling real estate for beginners.
Not having a thorough understanding of comps, repair value, and other considerations, wholesalers can grossly underestimate the costs the end buyer will have to absorb.
When wholesalers know where comparable homes are priced in the area, they can project into the future what the deal might look like.
By assessing a property’s renovation needs, wholesalers have a better idea of the ARV and stay one step ahead of the competition. Understanding rehab costs can save costly mistakes and ensure deals move forward to benefit sellers, wholesalers, and end buyers.
The best wholesalers know how to purchase low and assign the real estate contract at a high enough price that earns profit, but not too high that the end buyer has no room for contingencies. When investors don’t see room for potential problems, they won’t want to work with you.
Without a list of potential buyers, the wholesaler swims upstream. Create a strong interested buyers list and strengthen necessary people skills to engage on a level that builds trust.
Building your network consists of having a great community. At a minimum, you’ll need an appraiser, a general contractor, and a title company within reach.
Wholesalers typically seek distressed properties because they can be purchased under market value as the homeowner is often motivated for a quick sale.
To find these gems, consider real estate networking groups, craigslist, FSBO, HomesByOwner.com, social media, or even hiring an assistant to serve as your bird dog that will ultimately save you time, money, and many sleepless nights.
When considering how to find distressed properties, you may want to consider personal stories you’ve witnessed in your own life.
Searching probate court documents and public tax records may be helpful for discovering potential properties. Realtors who specialize in investment properties can also help you find the beauty in a distressed property.
With a little brainstorming, you can find distressed properties and reach out to let the homeowner know how you may be able to help get them out of their tough spot through a cash transaction.
Approaching the property owner with dignity and respect goes a long way in building trust. Remember, many distressed properties are owned by people facing a financial crisis.
Because you are not a traditional real estate agent, it’s crucial to extend professionalism, respect, and kindness to each new contact.
After a combination of direct mail, cold calling, social media, email, and door knocking, once connecting with your target market and sharing accurate contact information, your next step is to encourage distressed sellers to sign your contract.
As you meet with the property owner, highlight the benefits of working with you. Because you did your research, you know how to solve their problem by addressing the pain points of each seller.
While the seller is not likely to get the amount of money they hoped for, focus on assuring the seller that you are not there to take advantage of their unfortunate circumstances.
Answer their questions, alleviate their concerns, and remain honest in all interactions.
Disclose any issues you’ve identified that justify price discrepancies. This is a great time to stress how quick the process will be as you will bring cash buyers to the table for a quick close.
We mentioned that wholesaling revolves around people skills associated with marketing.
Share who you are and what you do with interested parties that you’ve added to your professional network. These aren’t typically your friends and family and are also not likely first-time homebuyers.
Instead, interested buyers in your network are likely real estate investors who are cash buyers.
As you let potential investors know you’ve found a property that aligns with their criteria, you can move forward in the process.
Even if they don’t end up being a great match for one deal, be sure to keep them in your network as you’re building your customer relationship management (CRM) database for future opportunities. This will save time and energy in future deals.
After finding the best buyer, it’s time to work the magic of the real estate deal. This is where your research comes in handy. Without proper research, you might miss the opportunity for your best payment in terms of your earned assignment fee.
Not only will this amount be the difference between your purchase price and your higher price for the end buyer, but it takes into consideration the expenses and fees you considered in your research on each particular property.
In the contract, be sure to specify your agreed-upon closing date and detail that the end buyer will pay all closing costs. Outline whether there will be a double closing or an assignment of contract. Both will be covered in the Wholesale Real Estate Contracts section.
Upon negotiation, you will also collect your earnest money, or good faith deposit, from the end buyer. This may be held in escrow until closing.
All parties come together in the office of the title company at the end of the deal for closing. At this point, the property deed will be transferred to the new property owner, the wholesale deal will be completed, and the wholesaler will receive payment for services.
Congratulations! You are now officially a real estate wholesaler.
There are typically two types of wholesale real estate contracts. We’ll cover both below.
Through double closing, there will be two separate purchase and sale transactions. In the first transaction, the seller and wholesaler exchange property. In the second transaction, the wholesaler and end buyer (usually cash buyers) sign the purchase and sale agreement.
Because these are two separate legal transactions, there will be separate escrow accounts and settlement statements to summarize the fees associated with each real estate transaction.
As two separate transactions occur, wholesalers need to note additional expenses of escrow, closing costs, etc. and be aware they will legally own the property when taking this route. Most double closings can occur within minutes of each other, so the risk is substantially minimized.
One of the key reasons a wholesaler will consider a double closing is the profit potential on the transaction. When you have a buyer who is willing to pay a substantial amount more for the property, it may be wise to work this method.
While this method does require a wholesaler to put more “skin in the game,” sellers tend to get anxious when they see a wholesaler earning a massive profit while they are taking a perceived loss on the sale of their home.
Unlike double closing, an assignment of contract creates a clause in one contract where the seller can transact with the end buyer. This allows the wholesaler to serve as a middleman and purchase property without the risks and upfront costs.
The contract should contain a clause for the wholesaler to exit the deal if they are unable to find a buyer for the property.
Now that you understand more about wholesaling real estate for beginners, you can see its appeal.
Is it for everyone? Certainly not. But with a thrill like no other, wholesale real estate offers a tremendous adventure and limitless income potential.
If you're looking to buy and hold more rental properties, or even scale your fix and flip business, wholesaling is an excellent way to get started and even expand your business.
You'll be analyzing properties just like an investor, and once you've accumulated enough capital, will be able to cherry-pick the best deals from your wholesale property pipeline.
Most who venture down this path find the rewards of wholesaling real estate are well worth the effort required.
Are you ready to crush it as a real estate wholesaler?
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