The Real Estate Wholesaler primarily performs the search for properties that can be sold to the investor for rehab and sale at market value. The wholesaler will locate a “distressed” house and contact the seller about purchasing it. basically you are the middle man.
The plan is to get the seller to agree to a low purchase price so it can be assigned to the investor and the wholesaler collects the difference. This is often called a wholesalers fee, this is the profit they receive from performing the search and initial contact with the seller.
With regards to learning to flip houses the wholesaling of properties can provide a learning opportunity as well as generate cash for your first flip. Some have inaccurate beliefs when it comes to wholesaling, instead of listing them here I found a great article on BiggerPockets that talks about some of the wholesaling lies.
Warning: This is not a legal document or legal advice. Be sure to discuss any legal and contract concerns with a Real Estate lawyer before signing agreements or contracts.
What is Wholesaling Real Estate?
The wholesaler is the middle man in this transaction and is not planning to flip the house for a profit. They provide the leg work in finding these properties and present them to a buyer to be flipped later. As you begin to wholesale you will grow a list of buyers and find that selling the house is the easier part of the process.
Most of the tasks involved are the same for the investor or flipper where they need to find a distressed property with enough room between the sale and market price to be profitable after repairs. The wholesaler will be adding a fee to the property price in order to profit from the transaction so getting the lowest price is key.
As an Example: [Single family split level house]
- Market Price: $149,000
- Purchase Price: $79,000
- Wholesaler Fee: $10,000
- Buyer Price: $89,000
In the example above the seller agrees to sell the property to the wholesaler for $79,000. This is at a large discount as compared to the actual market value of the property.
The wholesaler then contacts a buyer and offers the property to them at $89,000, this price now includes the wholesalers fee of $10,000.
This low price offers the buyer (usually an investor or flipper) approximately $60,000 to be used for any repairs plus room for profit for the buyer.
The Wholesale Process:
- Find a Distressed Property or Fix and Flip Opportunity
- Calculate Purchase Price
- Contact Seller to make an offer
- Contract the sale
- Find an interested buyer (Investor, Flipper)
- Negotiate a Price to Sell which includes your profit
- Finalize the sale
Why Wholesale, Not Fix and Flip?
The benefits of the wholesale process is that you do not perform the rehab and sale on the property to get paid. The other side of that coin is that the profits are smaller than if you had flipped the property yourself. Let’s explore why you might want to learn to wholesale before taking on your first house flip project.
Generate Startup Cash: The most attractive aspect of wholesaling is that it’s an easy method to generate thousands of dollars without taking on the cost of the rehab and sale. This can be used to buy materials or bridge the hard money gaps on your first flips. Some investors continue to wholesale and never actually switch to flipping houses full time.
Learn To Estimate: Since the process requires you to find and negotiate the lowest price you will learn to estimate costs before making an offer. This is very important for flipping houses and the more experience you get before spending your own time and money the better.
Develop Search Skills: Another primary skill you will learn is to find these distressed properties and learn to use the tools. There are many different methods such as using an agent, online searches and probate records and you will get familiar with all of these as a wholesaler.
Networking: This last benefit is very important as it is at the core of wholesaling. You will be regularly networking with Real Estate agents, investors and house flippers alike. Agents can be a very helpful resource on their neighborhoods and assist you in finding properties to wholesale. The investors and flippers will be your buyers and having multiple ‘lines in the water’ means you may could a buyer within days of having a contract signed.
For those who are thinking, “I am not a pro” or “this is my first time”,..
Most real estate success stories start with doing this as a part time job. Other professionals in this field such as the agents and house flippers usually started part time and will understand if you are just starting out and may even offer advice. Never fear the networking aspect because talking with others in the same industry is how you succeed.
Wholesaling Houses Guide
0. Distressed Property Types
You should have a solid understanding of the many property types and how they might be found. Motivated sellers will appear coming from many scenarios such as an inheritance but the property was not properly maintained or they just want to sell it fast. You can also find sellers following a divorce settlement or business partner dispute. Motivated sellers are everywhere and the property does not need to be in distress in order to find a deal.
Some types of distressed properties:
- Real Estate Owned (REO)
- Estate Sales & Probate
- Pre-Foreclosure
- HUD Homes
- Abandoned Properties
- Short Sale
- Tax Liens
As you learn about each type and begin searching for opportunities you will define your own personal methods that work best. Luckily there are plenty of online and offline methods to find distressed properties. Youtube is also a good resource for finding information on any one of these search types.
DISTRESSED HOUSE
We need to define what a distressed property looks like as you may find them online or offline but eventually you will see it. Properties that have been abandoned will show obvious signs of neglect. There could be damage to the property or just trash or an uncut lawn but not always in the front where it is visible.
Home owners that are just lazy may ignore it until the city attempts to cite them for the overgrown lawns or peeling paint. Many cities have requirements to keep up the neighborhood. Even in this case it shows that the current homeowner is not that interested in keeping the property. When driving by or visiting the property there are some obvious signs to look for, here is a short list:
- Overgrown lawn or landscaping
- Boarded or broken windows
- Trash in front or backyard
- Aged or peeling paint on the house or garage
- Door may have a posted notice
- Are there cars in the driveway?
- Any other damaged items such as fences and walkways
These signs are visible and can be witnessed in person when you drive by it. There are other signs that the owner is a motivated seller and we can find this by doing a search online.
DISTRESSED PROPERTY RECORDS
A further definition of the distressed property is based on the official and public records. There are taxes and liens and other situations where the property is in dispute or is passed to someone who is not interested in owning it. This type of search is mostly digital or online as we are looking for life changing events that can affect the ownership the property or its lien status.
Here are some ideas for finding distressed property online or through a Real Estate agent.
- Government Records: tax and public notice
- Foreclosure notices
- Bank owned or REO properties
- Government owned properties
- Bankruptcy
- Death or Divorce and Probate
You are going to use these opportunities to find motivated sellers and make them an offer well below the market rate. In some cases such as divorce or probate the decision on the property has not been made yet. Having an offer to buy the property adds your purchase as a quick option and may give them an easy way out when negotiating assets.
This same logic applies to the bank and government owned houses as the bank does not want to pay taxes and upkeep as well as a listing agents fee in order to sell the property. You can save them time and frustration by buying the property as-is and selling it to an anxious investor.
1. Finding Properties Online and Offline
REAL ESTATE AGENTS
One of the best resources for finding distressed properties is to partner with a Real Estate agent that has access to the MLS or Multiple Listing Service. To begin with the agent will have valuable information about their market as well as access to the MLS where they can bring up information about any property, perform searches and even be notified if something becomes available.
Networking with an agent can make finding properties easier and they may assist you by sharing buyers that will be interested in properties you find. One of these methods is getting the agent to provide you any “Expired” listings or listings that did not sell but were also not re-listed. You may find an opportunity by sending these owners a short letter or postcard showing interest in the property.
Lastly the agent can also provide comps (Comparable Properties) and calculate the After Repair Value (ARV). The comps are other properties in the same neighborhood that are similar to the house your looking at and the agent can bring this up in the MLS software. Recently sold homes will give you a good idea on the price your chosen target will sell for.
With comparable properties you will be able to easily calculate the market value (ARV) and then apply the %70 rule to find out if the property is worth the effort. This information is what you will use to calculate the price your willing to contract the property for that will leave enough room for your profit and the investors.
ONLINE
The easiest place to begin searching for distressed properties would be the many online Real Estate websites. These sites offer a search, filters and maps where you can browse results visually. When you find a property you can easily look for comparable properties in the area using the same tools.
Note: Be sure to have a few extra email accounts (gmail, mail.com etc.) and at least 1 additional phone number with texting to provide for “free” access to any website. Never give out your real phone number unless you fully trust the site or you are paying for services. Actually even then don’t give out your number, use an app like Burner or Google voice. [source]
I created a more detailed post on using different online tools to search for properties called “How to Find Good Houses to Fix and Flip“. This includes craigslist and google searches too. In summary here are some of the commercial sites I listed in that article.
Websites:
- RealtyTrac.com
- Zillow.com
- Redfin.com
- Foreclosure.com
- HUDForeclosed.com
- LoopNet.com
- Auction.com
- trulia.com
- Propertyshark.com
The goal of this step is to develop multiple methods in finding properties that are distressed or have motivated sellers. Using online tools is convenient as you can do this on your phone, tablet or at home on your laptop at any time of the day or night. As you work with the search features you will develop your own criteria that works and try them at each website. Some features are different and all of the websites do not necessarily offer the same information.
Use a spreadsheet to keep track of the properties address and any other information that can help decide if it is worth creating an offer for. The next task is to drive by the location to get a better idea of its status visually.
Offline
The offline search is your “boots on the ground” method which requires travel and some diligence. Some of these methods are more involved and you might not consider them until you close your first wholesale deal. Here are some offline methods to consider.
Offline Methods:
- Driving for Dollars
- Bandit Signs
- Bulletin Boards
- Direct Mail
Driving for Dollars: This is exactly what it sounds like, you will drive around some neighborhoods or your own and note any houses that look “distressed” per the lists in the post above. Document the issues you see from the street and then contact the owner using a post card or hand written letter.
Bandit Signs: Another option is to post the “bandit signs” in certain key high traffic areas. This is a sign that reads something like “We Buy Houses, Call Now!”. This is controversial because there are some places that have policies and ordinances against this practice and the signs usually get torn down quickly. (put them up on a Friday after 5pm)
Bulletin Board: The bulletin board idea has faded lately but there are still local businesses that will hang a cork board inside their walk way or near the restrooms. This is for others to post ads, lost pet notices or your contact info in case they want to sell their house quick for cash.
Direct Mail: The direct mail approach will usually follow the driving with dollars method. A common approach is to make a list and send a postcard with your interest in the property and contact info. This list may be generate by online searches as well as driving around. The house may not have any occupants at the time so you might end up sending a letter to the on-record address or a lawyer.
2. Calculate Max Purchase Price
In this business the profit is made on the purchase of the property not on the sale. Calculating the maximum price you can buy the house for is critical to securing a profit and being successful at wholesaling.
The first method is to find the market value buy using comparable properties in the same neighborhood. This is the price the house should sell for in this neighborhood based on previous sales of similar homes. This is called the After Repair Value (ARV) because it is the price the buyer will ask when they place the ‘repaired’ house on the market.
With this number we can then subtract the common costs related to this business including a profit range. The industry uses 70% of the ARV and this number leaves 30% for Real Estate costs such as:
- Closing Costs
- Carrying Costs
- Profit
Simple Formula: ARV(.70) – Repairs – Fee = MAO
$100,000 x (.70) – $15,000 – $10,000 = $45,000 (MAO)
In this example we are using the ARV $100,000 and multiplying it by the industry standard (.70) to get our starting price. After that we subtract $15,000 in repairs that will need to be done before the property can be sold at market. The last $10,000 is the wholesalers fee and where you will make your profit.
At negotiation time you may want to reduce the price in order to give yourself room to move when the home owner is not quite agreed yet. The key is to stay AT or BELOW the maximum allowable offer (MAO) price you calculated to be sure that the house can be sold to a flipper or investor after the property is under contract. In the example above you might make your initial offer at $38,000.
The only value that you can really modify in this formula is your wholesaler fee and reducing this will mean less profit for the work you are doing. If you find that the property will be easy to contract and sell to a buyer then you might consider reducing your fee if the seller is trying to negotiate lower.
Who’s your Buyer?
Another consideration when calculating your maximum price is who the buyer might be. Over time you will accumulate a network of Real Estate professionals that are interested in buying the properties you find. The values above do not necessarily apply to “anyone” that is interested in purchasing the property but can be modified to suit.
The professional fix and flip will be interested in keeping the repair and fee level low so they have room for the costs and a nice profit. The above numbers would fit best with this type of investor and they will consume the bulk of your buyers.
Another option is the Real Estate investor that’s looking for a rental property. You may be able to sell the property to as a rental and do minimal improvements to the property. This means you can reduce the repair costs to match your sellers ask because the property will not be competing with other homes, or comparable, so top dollar rehab is not necessary.
Lets say that the seller will not come down low enough to satisfy your numbers. You always have the option to walk away as your buyers will not be interested, the alternative is to consider a different ‘type’ of buyer to sell to.
You can ping your network and find out if someone is interested in buying a a home that needs work and then reduce the repair value of $15,000 to meet the sellers price. For the longest time the “fixer upper” has been a staple of the Real Estate industry and there’s no reason you could not sell the property as a primary residence to someone willing to handle repairs.
3. Sellers & Contracts
Now that we have a price range to negotiate with the next step is contact the seller and make an offer. The initial contact with a seller can be from your mailers, a phone call, they called you or just an impromptu meeting on their front lawn when you were driving for dollars. You may need to explain the process as you will be contracting the property but you do not intend to make the final purchase and take ownership. Instead you will be finding another buyer for the property.
Under Contract: You may hear that a house is “under contract” and it means basically what it sounds like. There is already a signed agreement to sell the property at an agreed upon price.
Note: Some states have laws that limit Real Estate Wholesaling and may require a license. Speak with a lawyer to discuss the legalities in your state and to create the contracts for each sale.
You and the seller will negotiate and agree to a price and then have the property placed under contract with the seller. You will be signing a purchase agreement but that contract will later be sold to the flipper or investor assuming it contains the proper language. In the contract there will be contingencies before the sale that includes things like an inspection period and contract expiration where both parties can walk away.
Proof of Funds: The proof of funds is a document that can be submitted with your offer to buy the property that proves you have the funds to make the purchase. In my research this is not required but can be requested by the seller so many wholesalers will include it with their offers.
Earnest Money Deposit: Providing earnest money to the buyer demonstrates that you are committed to buying the property or in the case of wholesaling, finding a buyer. Some sellers may request earnest money and will be more willing to sign a contract if the buyer provides this but it is not a requirement. The money can be held in escrow until the final sale or the contract expires.
Most sellers will say NO!
An important tip I have learned is that most sellers will say “No” to your low buy price. This is expected and you will make many many offers but only a few will agree. You will need to push past the first many denied offers to get to that first one. After the first success it will get easier and you will look at the offers and many “No’s” as simply part of the process.
4. The Buyers List
Building your network is a critical step in creating a list of resources or ‘Buyers List’ that will be interested in buying the properties you find. The buyer can be anyone that is willing to purchase the property from you at a price that includes profit. Real Estate Wholesaling tends to cater to the house flipper in most cases as they will also be searching for opportunities but creative thinking can provide additional interested parties.
List of Buyer Types:
- Investors or House Flipper
- Landlords (For Rental)
- Handyman Residence (Fixer Upper)
You do not need to have a property ready to sell in order to start creating your buyers list. In fact it should be part of your business model to continue building and updating your buyers list constantly. While you are learning and performing searches to find your first wholesale deal you can begin collecting contact info for buyers.
Buyer Sources:
- Local Real Estate Events
- Craigslist
- Social Media Sites
- Bandit Signs
- Google Search (“We Buy Ugly Houses”)
- Real Estate Agents
Begin creating contacts and discussing you wholesaling plans with people at local Real Estate events. You will find at least 2 of the 3 buyer types at these events and can talk about who and how to contact them when you find your first wholesale opportunity. Networking in this fashion will provide buyer resources for years to come.