You want to get into real estate but don't have much money. So, you do some research on "investing with no money down" and eventually you come across the term "real estate wholesaling."
A lot of people toss it around as a miracle solution to getting started in real estate for people with out any money.
Wholesaling real estate is a great way to get started in real estate, but you need to cut through the hype and get down to the nuts and bolts.
Which we lay out in this article. Since this article is rather long, you can click on any of the following sections and go directly to it.
Real Estate Wholesaling Explained
Let's take a step back and explain the big picture of wholesaling houses.
Wholesaling a house is similar to flipping except you are flipping a contract rather than flipping the house itself.
Let me explain.
When you send an offer to a seller and they sign it, you now have a binding contract. In other words, you have an "interest" in the property.
I don't mean you're interested in the property. An "interest" when used in this situation means you have a stake or share in the financial asset.
And, any stake in anything can be sold.
If you have a great contract for a low price, you can sell that contract to someone else because you are actually selling your interest in the property.
And someone will pay you a fee if the deal is good enough.
In theory, you can wholesale anything from houses, multifamily, self-storage, cars, websites, or even industrial complexes.
We'll stick to talking about wholesaling residential properties in this article, but know that the concepts apply to anything.
House Wholesaling Potential Salary
So you're wondering how much does a real estate wholesaler make. Of course, it makes sense to want to know what you can earn before you get started.
The thing is, as with any industry, the income generated by it varies widely.
By widely, I mean it ranges from $0 to 6 figures per month.
I personally know people pulling in 6 figures a month by flipping contracts. So, it's definitely no joke.
It all comes down setting up good systems that allow you to automate your business and take down more deals.
Think about it this way, In general, a wholesaler earns anywhere from $5,000 to $20,000 per contract. The sweeter the deal the more they make.
If you find amazing deals, it doesn't take very much work at all to earn a ton of money.
7 Steps to Real Estate Wholesaling
Wholesaling real estate is broken down into 6 basic steps, and each one of those has plenty of sub-steps.
- 1Finding Motivated Sellers
- 2Running the Numbers
- 3Put the House Under Contract
- 4Due Diligence
- 5Finding a Buyer
- 6Assign the Contract
- 7Title and Closing
Step 1: Finding Motivated Sellers
The first part of the business is to fill your deal pipeline. It's all a numbers game, so more leads means more deals closed.
Your deal funnel might look a little different than this one, but everyone follows a generally similar model.
So, if you can find more leads through a variety of methods, then you'll ultimately close more deals.
While you can find deals via any lead source, investors tend to not like it when wholesalers send them deals that are already on the MLS. So, avoid this unless you are able to negotiate some crazy numbers and terms.
There are two really common ways to find motivated sellers, and that is through direct mail marketing, and with a lead generation website.
Real Estate Wholesaling Website
When most people are looking for answers, they go straight to the internet to find them. If you have information that people are looking for, they'll find your website.
Then, some percent of those people will reach out to you for help.
That's the whole basis around generating leads via the internet. Provide information people need, get eyeballs on your page, capture their information.
It's pretty simple in theory, but hard in practice. That's why I use a service called Investor Carrot which makes lead generation websites super simple. Here's what I was able to put together in about 25 minutes:
Their sites are pretty sexy and easy to throw together. So, if you want to spend about 45 minutes or less to start generating leads, go ahead and check out investor carrot.
Direct Mail Marketing
Another popular way is through direct mail marketing. While it's a bit more time consuming, it does have some good results.
Last year I sent out 1,000 letters and ended up buying a 5-unit building from it, and I'm currently under contract for a 10-unit building as well.
Point is, direct mail works.
The key is to have a good list, have good letters and postcards, and be consistent.
Without a good list, you'll be wasting money by mailing to people who aren't interested in selling.
Bad letters will make people just throw your mail away like they do their junk mail.
And consistency is key because people may not be ready to sell today, but they might sell in 6 months.
If direct mail or online marketing is a bit daunting, we have a whole system to create deal flow for you. You can check out Deal Flow Mastery here.
Step 2: Running the Numbers
You've got your website up and running, your letters are going out every week, and...
...you get your first call!
Now what? It can be a bit overwhelming at this point.
What you do now really depends on where you are and what you real estate niche is.
The numbers are pretty simple and will only need some slight adjustments based on your market. In general you want to calculate:
Purchase Price + Closing Costs + Carrying Costs + Rehab Budget + Assignment Fee < 70-80% of After Repair Value.
The lower the percentage the better for the investor, so the lower the better for you. The investor wants a good pay day, and they aren't going to take mediocre deals from you.
So, you need to estimate the ARV, subtract out 20-30% right off the top, then subtract all the other costs, and that's your offer price.
Step 3: Putting the House Under Contract
You've got deals coming in, your running the numbers and making offers based on that. Now, someone has accepted your offer.
It's time to lock it up under agreement and give yourself some time to find a buyer.
There are a few key things that you need to have take place. First, you need to make sure the contract allows you to assign the contract to another buyer.
Second, you need to ensure money exchanges hands, and you record that exchange. In real estate, if this doesn't happen there often isn't a binding contract. It can be as little as $1 though.
Third, you need a good assignment contract that allows you to get paid from the buyer.
You are basically selling your purchase and sale agreement to someone else. The assignment contract simply captures this arrangement in writing.
Step 4: Due Diligence
Now that you have a contract that's favorable to you, it's time to get some preliminary diligence and inspections done.
The most important thing here is to verify your numbers as much as possible and spot any major things that will throw off the entire deal.
For example, I was recently trying to purchase a 10 family deal from a wholesaler. He didn't account for the cost of having to install a fire-panel system (estimated at around $30k). Missing something major can throw everything off at the last second.
You want to make sure the actual rehab costs are similar to what you expected, and you want to make sure no major items are overlooked (such as foundation issues, fire panels, etc).
If there is a big discrepancy in rehab costs, or if something big popped up, now you need to go back to the seller and renegotiate the wholesale price lower to offset the extra costs.
When you're doing diligence on the property, the first thing you want to do is walk the exterior. The entire exterior of the building is designed to keep water, insects, and animals out. It's also designed to support the structure above and inside.
So, when you're inspecting your wholesale deal, you're looking for anything that might jeopardize this.
Start by looking at the roof and chimney. If shingles are missing or are curled up on the edges, it is will need to be replaced. The chimney should be in good repair and nice and straight.
The siding should be intact. look for any cracks in any concrete or bricks. This can be a sign of structural problems. Some cracking can be very normal, so you need to determine if this is just a slight amount of settling or if it is due to a more serious structural issue.
You'll also want to look at doors and windows to make sure they are intact and not allowing water to penetrate when it rains.
The landscaping is also very important. The ground should slope away from the foundation and gutter downspouts should eject water away from the foundation, not directly toward it.
Diligence on Systems
You want to check the condition of the electrical service, electrical panel, wiring, plumbing, heating systems, cooling systems, water heater, and any other item that may last for a very long time.
It's important because older buildings may need some major upgrades. Owners may neglect these items for 20 years, or not even realize they need to be done.
You're looking for the cosmetic work that may be required to bring the property up to modern expectations.
Beyond that, you want to think of unique ways to improve the property and increase value. This could be something as simple as adding a closet to an office to make it a legal bedroom. It could also be something like taking out a wall to create an open floor plan.
While you're inside, think about any sagging in the floors and look for cracks in the walls. These two things will give you an idea if there are any structural issues.
Step 5: Find a Buyer
Now you send out a quick email and find a buyer.
If only life were that simple!
You should have a list of potential buyers before you put a property under contract. That way, when it's time to find a buyer, it's quick and easy.
So, let's talk about list building.
Building a Buyers List
You can start out in excel, or getting a cheap mail service such as Mailchimp. I like using a service because it lets you keep their information in one place and also lets you send them emails from time to time.
So, if a deal does pop up, you aren't writing 424 email to send it out. You're also not cc'ing or bcc'ing those 424 people into a mass email (a no-no because you need to include things such as an unsubscribe button).
Now that you've decided how you'll contact them and where to store the info, it's time to actually put people on the list.
This is fairly easy because just about any buyer will say OK when you ask to put them on your list. A buyer wants as many potential deals as possible coming to their inbox, so they always say yes.
When possible, it's good to ask the buyer what their criteria area, so you can notes and contact them directly if a perfect deal pops up meeting their requirements.
Even though it is fairly easy, it is still a lot of work! That's because you need a large list of buyers.
The best way to meet buyers is through real estate investing meetups, networking events, conferences, and seminars.
The next way is to email people already on your list and ask them if the know anyone else who might be interested to join the list.
How Big of a List Do I Need?
Think about it for a second. If you have 10 people who buy property, how many of them are actively looking to buy at any moment in time?
One person may have just bought one, another person might have one under contract. Perhaps a different person needs to sell another property first. You get the point.
Maybe 25% of your list is in the market at any point in time. So, if you have 10 good buyers, 2 or 3 might be shopping right now.
Your particular deal may or may not fit the criteria for any of those buyers.
So, 10 buyers is probably not big enough, unless you get a big fish on your list who buys a ton of property.
If you have average people, I'd say that you probably want 50-100 buyers to guarantee a sale happens. You don't want to be flailing around at the last second trying to find a buyer!
Step 6: Assign the Contract
There are two different ways to wholesale a property - contract assignment or via double closing.
contract assignment is the easiest and it's where you assign your purchase and sale agreement to a new buyer and charge a fee.
A double closing is a totally different beast and we'll cover that in step 7.
As for the assignment fee, in general, there can be an up-front fee or there can be a smaller up-front fee with a larger fee on the back end.
How Much to Charge For the Assignment?
I've seen the up-front fee range from $1,000 to $5,000 with the rest due on purchase.
As a wholesaler, you can charge as much as you want for the contract. In theory, if the buyer is going to make a ton of money, they shouldn't care what you make.
But, the reality is people still care. It's usually not possible to hide your fee (nor should you hide it).
If the buyer will make $25k and you're making $20k, they may think you're making too much for too little and not do the deal.
But, if they will make $80k and you make $20k, they probably won't care.
So, pick a fee that is fair to both of you, but generally $5,000 - $20,000 for typical properties.
Step 7: Title and Closing
If you assign the contract then you're not really involved with closing. Regardless, you should keep track of this because this is where you get paid!
Before closing you'll want to make sure that you send a copy of the contract or a bill to the attorney along with wire instructions. That way the attorney will add that amount to the closing costs and send you what you're owed.
This is a bit different if you do a double closing. Basically, a double closing is when you purchase the property from the seller then immediately sell it to the buyer a few moments later.
Generally, a double closing is used to hide something. What that 'something' might be can vary, but the purpose is to hide.
You might be looking to hide from the buyer how much you have it under contract for. Or, you might be trying to hide from the seller how much you are able to sell it for.
There are other reasons to do a double close, but those are the big ones.
Here's the thing though, most states have open records meaning it's all publicly available. So, doing a double closing is only going to hide the information for so long. As soon as your buyer finds you made $100k profit and they only earned $20k, they will never work with you again along with any house buyers they know.
So, it's a rather short term approach.
Regardless, there may be a legitimate situation where you need to do it, so add this tool to your tool bag but don't necessarily use it when you don't need to.
When You Should (and Shouldn't) Wholesale a Property
Your job is to negotiate the lowest price possible, and that's what can create some moral conflicts.
A lot of people that you'll be dealing with are older or less educated folks who may no even understand the details behind why they are losing their house.
And some people will use this opportunity to take advantage and get ridiculously low prices meaning massive profits.
Hopefully no one reading this article can take Grandmas last $10,000 and pocket it when she has medical bills to pay. But, that is kind of what some people do.
Times You Should NOT Take the Contract
The problem with wholesalers is they are not bound by laws that govern real estate salespeople (or REALTORs). A licensed real estate sales person has a Fiduciary relationship with their client and has to serve their best interests.
A wholesaler only serves their own best interests since they are earning an assignment fee (or doing a double closing) and not earning a commission.
This opens up the door for some serious abuse and for people to take advantage of other people. I don't believe in this and don't believe that you should do this. But, it's an easy trap to fall into when you see a huge dollar sign at the end of it.
When Not to Wholesale a House
Pay attention to these times when you should walk away from the deal and not wholesale it, even if you could have made money:
- When they don't truly understand what they are signing.
- If you have to trick or convince the seller to wholesale their residence rather than list it on the MLS.
- If you believe any other solution would be significantly better for the seller.
When You Should Wholesale a Property
There are plenty of legitimate reasons to use wholesaling to help a person. Here are a few:
- When the seller needs to sell in a ridiculously short time-frame and you know someone who can buy that fast.
- If the seller is facing foreclosure and you are willing to pay more than what they'll get at a foreclosure auction.
- If the seller wants to avoid listing a property on the MLS.
The fact is their property will almost always sell for more when listed on the open market. So, they have to take a discount to work with you.
Since they have to take a big hit on their selling price, make sure there is a good reason for it.
Risks of Wholesaling
Wholesaling sounds so easy and great, but it's a lot more difficult than it sounds.
There are a ton of pieces that have to come together for a real estate transaction to work out. By wholesaling, you are adding another piece to an already complex puzzle.
Additionally, you're going to face a lack of trust on both sides of the transaction, from both the seller and the buyer.
The seller isn't going to trust you because you aren't a real estate agent and they don't really understand what you're trying to do or why.
The buyers aren't going to trust you because you have no experience in real estate and they have no idea if your budgets are accurate. And that leads into the biggest risk of being a wholesaler...
Not Knowing Your Budget as a Wholesaler
The biggest risk you'll face is messing up your rehab budget and therefore messing up your offer price.
Think about it this way - if you miss a big-ticket item and are $10,000 off on your rehab, budget, then you are $10k off on your purchase price as well.
This may not be a huge issue if the property is $500k, but if it's $100k, it will be a huge percentage of the price and the deal probably will fall through.
Or, if you do sell it, the buyer will quickly realize you were way off and left them with a lemon. It will tarnish your name and leave you with a short career as a wholesaler.
Not Finding a Buyer
The next biggest risk as a wholesaler is not being able to find a buyer. This is especially true if you're very new.
The issue is that most investors simply won't believe you know what you're doing so even if you have a good deal, they may not give you the time of day to review it.
Not Finding Sellers
Another problem you might run into is that you're marketing but can't land a deal.
This could come from marketing to the wrong households in which case you'll need to try building a new list.
Another issue is that you are marketing to the right people, but you're negotiating wrong or giving prices that are just too low.
You can overcome this by just going to more houses, making more offers, and adjusting your offers slightly each time. Eventually you'll get something (hopefully your marketing budget is large enough to cover the costs while you figure things out)
Limiting Your Risk as a Wholesaler.
The best thing to do is limit your risk by keeping your earnest money or option payment to a minimum.
In many cases, I've seen a property go under contract for as little as $1.
So, if you find that you've made a mistake, can't find a buyer, or something else pops up, you can simply dump the contract and just lose your option money.
Remember, it's better to lose your option money than make a bad deal go through.
Now It's Time To Take Your First Step as A Real Estate Wholesaler
Are you going to start wholesaling properties? Comment below with what you're doing to start your business.