A Great Strategy for Real Estate Rookies
If you are a real estate rookie, say hello to your new favorite strategy! We'll refer to it as wholesaling, but you may also hear people refer to it as quick-turning, assigning the contract, or flipping. Why will it be your favorite strategy? Easy. Because you:
- Don't put your credit at risk.
- Don't need to use any of your own money.
- Don't do any repairs or rehab work.
- Get paid a nice chunk of change for doing it. In fact, it's not uncommon for a wholesaler to make a profit of $5,000, $10,000, or even $15,000 per deal!
Wholesaling is a great way to get started in real estate. Keep in mind that you're getting paid for doing something very important: finding good deals for others. You can help people who rehab property, people who buy and hold property, and people who rent out property. All of these people will pay you to find good deals for them.
Wholesaling works with small houses, large houses, commercial property, raw land--literally every type of property. Your job is simple: put buyers and sellers together. You play the part of the middleman, the matchmaker. Below is an example to show you the simplicity of this strategy.
Example of a Wholesaling Deal
Let's say you find a property worth $200,000, and you can purchase it from the seller for $130,000. You have 60 days to close, contingent upon your inspection (which gives you a way out of the deal if necessary). You run an ad online and in the paper that says, "Three-bedroom, two-bath house on Second Avenue. Make an offer. Must sell."
Don't mention a selling price in your ad. In negotiation, the first person to mention a number loses. In addition to the ad, send emails and flyers to all of the potential buyers you know. You can also call real estate agents in the area and say, "I've got to move this house quickly. Do you have any potential buyers?"
From your marketing efforts, a buyer (it could be an investor or an owner occupant) agrees to buy the property from you for $140,000. At $140,000, the buyer is getting a good deal. And that works for you, as you are paying the seller $130,000. It's a win/win/win. The seller sold the house, the end buyer got a good deal, and you pocketed the $10,000difference. Consider it a finder's fee. It happens all the time.
The Advantages of Wholesaling
Many new investors need capital to get started. If this is you, get your cash flow going by wholesaling properties before trying other things. Once you do a couple wholesale deals, you can try other strategies such as rehabbing, lease options, or landlording. All you will have invested is your time.
The following are some advantages of wholesaling properties:
- You don't need any money or credit.
- You have no tenants to deal with.
- You don't need to get into rehab work.
- You can wholesale any kind of property.
- You have no liability if you write your contracts properly, and use the appropriate contingency clauses.
- Your profit can range from $5,000 to $15,000 per house!
- The profits from wholesaling can fund your other real estate investments and help you start becoming profitable in real estate very quickly.
The Disadvantages of Wholesaling
The following are some disadvantages of wholesaling properties:
- There is no residual income.
- You won't build up long-term wealth with these properties.
- You have to pay taxes on your profit because they are cash transactions.
Wholesaling is a good way to get started in real estate investing. And as you can see, the advantages of wholesaling far outweigh the disadvantages. If you are a real estate rookie, we encourage you to give it a try. You'll probably find wholesaling to be $5,000, $10,000, or $15,000 of the quickest bucks you've ever made!
Six Steps to Your First Paycheck
There's a reason wholesaling is a favorite strategy for many real estate professionals: It's not a complicated technique. Below, we've broken it down into six simple, straightforward steps.
- Find a Property
Before you can wholesale a property, you need to find a good deal. Use whatever method you prefer for finding good deals--and then get that deal under contract. A good wholesale deal must be 25 to 40 percent below retail value. For example, if you find a house that's worth $100,000 and you can purchase it for $93,000, you probably won't profit from the deal. You need to find a deal with a good profit margin so that when you wholesale it to someone else, they profit from it as well.
Don't be too greedy. Make sure you allow room for the next person to profit. Develop a system where motivated buyers (other investors) want to do business with you because you passed on the profit. They'll keep coming back.
For example, if a house is worth $100,000 and you can buy it for $60,000, don't attempt to wholesale it to another investor for $95,000. Instead, wholesale it for $70,000, and you'll make $10,000, which is a nice profit for you. The investor will make a bigger profit, but he's also fixing it up, borrowing the money, and taking all the risk.
- Analyze the Deal
Begin this step by determining how much you can get the property for. Then find out how much the property is worth by talking to agents, looking at comparable properties, or even obtaining an appraisal (if you're not comfortable with the first two yet).
Next, determine what repairs are needed to bring the property to full retail value. If this is new to you, bring in a licensed contractor to give you a detailed repair bid. During this step, be sure to keep all the information together. You may need it later.
- Get it under Contract
To place the property under contract, use a standard buyer's contract, which includes a contingency clause, disclosures, and long closing period built into the contract. Make sure your contingency clause says, "This contract is contingent upon buyer's inspection and approval before closing." Try to negotiate a closing period of 90 days for your deals.
Be sure your contract includes permission to show the property to prospective buyers. Also, make arrangements with the sellers for a way to show the property. Consider putting the following clause in your contract: "I'm going to have people I work with look at the property. That may include partners, an appraiser, a contractor, or a handyman. We need to have access to the property." This will allow you to show the property to the people you need to make the deal happen.
- Find a Buyer
To find buyers, start building a list. Ask other investors, rehabbers, or landlords if they are looking for properties. If they are, put their names in your database. You can also run classified ads and find potential buyers through the newspaper. Real estate agents also know rehabbers, as do people at your local real estate association. Then, when you get a wholesale deal under contract, you can send out an email or a flyer. Send the email to your list of potential buyers. Take the flyer to your real estate association and pass it out. Tell them it's first come, first serve. This will create a sense of urgency.
- Assign the Contract
Once you find a buyer and negotiate a price, the buyer pays you to sign over the contract to him/her. You use an Assignment of Contract for Purchase and Sale to make this happen. Once this form is signed, the buyer simply steps into your shoes; all the rights you negotiated in the original contract become his/her rights. To ensure the seller can't back out of the deal with the new buyer, be sure the original contract says, "This contract may be sold or assigned."
- Closing
Once you've sold the contract, you are out of the transaction--so this step doesn't really involve you. However, we're covering it so you can see how the process ends. Since you sold (or assigned) the contract in Step Five, if the buyers don't close, that's not your problem. Make sure you have a contingency clause in your contract saying that if the end buyers don't sell, you still get paid. But typically, the original sellers will close with the buyer--you simply played the role of matchmaker.
Your first deal is always the scariest. But if you utilize these six steps when wholesaling, your deals will be successful. And what could be easier? You're only six steps away from your first paycheck!
