It works like this: You know of a property in a desirable neighborhood with an owner who just died. The home needs a lot of work and is prime for redevelopment or renovation. You approach the family and negotiate a price to get it under contract.
However, your goal isn’t actually to settle on the property. It’s to assign the contract to another investor who will renovate and resell it. You get paid for your work to secure and refer the lead.
You've essentially sold the investor the property at a wholesale price, or less than market value. Almost all wholesale properties are off-market, meaning they haven't been publicly listed for sale. This gives investors a chance to compete with other investors for the property, rather than also competing with homeowners, who could drive up the price.
Let’s say you negotiate with a family to sell their home that needs work for $150,000. You put it under contract as House Flippers LLC. You know an investor looking for his or her next fix-and-flip and show them the property. They want to buy it because, even though it needs $100,000 in renovations, it could sell for $375,000 when it’s done. You negotiate to assign the contract for a fee of $10,000, making the total cost of the property $160,000 for the fix-and-flipper.
You've now made $10,000 and the investor is set to make $215,000. You both win.
Know the rules
Depending on the jurisdiction where you live, wholesaling can be tricky. There are lots of rules and regulations governing who is legally able to make a commission. For example, in Maryland, only licensed real estate agents can earn a commission in a real estate transaction.
In that case, you could set up an LLC for the specific property and indicate that the buyer (you, the wholesaler) is that LLC “and its assigns.” This allows you to enter into a separate contract with an investor who will purchase the LLC, and therefore the assignment of the contract, from you.
Talk to a qualified real estate attorney to learn how you can wholesale legally in your state before entering into a contract with a seller. Also, make sure your contract has plenty of outs in case things go south and you can’t find a buyer.
You have to do your research
Before you strike your first deal, you need to know the markets you want to work in like the back of your hand. You’ve got to make sure you’re getting properties at a price desirable enough for a fix-and-flipper (including your profit).
To set a desirable price, you should have a good handle on how to estimate construction costs -- a friend or two in the business can help a lot with this. You also need a firm grasp on what a property’s conservative after repair value (ARV) is.
You have to put in the time
Though it sounds easy, real estate wholesaling can be tough.
Successful wholesalers rely on large networks that take time to build. For every one deal or contract he or she secures, the wholesaler may have knocked on 100 doors or made 100 cold calls to potential sellers.
There are countless stories of wholesalers who put down substantial deposits for properties bought at foreclosure auctions only to be unable to find buyers by the deadlines. Those wholesalers forfeit their deposits. When you have a big network of potential investors to work with, you can likely avoid that scenario.
Some wholesalers spend hundreds or thousands of dollars on local TV ads or direct mail in their target neighborhoods. Others comb tax sale lists for distressed properties and mail letters to those owners to see if they're willing to sell. Foreclosure auctions can be a good way to purchase distressed properties, but they can be extremely risky.
Wholesalers need to do their due diligence on every single property they're interested in. Is it occupied? How much is owed on it? (This dictates the starting bid at the auction.) How much work is needed? What's the ARV? You need all of these answers.
You may need money
The amount of capital required for a wholesale deal varies.
In some cases, you may be able to secure a property from a seller for no money down. Most of the time, a seller will want you to put down an earnest money deposit (EMD). This can be as little as $500 to show that you expect to get their property to the closing table.
If your state doesn’t allow assignment of your contract, you may have to buy the property before selling it to another investor. You want to have them already lined up and ready to buy from you. Because there are closing costs, and because you would need to obtain bridge or mezzanine financing, the price at which you'd need to sell it would be higher. This may make the deal less attractive unless you could get the seller to a low enough price to make the numbers work.
You have to be diligent
In a hot market, sellers know their properties are more valuable and are apt to list them publicly with a realtor to try to get top dollar. It can be difficult to negotiate below-market pricing in this instance.
Wholesaling is essentially a job as a real estate salesperson. With both sellers and buyers, you need to follow up, follow up, and follow up again. Successful wholesalers keep email lists of leads and communicate with them regularly. They ask leads what their goals are, what kind of properties they have or want to buy, and other questions.
Plenty of real estate "experts" out there say wholesaling can make you tons of money. That’s true, but it takes lots of hard work, aptitude, and knowledge to get there.