Are you an avid garage or yard sale shopper? Does it make your day to find an item that’s priced below its true value and then argue down the price a little more? Have you resold some of your booty at a profit, either online or in person? If so, you could be ready to up your game and your transaction size dramatically. You fit the profile of a successful real estate wholesaler. By the way, you may not need to buy homes before you sell them.
What is Real Estate Wholesaling?
The best way to explain the process is to relate it back to our normal concept of retail wholesaling. When you shop in the local grocery store, all of that stuff on the shelves was stocked there by a wholesale supplier. The wholesaler deals with the manufacturers to buy in very large lots, stores the items in warehouses, and then transports smaller lots to the stores. The wholesaler works on low markup, making their profit from the large quantities supplied to stores on a regular basis. It is expensive to maintain warehouses, trucks, and employees.
When it comes to residential real estate wholesaling, you’re going to avoid almost all of the costs of the traditional wholesaler. You’re not going to need a warehouse, nor a truck, as the house isn’t going to be moved. You don’t need employees either. Basically, you can operate from your kitchen table with a computer and the internet. If you don’t have a kitchen table, go to the library.
Success Requires Buyers
You’re going to start at the tail end first. You need to meet and cultivate relationships with real estate investors who will become your customers for homes. They are of two types: Rental home investors or fix and flip investors. The difference between the two is the condition of the home you’re selling. The rental investor wants a home ready for a tenant, while the fix and flip investor will be doing repair and rehab to fix up a home and profit from the work.
You need to get your buyers to give you their requirements, including:
- neighborhoods of interest
- desired profit margin on a flip or desired rental cash flow
Once you have this information, you’ll know what they’re willing to pay for a home, and you can move to the next step. Once you have buyers waiting for you to deliver properties, you’re ready to have that bargain-hunting fun.
The Real Estate Wholesale Process
Now you go out and find deals that your buyers are unable or unwilling to locate themselves. Often they’re very active investors who prefer to have deals come to them. Using the classifieds, Craigslist, neighborhood signs, or just driving around, you want to find homes with motivated sellers. They may be in financial trouble, or they may need to move in a hurry to get a better job. Whatever the reason, they’re motivated to sell in a hurry.
Of course, you want to locate homes with enough equity to buy them and resell them to your buyers with a profit in the middle for you. As you’re not going to do any work on the homes, your holding period is a matter of a few weeks, so it’s a quick flip for profit. You know the price your buyers will pay, so you work down the purchase price until your desired profit is in the middle.
How to Fund the Deal
Depending on the state in which you’re doing deals, you may be able to do assignment contracts to fund your deals. An assignment is a contract with the seller that allows you to assign your rights and obligations in the purchase contract to another buyer. Once you have the contract signed with the seller, you can execute another contract with your buyer that assigns them your rights and obligations. You’re out of the deal at this point, simply waiting for your profit paid to you when your buyer closes the deal.
If you can’t do assignments legally in your state, you can still do these deals with little or no money, but you’ll have to use transaction lenders. These lenders specialize in working with real estate investors, funding short term flips and deals like yours. You execute a purchase contract with the seller with you as the buyer. The transaction lender funds the deal at closing. When your buyer closes on buying the home, the transaction lender gets their fees and money back from the purchase. Your profit is what is left.
This is a simplified description of wholesaling real estate, but it should be enough to get you excited about it. It’s the ultimate bargain hunting pastime.
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