Photo by Maria Ziegler on Unsplash
The world of real estate investing is vast and exciting, but for newcomers, it can also feel overwhelming. If you're eager to take the first step but lack extensive experience, wholesaling may be a great option. This dynamic strategy allows you to enter the market quickly and efficiently, building valuable skills and knowledge along the way.
How Does Wholesaling Work?
Imagine you're going to a grocery store to buy coffee (or maybe you don't have to imagine it:-). You know that the grocer who sells you the coffee usually doesn't have a grove of coffee plants out in back. The grocer is the reseller. The reseller normally buys the coffee beans from a coffee wholesaler, who likely doesn't have a single coffee plant either. In this example, the coffee wholesaler is sourcing the beans directly from the coffee farmer. The beans go from grower -> wholesaler -> reseller (grocer) -> end user.
Wholesaling real estate works in a similar way. You, as the wholesaler, are looking to match the grower - the person that currently owns the home - with the reseller. The reseller, usually called the investor or developer, then buys the home and does whatever is necessary to make the house attractive to the end user. Your job as wholesaler is simply to make the connection between seller and buyer. You're scouting for owners of distressed property and matching them with buyers who are willing to improve the property.
How Does a Wholesaler Get Paid?
Although the concept of wholesaling is relatively simple, your success depends upon two key factors: your ability to properly price the home, and your network of ready buyers. Wholesalers capture the difference between the purchase price agreed on with the seller and the price that the reseller will pay. For example:
- You find a distressed home.
- You do your calculations and decide to offer $100,000 to the property owner.
- You put the property under contract for $100,000 listing "Your company name or its assigns" as the buyer.
- You take photos, get measurement, and prepare a listing package.
- You find a developer who's willing to pay $120,000 for the home.
- You make a contract with the developer to assign the purchase contract to them for a $20,000 assignment fee (the difference between the $120k from the developer and the $100k to the property owner).
- You stop at the bank on your way home from the closing to deposit your $20k check!
Pricing the Home
In the example above, what's the most important bullet? I'll give you a hint, it starts with "You do your calculations". Imagine if you didn't know how to price the home correctly. You might offer the seller $130,000 for the home, only to find out that investors are only willing to pay $120,000 for it. That would be a real bummer.
So how do you know how much to offer? It just takes a bit of research. To begin, you'd need to figure out what the home is likely to sell for once it's fixed up. You can search a site like Zillow or Realtor.com and look for recently-sold homes in the area that are a similar size and in good condition. Once you've got the sales price, you'll need to subtract the renovation cost and a percentage for the developer's profit. Renovation costs can vary widely based on the neighborhood, condition of the home, etc. You may want to find a contractor or real estate agent to partner with you on your first few wholesale projects.
Finding Ready Buyers
Think of your buyers list as a rolodex of potential investors actively searching for their next deal. To cultivate this list, you'll need to implement a strategic lead generation campaign. This might involve:
- Digital marketing: Utilize targeted emails, social media ads, and search engine optimization to reach relevant investors.
- Direct marketing: Employ direct mail campaigns to reach investors in your local market.
- Face-to-Face: Attend networking events for real estate investors and agents. You can normally find both in-person and remote options.
As you gather leads, ensure you capture essential information like:
- Investor names and contact details
- Preferred funding methods
- Specific buying criteria (property type, desired location, price range)
- I also like to note the percentage of profit that they want for each project.
Stay in touch with these folks to ensure that you have the right buyers lined up when you find the perfect off-market property.
Benefits of Wholesaling for Beginners
- Low capital requirements: Unlike traditional investment approaches, wholesaling doesn't require significant upfront capital to purchase properties. While marketing might require some investment, you won't be responsible for the full property purchase price.
- Networking opportunities: Building a buyers list and connecting with sellers fosters valuable connections within the real estate industry. This network becomes an invaluable resource as you navigate your real estate journey.
- Market knowledge: Identifying distressed properties and understanding their potential requires in-depth local market knowledge. Wholesaling lets you gain this crucial knowledge firsthand, setting you up for future success.
Want to learn more about ways to begin your real estate investing career? Reach out to me for real estate investment coaching. In the meantime, stay tuned for our next blog post, where we'll explore other types of real estate investing, allowing you to find the best way for you to excel in this exciting field.
This article was written by Chris McCarron and Bard but this article was the original inspiration.
