Real estate wholesaling is a controversial topic, for sure.
Yet it remains a popular way to make money in real estate. And we think we know why.
In 2017, the average gross profit made per home flip was $68,143. Hate it or love it, wholesaling is an attractive way to drive profits, both for investors and investor-buyers.
So should you give it a try? Maybe.
Before you do any type of wholesale deal, there are some important things to know.
First, what exactly is real estate wholesaling?
Depending on who you ask, it’s either the best way to make some real money or the fastest way to degrade the reputation of the entire real estate industry.
Here’s a straightforward definition from Investopedia:
“Real estate wholesaling occurs when a party (the ‘wholeseller’) contracts with a home seller, markets the home to potential buyers, and then assigns the contract to one of them. The wholesaler makes a profit, which is the difference between the contracted price with the seller and the amount paid by the buyer. The goal in real estate wholesaling is to sell the home before the contract with the original homeowner closes.”
Think of it this way:
A company like Amazon enables wholesalers to sell you pretty much anything you want (clearly within reason) via a digital platform. In essence, real estate wholesaling operates along the same principles. The wholesaler finds a distressed property that’s being sold at a discounted price and makes an offer. When accepted, they sign a contract to buy the property and either assign the contract to another buyer (e.g., investor) or do a double close (where they buy and sell at the same time). And the wholesaler pockets the difference.
Quick profits, low risk and the advantage of being your own boss, what’s not to like? But many real estate professionals remain skeptical about the legitimacy of making wholesale plays.
Inside the wholesaling debate: what every Realtor should know
Whichever way you look at it, wholesalers are here to stay. Let’s take a minute to get to the bottom of all the hype and find out how you can benefit from it, and whether or not you actually want to.
Let’s kick off by looking at the benefits of wholesaling:
- Great for beginners because you can hit the ground running—no license or college degree needed
- Low risk as you don’t put down any of your own cash upfront
- Fast—most people who sign with wholesalers need a quick sale
- High ROI
- Flexible—you can work where you want with who you want
- Great way for Realtors to become investors
- Brokers who let their agents wholesale can split the commissions and boost transaction volume
But of course, it’s not all sunshine and roses.
Where there’s an up, there’s always a down. Time to investigate the less glamorous side of the business:
- No guaranteed income
- High pressure to constantly find discounted homes for sale
- Takes time and money to nurture leads
- Lots of legal red tape
- Wholesalers have a rep as unethical bottom feeders
- Selling below market value can bring up some tough ethical questions for Realtors
Because Realtors are bound by a Code of Ethics to always act in the seller’s best interest, many brokers and agents just won’t go there. But others insist that there are situations where selling below market value actually is in the seller’s best interest.
If you tend to lean toward the latter, read on.
Source: The Balance
How to wholesale ethically
Wholesaling gets a bad rap because many people don’t do it ethically, or even legally. And, herein lies the crux of it—wholesaling is legal if you do it right.
Confused? Think about it a different way. For instance, driving is legal but driving over the speed limit is illegal.
So let’s say you’re open to the idea of adding a new revenue stream to your business via wholesaling. You want to be 100% legit about it. Great, there’s plenty of money to be made.
How much exactly?
Well, how long is a piece of string? As with traditional deals, some people make $10,000 a month while others reach $100,000 a month. As a rule of thumb, you can expect to make around $15,000-$25,000 in higher-priced areas compared to a profit margin of $3,000-$5,000 in lower-priced areas.
But it depends on a few key factors, such as:
- Consistency – You must nurture a constant pipeline of deals. If you want five transactions a month, you need a system in place to continually bring in deals.
- Smart math – Always calculate your projected ROI including the cost of marketing e.g., direct mailing, online advertising, etc., into your budget.
- Realistic expectations – Make sure your numbers are realistic otherwise, investors won’t bite.
Of course, it’s also an absolute must to check with your legal pro and make sure you’re completely crystal on the wholesaling laws in your state.
Still think you have what it takes to win in wholesaling?
Here’s a step-by-step guide to doing it right
1.Know the rules
As a Realtor, there’s no reason you can’t engage in investor activities—as long as you follow the rules.
If you want to do wholesaling legally and ethically, here a few things to consider:
- You could offer a bilateral contract between you and the seller that stipulates that you are acquiring an equitable interest.
- You must provide proof of the intent to purchase, e.g. proof of funds letter.
- When the house goes under contract with the first seller, only then can you go out and find a new buyer.
What’s considered illegal?
We can’t stress this enough: The information you’re reading here is NOT legal advice.
Always check with your legal counsel to make sure you’re operating in accordance with the laws of your state. Having said that, there are a few practices that are considered illegal in many jurisdictions:
- Bringing in a buyer before you have a seller
- Not having a contract in place with the seller
- Not being able to prove intent to purchase
Again, don’t take unnecessary risks. Always consult with your lawyer before you solicit your first wholesale deal.
2. Build a pipeline of wholesale leads
Than Merrill, CEO of CT Homes and Fortunebuilders, says “The most successful real estate investors and wholesalers have one key thing in common: they are also expert marketers. To thrive as a wholesaler, you have to find the best deals. And to find the best deals, you need to know how to market effectively.”
Without a healthy pipeline, you don’t have a business.
Here are some tips to help you set up your wholesale pipeline to get the best deals:
- Find the right leads – You don’t want home sellers who aren’t a good fit, a good lead is a seller who has an urgent need to sell for whatever reason.
- Keep them moving – At any one time, aim to have at least 15 different deals in your pipeline at various stages, e.g., initial contact, follow-up call, bid preparation and closing.
- Use your MLS – As a Realtor, you can reap the benefits from the wealth of info already at your fingertips.
- Hire an assistant – If the opportunities aren’t already finding their way across your desk, get an assistant to help you locate potential sellers by searching for distressed properties.
- Foster trust – At all points of the process, always aim to nurture trust with your investors and homesellers.
3. Do the math
Wholesaling isn’t a hustle where you think on your feet and over-inflate your prices in the hope someone will be desperate enough to go for it.
No, you need to prepare and do your homework. Calculate your Maximum Allowable Offer (MAO), the top amount you can spend and still make a profit. To get an accurate figure, you need to calculate everything from repair costs, the flipper’s profit margin and transaction costs.
Armed with this info, you’re ready to negotiate with the seller.
4. Put in a transparent offer and close the deal
As an ethical investor-buyer and Realtor, your priority is to act in the best interest of the home seller, not your own.
So when it comes to putting in an offer for the property, there are few things to keep in mind:
- Always be professional – Be polite, on-time and treat this deal like any other.
- Outline the benefits to the seller – For instance, avoiding defaulting on their mortgage, facilitating a quick move, etc.
- Explain the process clearly – Tell them exactly what’s involved and your role in the process. For example, you’re responsible for dealing with the contract and property inspection, etc.
- Be clear about your offer – You could point out the cost of repairs but also let them know that if they’d be willing to wait and make those changes, they might be able to get a higher asking price.
- Have your paperwork ready – Make sure you have a CMA ready to be presented and signed by the seller and that all the right disclosures are in order.
Remember, as a Realtor you’re better placed than most to reap the rewards from a career (or side hustle) in real estate wholesaling. Just don’t sacrifice your morals to make it happen.
By simply applying your one-of-a-kind skills, knowledge and capacity for building genuine relationships, you’ll have a much greater chance of success than the majority of wholesalers out there who see it as little more than a “get-rich-quick” money-maker.