In the single-family residential market, you have undoubtedly heard of wholesaling. Naturally, this might conjure up thoughts of houses sitting on tall shelves in warehouses. What exactly is wholesale real estate anyways?
Real estate investing can come in many different strategies. The industry itself is massive and has many other asset classes, hold times, and business models that you can implement. When just starting, you may look into single-family rentals, the BRRRR Method, multifamily rentals, and commercial real estate.
What is Wholesale Real Estate?
Wholesaling is a nickname used to describe a type of real estate investing or transaction where the investor buys and sells an interest in the property without holding it.
The wholesaler has a direct relationship with sellers through various marketing forms. They can then negotiate the terms of a sale to take to another market and sell for a profit.
Since the real estate market is tight, investors like house flippers find much value in dealing with wholesalers to source their subsequent real estate investments.
Assignment Vs. Double Close
Wholesalers typically use a double close or an assignment of the contract to sell the property. The investor buys the double property close and immediately sells it to the end buyer. Frequently the title company waits until everything is signed and funded to execute both closings. The wholesaler assigns their interest in the purchase contract to the end buyer with an assignment model.
Benefits to Wholesaling
There are many benefits to wholesaling as a real estate investor.
- Wholesaling is a short-term strategy that an investor can realize benefits from quickly.
- It does not require a large pool of capital to get started in wholesaling.
- Wholesaling can be used to get direct experience in many aspects of real estate investing.
- Since wholesaling focuses on acquiring real estate and quick disposition, investors can cycle through more deals quicker.
Negatives of Wholesaling
- By selling the properties without holding them, wholesalers short-circuit one of the best ways to build wealth in real estate.
- To be successful, a wholesaler must accurately determine the ARV and estimate rehab costs to determine a property’s value. That can be very challenging for a new investor.
Skills Required for Wholesaling
Sometimes wholesaling is viewed as an entry-level real estate investing option. That is because it does not take a lot of capital to get into wholesaling. At the minimum level, the only requirement is to get out to potential sellers and get the property under contract.
Of course, without understanding other parts of real estate investing, it would be very easy to get things wrong and get a property under contract at too high of a price to make any money on the resale.
To be a wholesaler that can get a high percentage of deals to the closing table over the long run, you need a big picture skillset than just negotiating contracts with sellers. You need to see the end-use and work backward from there.
Marketing Directly to Sellers
When marketing directly to sellers as a wholesaler, you have many different options on how to get in contact with a seller. Some wholesalers focus on one or two channels, and others embrace a multichannel marketing strategy.
Here are some of the most popular advertising channels used by wholesalers:
- Direct mail
- Cold calling
- Door to door marketing
- Social media advertising
- Radio ads
- TV ads
Once you contact a seller, it is up to you to build rapport with them, find out their problems, and see if you can help them solve them. Sometimes this is as simple as getting them a specific price and closing by a certain date. Other times, their problems might require a little more creativity to make the deal happen.
Frequently the sellers will be in what is considered a distressed situation. For example, they could be facing foreclosure, going through a divorce, or other problems where they need to sell their property quickly.
Wholesalers need to be aware of the benefits of selling to a wholesaler instead of listing with a realtor. These benefits are that a wholesaler can usually close quickly and buy the house as-is without repairs or cleanup. In addition, properties sold to retail buyers typically have an extensive due diligence period.
How to Get Started Wholesaling
There are two main aspects to work on to get wholesaling at a high level. The first aspect is to get the deal flow going. You can do this by starting a marketing campaign for potential home sellers. The second aspect is to build a buyers list. To make a buyers list, you will be identifying active real estate investors in your area and seeing what kind of properties they are looking to buy. Your job as a wholesaler is essentially to find properties that match the investors’ criteria that you know.
How do you build a buyers list? There are several ways you can go about this. The first thing to know is that you do not need to know every active real estate investor in your market. The two methods are to find local social networking groups. Facebook groups are pretty popular among real estate investors. There is likely a local wholesaling, real estate deal, or investing group in your area.
The other common way to build your buyers list is through networking: the non-online, old school, face-to-face kind of networking. That is a tried and true method and has worked for many wholesalers. The best way to start is to find a local meetup or REIA meeting. When you attend these meetups, don’t just start by telling people you are a wholesaler and asking if they would like to be on your list. It works better to build the relationship more gradually and authentically.
You need specialized skills to be aware of and work on as a wholesaler. One of them is finding comparative sales or comps and adjusting to the subject property. You need to understand the renovation process and how a flipper might approach the deal. For properties that are best as a rental property, you need to understand the rents and potential cash flow.
Most wholesalers focus on single-family residences. However, because these properties are so competitive, many wholesalers have started marketing to duplexes and fourplexes. Networking with property management companies can be a great way to get these multifamily properties under contract. Why? Because they often know when the property owners are looking to change their portfolios.
How to Find Wholesalers in Your Market
If you are not looking to become a wholesaler but realize that wholesalers could be a good source of deals for real estate investing, finding wholesalers is essentially the same process as finding buyers as a wholesaler. You can go to local meetups and REIA meetings. You can also find the local groups on social media and get involved.
Buying a property from a wholesaler is an excellent option if you want to get into real estate by house hacking. House hacking is purchasing a home or multifamily as an investment and primary residence. Usually, it involves purchasing a property that requires some work, and wholesalers specialize in buying and selling this type of property.
Is Wholesaling Illegal?
Whether wholesaling is illegal depends on the specific methodology of wholesaling and the state where you are conducting business. The laws regarding transacting real estate vary from state to state.
Residential real estate transactions are highly regulated at the state level. Most states have restrictions on what you can and cannot do without being licensed in real estate sales. There are also regulations on doing as a licensed real estate sales agent or brokerage.
However, a few things can land investors in hot water in any state. One is advertising that you have a property for sale when you only sell the assignment of interest in a contract to purchase the property. Some states make it illegal to assign contracts, making it much better to do a double close or close and then sell the property.
What is Wholesaling
Wholesaling is a play on words by combining wholesaling and retailing. It has become more popular lately, with the retail market hotter than ever.
Wholesaling involves purchasing a more cosmetically distressed property than being generally poor. The investor then cleans up the trash and debris and does minimal cosmetic repairs such as new carpet or paint. The investor then lists the property on the MLS to market it to the retail buyer pool.
Many wholesalers get into wholesaling by getting hard money loans. These types of loans are given on the security of the property itself and the strength of the business plan. Hard money lenders are in the business of writing mortgages for investment properties.
Wrapping it up
Wholesaling is buying and selling properties to investors rather than retail home buyers. Many investors utilize wholesale as an effective strategy in their investing portfolio. As an investor, wholesalers can provide a steady stream of properties to invest in.
This article originally appeared on Wealth of Geeks.