Wholesaling Basics
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What is Real Estate Wholesaling?
Simply put real estate wholesaling is the process of finding real estate you can buy at a substantial discount, placing the property under contract by signing a purchase agreement with the seller, then selling your interest in the property to another buyer at a discount. The difference between the "substantial discount" you buy at and the "discount" you sell at is where you make your money. Here's the reason why wholesaling works... When you sign a contract with someone and give them consideration usually in form of a Earnest Money Deposit (EMD) they're legally bound to sell you that property. (There has to be some type of consideration to make the contract binding even if it's just one dollar $1.00) |
In other words it gives you "equitable rights" to the property and its perfectly legal to sell those rights to another buyer.
Typically in the real estate wholesaling world your buyer will be an investor that is going to fix up and either rent or resell the house.
The best type of buyers you can have is a cash investor because they can move quickly and make the real estate transaction go smoothly, and quite often they have experience working with other wholesalers.
Typically in the real estate wholesaling world your buyer will be an investor that is going to fix up and either rent or resell the house.
The best type of buyers you can have is a cash investor because they can move quickly and make the real estate transaction go smoothly, and quite often they have experience working with other wholesalers.
Let's take a look at what a typical wholesaling transaction looks like:
- The wholesaler (you) locates a house owned by someone motivated to sell below market value because the home needs repair or for numerous other reasons we'll discuss later.
- The house's ARV (After Repair Value) is $110,000 but the savvy wholesaler (you) negotiates a price of $60,000 because of the condition of the property and you estimate the needed repairs to be in the neighborhood of $10,000
- The wholesaler (you) and property owner (Mr. Seller) agree to the price and you place the property under contract with a real estate purchase agreement.
- The wholesaler (you) then sends the property information to his list of house hungry cash investors and quickly find one eager to buy it at the price of $70,000 ($60,000 sales price + $10,000 assignment fee)
- The Wholesaler (you) and the cash investor (Mr Cash) sign a one page assignment agreement that transfers your equitable rights to purchase the property to him for an assignment fee of $10,000 dollars.
- Lastly the real estate closing takes place and you walk away with a check for $10,000 dollars and move onto your next deal.
Now obviously the example above is over simplified but it's meant to be so you get a very basic understanding of how the wholesaling process works. Don't worry by the end of the course you'll know everything there is to know about the real estate wholesaling business.
No Cash, Credit or hammers needed
Many people want to get into real estate investing because we've all been told its one of the best ways to build wealth, but there is a common misconception you need cash and good credit to jump into the game... This is just Not True!
As you'll learn wholesaling doesn't require cash or credit because you're not personally going to buy the property. Your role is really to be the the middle man in the transaction that brings the seller and buyer (investor) together.
The funds needed to buy the property will come from the buyer you assign the contract to so again you'll never need cash, credit, line of credit or mortgage approval to be a real estate wholesaler.
In addition to eliminate any risk all the real estate contracts you'll use in wholesaling contain "exit clauses" that allow you to get out of the contract should you have problems finding a buyer to assign the contract to.
We'll speak more about contracts and exit clauses in the wholesaling contracts section later in the course.
Another great aspect of wholesaling houses is that unlike flipping houses you'll never lift a hammer or touch a paint brush. Wholesaling is a quick transaction which is usually completed in 30 days and often much less.
So while flippers sometimes make more money on a deal they have a lot more time, money and risk invested as well. (YAY WHOLESALING!)
As you'll learn wholesaling doesn't require cash or credit because you're not personally going to buy the property. Your role is really to be the the middle man in the transaction that brings the seller and buyer (investor) together.
The funds needed to buy the property will come from the buyer you assign the contract to so again you'll never need cash, credit, line of credit or mortgage approval to be a real estate wholesaler.
In addition to eliminate any risk all the real estate contracts you'll use in wholesaling contain "exit clauses" that allow you to get out of the contract should you have problems finding a buyer to assign the contract to.
We'll speak more about contracts and exit clauses in the wholesaling contracts section later in the course.
Another great aspect of wholesaling houses is that unlike flipping houses you'll never lift a hammer or touch a paint brush. Wholesaling is a quick transaction which is usually completed in 30 days and often much less.
So while flippers sometimes make more money on a deal they have a lot more time, money and risk invested as well. (YAY WHOLESALING!)
Important Wholesaling Facts you must understand!!!
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Real Estate Agents (Realtors) and Brokers are licensed to sell real estate (you're not)
Your state's laws require Realtors and Brokers to meet certain education requirements and pay licensing fees to legally negotiate and arrange the buying and selling in real estate transactions. Real Estate Wholesalers on the other hand DO NOT sell property, they sell their equitable rights to a purchase contract. I'll say it again... Real Estate Wholesalers sell the rights to the purchase agreement they have negotiated with the property seller, not the property itself. |
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As you might of noticed I've repeated myself several times on this page and it's because I want to beat the basic concept of wholesaling into your head.
Almost always I see wholesalers advertising a "house for sale" instead of a "contract assignment"
This is completely wrong and could get them into hot water. Later will discuss how to market the properties you get under contract the correct way so you don't get yourself into trouble.
Almost always I see wholesalers advertising a "house for sale" instead of a "contract assignment"
This is completely wrong and could get them into hot water. Later will discuss how to market the properties you get under contract the correct way so you don't get yourself into trouble.
Income Potential
Many people ask how much they can earn wholesaling houses, and as you can imagine its largely based on your market, skills and effort. Since you're probably looking for a more specific answer lets dive a little deeper.
Personally I've done most my wholesaling in metro Detroit, and the investors I work with typically buy houses in the 20-50k range. Many rehab the properties and turn them into rentals and a few completely renovate and resell them.
My assignment fee's are usually between $5,000 and $10,000 on homes in this price range, but can go as high as 15,000 and as low as $2,500.
Now I like making money on my deals just as much as the next guy, but I'm not greedy and like to leave profit in the deals so the investors I work with can make money too.
I also almost never have problems finding buyers like so many wholesalers I see online trying to peddle their over priced deals.
If you're in a city similar to Detroit like Chicago, Philadelphia, Saint Louis, Baltimore or any other like them, and are working with lower priced properties I'd expect you to make the same on your assignment fees.
However, if you're in an area with higher priced properties or working with investors flipping high-end homes you could expect to make two or three times the amount on your deals.
Quantity of deals is also a factor... Some wholesalers do a deal or two a month and are okay with that. While others fine tune their system, pour money into marketing and do dozens per month.
Hopefully this gives you an idea of what you can make wholesaling houses, but at the end of the day your skills and effort will truly determine what you'll earn.
Personally I've done most my wholesaling in metro Detroit, and the investors I work with typically buy houses in the 20-50k range. Many rehab the properties and turn them into rentals and a few completely renovate and resell them.
My assignment fee's are usually between $5,000 and $10,000 on homes in this price range, but can go as high as 15,000 and as low as $2,500.
Now I like making money on my deals just as much as the next guy, but I'm not greedy and like to leave profit in the deals so the investors I work with can make money too.
I also almost never have problems finding buyers like so many wholesalers I see online trying to peddle their over priced deals.
If you're in a city similar to Detroit like Chicago, Philadelphia, Saint Louis, Baltimore or any other like them, and are working with lower priced properties I'd expect you to make the same on your assignment fees.
However, if you're in an area with higher priced properties or working with investors flipping high-end homes you could expect to make two or three times the amount on your deals.
Quantity of deals is also a factor... Some wholesalers do a deal or two a month and are okay with that. While others fine tune their system, pour money into marketing and do dozens per month.
Hopefully this gives you an idea of what you can make wholesaling houses, but at the end of the day your skills and effort will truly determine what you'll earn.
Market conditions
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I've read some articles talking about the impending doom of another housing collapse and how it would kill the real estate investing and wholesaling business.
These articles must of been written by house flippers or people that only understand that side of the business, so I wanted to take a minute and clear things up for you. As a professional real estate wholesaler you should have two kinds of investors on your cash buyers list... Landlords (buy and hold investors) and Flippers (buy, renovate and sell investors) You see when the real estate market is Hot Flippers are buying up properties to renovate and resell, because there are a lot of potential homeowners looking to buy. But when the market cools down Flippers stop buying. |
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However, savvy real estate investors that like to "buy and hold" know that a down market is the best opportunity to make money, so they start buying up discounted property while the market is bad.
I personally got into wholesaling in a down market so it makes me laugh when the "experts" say wholesaling will be harder in a down market. Trust me, they'll be more opportunities than you can handle if you have the right investors on your cash buyers list.
I personally got into wholesaling in a down market so it makes me laugh when the "experts" say wholesaling will be harder in a down market. Trust me, they'll be more opportunities than you can handle if you have the right investors on your cash buyers list.
Lesson 1: Wholesaling Basics Recap
- Wholesalers make their money on the assignment of the purchase contract.
- You do not need a real estate license to wholesale real estate.
- It's 100% legal because your assigning your rights to a contract not selling real estate.
- Wholesaling is a cash now strategy unlike flipping or owning rental properties.
- You don't need cash or good credit to be a real estate wholesaler
- Wholesaling is the perfect place to start for new real estate investors
- Make sure you have both types of investors on your cash buyers list
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