9 Things I Wish People Would Have Told Me Before I Started Wholesaling Real Estate
I did my first wholesale deal when I was 20.
Now, I’ve been an active real estate investor for more than 4 years and my team has done hundreds of deals.
And while wholesaling was presented to me (and probably to you, too) as “THE” way to get started in real estate investing with little to no money down, that doesn’t mean the journey is simple or easy.
Yes. It’s a great way to get started and it’s an extremely profitable business model. But as with any business, there are challenges.
So here are 9 things I wish people would have told ME before I started wholesaling real estate.
What is wholesaling in real estate?
Wholesaling real estate is the term used to describe finding opportunities for investors, selling them to an investor at a markup, and getting paid in the middle. The steps for wholesaling a deal are outlined below.
And this isn’t exclusive to real estate. Wholesaling exists in every industry in the world. To sum it up… It’s the process of buying low and selling high. It happens at grocery stores, gas stations, dealerships, and with houses.
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Step by step wholesaling instructions:
1) Find a Property That You Can Buy Directly from the Owner at a Discount.
Most wholesalers use “The 75% rule” to analyze whether or not a property is a good deal for an investor or not (check out the video below to learn more about the 75% rule). Wholesalers find these properties by advertising their service (“We can buy your house fast for cash!”) to homeowners with high equity. Typical targeting includes out-of-state owners, people going through probate, people filing for divorce, vacant properties, longterm landlords and more. The goal is to find people who may want to sell their home quickly and as-is, or who are struggling to sell it on the MLS.
2) After Finding a Property, You Negotiate With the Owner to Purchase the Property As-is, for Cash, and Typically Within a 30-day Timeframe.
This is how we make our offers:
Some folks struggle with the “ethics” of going under contract on a property that they can’t technically purchase with their own money. I totally understand not wanting to do business in a “shady” way, which is why I prefer reverse wholesaling for newbies. You can watch a free training on how I made $100,000 starting with $0 below.
3) If You Get the Property Under Contract, the Pressure Is Now on to Find a Cash Buyer to Purchase the Contract.
Notice I didn’t say, “purchase the house.” In order to avoid getting charged with “brokering without a license” — a criminal offense — wholesalers need to be very careful of the language that they use to explain what they’re doing. You’re selling the contract and taking a commission for finding the deal, you’re not really buying or selling the property itself.
Fortunately, finding cash buyers is typically much easier than finding motivated sellers. So you shouldn’t have too much trouble here. A cash buyer is usually a real estate investor who wants to buy low-price homes and then flip them for a profit (or hold them for recurring revenue). You, as the wholesaler, help them find those deals and take a commission in the middle.
So how are you going to find these cash buyers who will purchase your contracts and won’t mind giving you a cut out of the middle? This is how I find all of mine. 🙂
4) Once You’ve Found a Buyer, You’ll Find an Investor-friendly Title Company Who Is Familiar With Assignments and Simultaneous Closings.
Just call a few title companies in your area and ask them if they work with investors and if they’re familiar with assignments and simultaneous closings. It won’t take long before you find a winner.
What Is An Assignment?
An assignment is when you “sell” someone your contract for a fee. The amount you get for a fee is totally negotiable and can range from $1-$100,000+. My personal average profit is $17,500. I advise new investors to always budget for a minimum profit of $8,000.
What Is A Double Or Simultaneous Closing?
A double closing or simultaneous closing (I use the two to describe the same thing) is when you sign a second contract with your buyer. Contract 1 (known as A-B) is between you and the seller. Contract 2 (known as B-C) is between you and your cash buyer. You are the seller now (as if you own the house) and they are the buyer. A title company then uses their funds to fund your purchase of the property and cuts you a check for the difference. This is a more complicated closing, but the pro is that the end buyer can’t see what you made on the property without going back to look at recorded documents a month or so later.
Note: In some markets, you can’t double close without funding for your A-B contract. This is where you would need to look into transactional funding. In some markets, you don’t use a title company but a closing attorney. In some states, you also have to pay a “transfer tax” which can tack on an extra 1.5-2% in fees. On a 250k house this could eat up THOUSANDS of dollars of your profit.
I Suggest “Googling” The Following For Your Specific Market
A. Is (insert your state) a title company or attorney state?
B. Does (insert your state) have a transfer tax on property sales?
C. Is transactional funding required to wholesale houses in (your state).
This will allow you to approach a title company or attorney and sound like you have somewhat of an idea what you’re talking about.
Which Closing Method Should You Use?
90% of the time, we double close. In theory, it shouldn’t matter to your buyer what you’re making if they want the deal. This would work great if people were strictly logical, unemotional beings.
But, of course, they’re not.
The last thing you want is for a buyer to see that you’re making a $20,000 profit and refuse to sign because they’re jealous. It sucks… But it happens. Our rule of thumb is that we will double close anything over $8,000 unless we know the buyer (have worked with them before). I have no problem assigning a low-end dumpy house that I’m only making a few thousand bucks on.
A good rule of thumb is to assign anything where you’re making $8,000 or less and to double close anything more than that — but again, this will depend on the state where you’re operating.
Is Wholesaling Real Estate Legal?
I HIGHLY recommend talking to a real estate attorney in your market. There are states like Illinois, Florida, and Ohio that have enacted legislation that limits your ability to operate within the guidelines of the law unless you’re a licensed real estate agent/broker. In most markets, if you abide by the laws (which your attorney will discuss with you), you are in the clear. I am not an attorney and this DOES NOT constitute legal advice. Consult your advisors.
Isn’t wholesaling shady though?
I understand why people ask me this question. In some sense, wholesalers pretend like they’re cash buyers when they really aren’t.
Maybe that bothers you… maybe it doesn’t.
But if you don’t have the cash to buy the deals that you’re finding, you can always reverse wholesale (which I outlined above), partner with someone who has the cash, or get pre-approved with a hard money lender. The truth is (and many “gurus” will disagree with me), you should NOT go under contract on a property that you cannot close on. Doing so puts you at unnecessary risk and can quickly hurt your business’ reputation.
Some reputable hard money lenders you might consider are Ironbridge out of Portland, Dominion Group out of Baltimore, and Lima One.
If you have the cash or the ability to close on the property, I have zero issues with wholesaling.
If you live in a state that doesn’t allow “wholesaling,” you could always close on the properties and resell them for a profit. With the exception of Illinois, I haven’t seen a state that restricts its citizens right to buy and sell property.
Won’t Sellers Get More Money on the MLS?
Not always. Often we purchase properties that WERE listed on the MLS and didn’t sell. There are a number of reasons that a property would not sell on the MLS. Bad pictures, poor description, wrong pricing, if the house needs to be repaired, isn’t staged, or is dirty, for example. When I quit my W2 job, my first wholesale deal was my wife’s grandparents Triplex. I sold the property for MORE than it was listed on the MLS, making them more money. They didn’t have to pay any agent commissions. You can hear the ins/outs of that deal here:
The 3 Lies Newbie Real Estate Investors Are Told…
- You are going to be working with people desperate to sell their houses.
- You can wholesale properties with no cash and no time.
- Wholesaling will make you rich and wealthy.
What I Wish I Knew When I Was Starting
Wholesaling real estate is a transactional business that can end up being much more of a J-O-B than you’d think. I remember calling my dad in 2017, telling him that while I was making great money, it ALL hinged on me. I couldn’t get sick, take a day off, or stop “hustling”. If I did, the money would stop coming in.
If you want this to be a business and not a job, you’re going to have to build a team. A 7-figure wholesaling business usually consists of someone doing acquisitions, dispositions, and admin work… at a minimum.
Here’s what that looks like…
Acquisitions: Working the leads, meeting with sellers, and negotiating the deals.
Dispositions: Selling the properties that acquisitions sources, networking with cash buyers, and building the buyers list.
Admin: Getting all of the contracts to the right people at the right place, coordinating utilities, insurance, etc.
When you are first starting out, you are ALL of that!
But as time goes on and your business starts making money, reinvest your profits into hiring the necessary people to make running your business easier… that way, it will support you and your family for the long-term.
Hate Accounting? You Have to Track Your #s from Day 1!
If you really want to be successful in this medium of real estate investing, you have to set up really good accounting from day one. The vast majority of investors don’t know their numbers.
They don’t know how to predictably scale because they don’t know how much it costs them to get a deal. They treat it much more like gambling than a business. You should never “hope” a campaign is going to work. You need to know what your profit and loss statement looks like every month. You need to know what your cost per lead, appointment, and deal are. Only then can you make informed business decisions.
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