Wholesaling 101

wholesaling 101

Welcome to Wholesaling 101. Wholesaling is a great way to get started in real estate investing with little or no money, it doesn’t matter if you have bad credit or no credit at all. What is wholesaling?  Most simply, wholesaling is putting a property under contract and then assigning the contract to another buyer. In some cases the wholesaler will actually purchase the property and resell it quickly to an end buyer, this is also known as a simultaneous closing. Because the wholesaler (you…yes you will be ready to wholesale by the end of this page) is dealing directly with homeowners, putting the property under contract, and then quickly selling that contract, there is no need for banks, credit checks, etc. This is the reason why anyone can begin wholesaling today.

The difference between bird dogging and wholesaling is that a wholesaler takes a few extra steps. This is what allows a wholesaler to make more money instead of a small finder’s fee. A bird dog will just pass a lead to an investor and let the investor put the property under contract, etc. A wholesaler will put the property under contract, and then market the property to prospective buyers. This gives the wholesaler more control and the ability to determine how much they will make on each deal.

Who can become a wholesaler?

Just as anyone can become a bird dog, the same holds true for a wholesaler. You don’t need a license to sell real estate that you have an equitable interest in. If you do not have equitable interest in a property, you would then need a real estate license to sell the property for the seller.

How does it work?

Here’s a quick scenario of how a wholesale deal may unfold:

-Wholesaler markets to distressed property owners
-Wholesaler obtains a lead and screens prospective seller
-Wholesaler researches comps in the area and determines if this is a good wholesale deal
-Wholesaler meets with sellers and puts property under contract
-Wholesaler immediately begins to market to cash buyers
-Wholesaler assigns the contract to cash buyer for $x

Sample numbers might look like this:
ARV (After Repaired Value): $100,000
Repairs: $10,000
Under Contract: $50,000
Sell to Cash Buyer $55,000
Collect $5,000 assignment fee (profit to wholesaler)

What is the wholesale buying formula?

The wholesale buying formula can vary depending on location and market condition.  The worse the location of the property, the less you will pay for the property.  If the property is in “the hood” you would obviously adjust this formula accordingly.  Likewise for properties in nicer areas.  The typical buying formula that I use in most areas of New Jersey that I’m wholesaling is 65% FMV (fair market value) minus repairs.  This is just a guideline, so as a new wholesaler, you should research your area to adjust your formula accordingly.  A great way to figure out what formula works for your area is to ask investors what they would pay for property X.  Based off their feedback you will be able to get an idea of what percent of ARV you need to be.

What contracts should I use?

This depends on the deal as well as your state.  Whatever contracts you decide to use, you should have them looked at by a real estate attorney (you have a real estate attorney don’t you?).  It’s best that you use a real estate attorney that understands creative real estate transactions.  This will make your life a lot easier in the future.  If your attorney is a general attorney that “does” real estate closings but doesn’t specialize in real estate, you will find yourself spending a lot of time trying to educate your attorney on basic transactions such as assignments (this holds up deals and is not fun).

I recommend that you have a few contracts that you can use: 1. Simple real estate contract, 2. Option Contract, 3. Flex Option contract. I like my contract to be as simple as possible so it’s not intimidating to the seller, while containing the right clauses to protect myself.  I use an option contract when I’m not 100% sure of the property value but would like to market it to my cash buyers.  I use flex options when co-wholesaling with associates.

Where can I get these contracts?

There are a few sources where you can obtain these contracts:

-Staples should have a standard contract for your state
-Ask investors in your local REIA if they would share
-Purchase a wholesaling course and have your attorney make sure it’s state compliant
-Pay an attorney to draft one up
-Search online and have your attorney make modifications so it’s state compliant

I have never obtained a contract from staples myself.  I’m not sure if they are simple or if they are similar to Realtor contracts (lengthy). If you’re a new wholesaler in NJ, perhaps I could share mine but it will cost you plenty of blue monkey coconut waters!

How can I find leads?

Please refer to the Bird Dogging 101 page for information regarding lead generation

How can I find property values?

The best place to find property values is sold comps on the MLS (Multiple Listing Service). In order to get MLS access you need to:

-be a licensed agent
-obtain access from a licensed agent (against TOS on many systems)
-have an agent provide comps to you

Other ways to obtain general values are through automated systems online:

www.zillow.com
www.eppraisal.com
http://express.realquest.com

These three sites are helpful tools, however, they shouldn’t be used for concrete numbers.  I have seen some property values vary over a few hundred thousand.

Once I have the value of the property, what do I do?

Once you have your ARV value of the property, you apply your formula above to obtain your MAO (maximum allowable offer).  Your MAO is your offer price to the homeowner.  Once accepted, you obtain a signed contract from the seller (now you have equitable interest) and begin marketing the property.  You market the property for the amount you have the property under contract PLUS your wholesale fee.

How do I market the property?

There are a number of steps to go through when marketing  a property.  Here are some of the steps I use:

-Post the property through online web sites (vFlyer, Postlets, Craigslist, etc. – see full list under resources page)
-Send email blast to all of my cash buyers (you have been building your buyer’s list haven’t you?)
-Place handwritten bandit signs in the neighborhood (*caution – make sure you know the zoning regulations & laws)
-Jedi Tip* – Look up closed transactions in the past 6 months that were closed cash.  Call up these buyers and tell them about your property

I have a buyer, now what?

Once you have a cash buyer lined up and have agreed on a price, you have them sign an “Assignment of Contract”.  Upon signing the assignment, the buyer should provide a non-refundable deposit (typically $1,000) and the rest of the balance will be paid upon closing.

After you close on the property, rinse and repeat.

Don’t forget to leave a case of coconut water at the door….the Jedi is out!

update: For further education and taking your wholesaling to the next level, please join our forums at www.reiunite.com/forums


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