Wholesaling properties is the investment strategy I used to get started as a real estate investor. To wholesale is to buy something less than retail and re-sell it for a profit. The common practice of wholesaling in real estate investing is to contract a property for purchase and 'assign' the contract to an end buyer who will actually close on the property and own it. The wholesaler finds, analyzes, negotiates, and contracts properties for buyers. He/she is the middleman in the transaction and will sign a ‘purchase contract’ with the seller and sign an ‘assignment of contract’ with a buyer. The wholesaler receives an assignment fee as payment, not a commission. Using the term commission and not being a licensed agent to receive a commission will get you into hot water.
If you want to wholesale properties, the first step I recommend is to build your buyers list. A lot of people I have taught to wholesale seem to refuse to do this all important first step. They get excited about finding deals but have no one to give them to. Build this list first. The saying goes, “if you build it, they will come.” Thee most important rule to follow is, what is your exit strategy for every deal? Contracting properties for wholesale is great, but if you have no one to market them to, then what is the point? Build your list!
You need to find out from your buyers what type of properties they are looking for. I was wholesaling rehab properties because there was more equity spread in the deals. A bigger equity spread will allow for you to possibly receive a higher assignment fee. However, this should not be your focus. The bigger the equity spread will probably equate to more work needed on the property. You will have to factor in the rehab costs which will reduce your chance for a higher fee. Your primary focus should be giving your buyers a great deal. As time goes on, the more quality deals you give them could result in a higher fee for you.
A general equation used in the industry for contracting rehab properties for your buyers is as follows:
After Repair Value (ARV) X 65% - Repair Costs.
Example: ARV - $200,000 X 65% = 130,000 - $25,000 (Repair Costs) = $105,000. This is a good price to start negotiating to contract the property.
$105,000 Contract Price
+25,000 Repairs
$130,000 Cost for rehabber
+10,000 Re-sale after repair - Realtor commission (if rehabber uses Realtor)
+10,000 Estimate Closing costs, holding costs for repair time
+5,000 Assignment fee
$155,000 Total cost for Rehabber
$45,000 Net Profit for rehabber and $5,000 assignment fee for wholesaler. Remember these costs are estimates. Repair costs may be more or less. I made these numbers up for this example. Find out as much as you can about the seller and the property. The more you know, the more negotiating power you will have to contract the property at a lower price.
Depending on the quality of your negotiating skills will determine how solid your purchase contract will be along with protecting yourself in case one of your buyers does not want the property. You will want exit contingencies in your contract in case none of your buyers bite on the deal. The more you have written in your contracts, the better chance of getting out. All contracts have contingencies such as financing, title, inspection, etc. It is in some of these contingencies that I add on to, to protect myself in case I need to get out. I also include my own contingencies for further protection and wording in the contract so there is no money out of my pocket. Remember, everything in real estate is negotiable. The extra contingencies I add in always gets me out of the contract if needed.
I only give out these extra contingencies to those who commit themselves to further education. This is the way I learned. If you are truly committed to learning how to wholesale and get the best real estate investment education, contact me and I can get you started today. Once you commit, I will fill in the rest for you so you have a solid win-win-win transaction for all parties involved and you will have my team as a resource. One couple who committed to further educating themselves called me and asked me to show them how to do this. Last year they made over $600,000 in their business and real estate investing. Of course, they took action. Will you?
If you are ready, contact me in the Contact Us section of my blog.
Happy Investing!
Tony
