Real Estate Wholesaling - A Viable Real Estate Investment Strategy
Unlike grocery wholesaling, real estate is low overhead and high profit.
Real estate wholesaling in articles and books gets both good and bad coverage. Let's look first at a general definition: Real estate wholesaling is taking a position between a seller and a buyer and profiting from an immediate resale of a property without significant rehab or time of ownership.
That's my definition, but it fits my view considering my extensive freelance writing work as a ghost writer for real estate investment "gurus." You could call it "flipping," but wholesaling seems to add a bit of professionalism. Contrasting it to other wholesalers in various industries, it's a really very low overhead and high profit margin business. You don't have:
- warehouse space rent and upkeep.
- office space to manage and sell from.
- employees to manage inventory.
- trucks to transport inventory.
- insurance to cover all of the above.
- necessity to purchase from manufacturers in bulk before sale.
Those overhead costs are significant, and most wholesalers have profits in the very low single digits. The real estate wholesaler on the other hand:
- can work from their kitchen table.
- doesn't need to warehouse anything.
- doesn't need employees nor insurance for them or facilities.
- can control a large value asset with relatively little money out of pocket.
Who is your customer in real estate wholesaling?
Before you ever investigate real estate for purchase or control, you need buyers-in-waiting. It's called building a buyer list, and it's crucial to your success. Your primary customers are other investors, either rental property buyers or fix & flip investors. You can sell at retail to consumers, but it's more risky and costly due to marketing and commission costs.
You need to build out a list of buyers through building relationships with other investors. You can join real estate investment clubs to meet them. You can advertise to them through running property for sale ads in newspapers and Craigslist. Basically, you need to meet as many real estate investors as possible, and you need to keep a database or file with a minimum of this information about each:
- their neighborhoods of interest.
- their primary interest; are they going to fix & flip or are they buying rental properties?
- their price range and profit goals; in other words, what will they pay for a home?
Do not go out and search for properties or run marketing until you have at least a few active investors on your buyer list. You'll not want to commit to a property without a reasonable prospect of selling it quickly.
What are your sources for properties for real estate wholesaling?
Once you have buyers on your list, it's time to go out and find properties that will make you a profit as a wholesaler. They could be:
- owner occupied pre-foreclosures.
- owner occupied by distressed sellers.
- abandoned pre-foreclosures.
- government auctioned foreclosures.
Foreclosures are easy to find through foreclosure websites and other sources that publish foreclosure property lists. Owner occupied properties normally require marketing. Real estate wholesaling marketing methods include:
- bandit signs.
- newspaper classifieds.
- Craigslist ads.
- wholesaler website.
- wholesale investor blogging.
- social sites marketing.
- relationships with real estate agents and mortgage brokers.
When you locate a property that could be right for one of your buyers, running the numbers and due diligence is next. You'll need to be very cautious in getting all of your costs covered, as well as a pretty close idea of what your buyer will have for costs, especially in the fix & flip deal. In other words, you need come up with what the property is worth in the current market, then subtract these items to see what you can pay for it:
- the discount to value the buyer will want.
- the rent that can be charged if your buyer is a rental property investor.
- the costs of rehab if your buyer is a fix & flip investor.
- your costs in getting it to the closing table.
- your desired profit.
If you run all of the numbers and you see that this property can be quickly re-sold to one of the buyers on your list, it's time to contract to buy it or lock up control through one of two methods:
- Assignment Contract - You sign a deal with the seller that allows you to "assign" your purchase rights and responsibilities over to another (your buyer ultimately). You'll need some earnest money, but you'll need no further financing with this method. You go to your buyer and do an assignment of your rights for a price that includes your profit. Your buyer takes over and takes it to closing.
- You Contract to Buy - You actually sign a deal to buy the property. This will require two closes, one for your purchase and another right after for your buyer to purchase from you. You'll need earnest money, and you'll need transaction funding to pay for the home and collect their fee and reimbursement from the second closing.
This is admittedly an overview of the process, but it should help those interested in real estate wholesaling to take advantage of the other links and to learn more.