The Basics of Real Estate Wholesaling
Little or no money isn't a barrier to wholesaling real estate.
I'm not here to puff up real estate investing, nor to convince people that they can get rich quick in the business. However, there are people getting pretty nicely compensated in real estate investment, as there are many ways to approach the business. One way to enter and even succeed long term is to become a real estate wholesaler. There are some really major advantages in wholesaling real estate over wholesaling to retailers.
- You don't need to buy inventory in huge quantities from manufacturers.
- You don't need to buy or rent warehouse space to store all of that inventory until you parcel it out to retailers.
- You don't need trucks to cart your inventory around.
- You don't need employees to count, secure and transport your inventory.
- You don't need insurance and employer taxes to cover all of this major investment.
Your inventory is permanent in location, doesn't need to be transported anywhere, and you don't need employees or even insurance to secure your investment. Real estate wholesaling mostly requires a thorough education in property valuation, as well as marketing and negotiation skills. All of these are things you can learn.
So, just what is real estate wholesaling? You become the middle person who matches up a distressed or undervalued property with a happy buyer. Who is the buyer? In the vast majority of cases, it will either be a fix & flip investor or a long term rental investor. What value do you deliver, as that's required if you're going to profit in this business? You bring your time and skills in locating undervalued properties, controlling or buying them, and selling them to your buyers who wouldn't have known about them otherwise.
Since you're selling to investors, the first critical factor in a successful real estate wholesaling business is that you understand that they want to buy properties below their current market value. The savvy investor understands that a successful real estate investment begins with a purchase below real current value. In other words, some profit exists the moment you leave the closing table.
With that in mind, your job is to find and control/purchase properties that are far enough below current market value that you can meet your buyers' needs and still have room for profit in the middle. If you're selling to a fix & flip investor, you'll need to know enough about the costs of renovation and repair to be able to know that it can be rehabilitated and that the ARV, After Repair Value, will still be high enough for you and your buyer to make money.
If you're selling to a long term rental investor, you'll have to understand your local real estate market, population demographics, and rental prospects and rents. You'll need to be able to calculate what your buyer can get for rent, their costs for the property, if they're buying cash or using a mortgage, and what they would consider adequate cash flow.
I'll go into detail in other articles, but the thing that makes real estate wholesaling so enticing is that you can do all of this with very little or no money out of pocket. Using assignment contracts, you can control a property through closing with your buyer with only a small earnest money deposit. Profit can be increased if you actually contract to buy the property and do a "double-close." This requires using transactional funding. These transactional lenders provide the funds to close the purchase with you as buyer, and they get paid back hours or a day or so later when you sell to your buyer.
Those are the basics of wholesaling, and we'll get into it in more detail in other articles.