Wholesaling For Beginners
by Tad Lignell, Senior Real Estate Adviser
- Wholesaling is great investing opportunity for those with low capital or low credit
- Always have an exit strategy in place, do your due diligence
- If you want to close deals, you have to make offers
- Education is key to every real estate deal, it never hurts to be prepared
Wholesaling is one of the most underrated ways to get into real estate with little to no money or risk. For the aspiring real estate investor with little to no money or low credit, wholesaling is a great starting point even if your ultimate goal is to become more involved in fix and flips or rental properties. New and experienced investors alike, this investment approach can produce significant revenue and contribute to your overall success as a real estate investor.
Basics of Wholesaling
When completing a wholesale deal, there are going to be three main players involved. The seller, the wholesaler, and the buyer. When wholesaling you will be putting a property under contract and then selling your contract to someone else at a higher price. Since you are selling your contract, you are never closing on the property, which means you are not buying the property, someone else is. (This means no money, no credit needed from you). By doing this, you are not having to put down a large down payment, you are not having to get a loan. The only money you will need, is money for an earnest money deposit (EMD). In some cases, the EMD can be a very small amount of money and can even be nothing at all.
What’s the Next Step?
The trick to completing a successful wholesale transaction if you’re low on money or credit is establishing your exit strategy beforehand. Start by building your network and try finding a buyer early. If you’re not prepared to purchase the contract due to minimal funds, having a few potential buyers in mind can help ease some stress when coming to the end of your deal.
When wholesaling a property, you must put the property under contract at a discount. Why? Because you are putting the property under contract at one price and then selling the contract to an investor at a higher price. There must be enough room or profit margin for the investor to pay your higher price and also for the investor to be able to make money on the deal. You can do this by offering to buy a distressed property. While you may not be in the position to do a fix and flip on your own, someone else might be. Making an offer on a distressed property can be easier because a lot of the time the seller is motivated to sell quickly and you will also be purchasing the property lower than the market value.
Most likely you are going to have to make several offers to get one accepted, but that’s okay. It costs nothing to make an offer. Making a low offer is also okay. If a seller accepts your first offer, you’ll never know how much lower you could have gotten the property for. Remember, every dollar less that you are able to put the property under contract goes straight into your pocket.
Let’s look at an example.
You find a property that has an ARV of $275,000 needing $25,000 in rehab. Lets say you are able to put the property under contract for $175,000. Say you sell the contract to an investor at $185,000, you make $10,000 and leave the investor $90,000 to rehab, pay money costs, holding costs, selling costs and profit. Everybody wins!
So How Do I Start?
Education! Every real estate investor should always start their real estate journey by getting the right education under their belt. Understanding the market, knowing the risks, analyzing potential exit strategies, and familiarizing yourself with the different processes of wholesaling will leave you feeling more confident and capable of performing a seamless wholesale transaction. Once you have the education, the only thing left is having the courage to take that first step. And that is up to you.