Wholesaling is one of the best ways for real estate investors to break into the industry. While looking for potential wholesale opportunities, some investors will look towards the foreclosure category as a potential avenue. Dealing with foreclosures, though, takes a bit of nuance. Let’s talk about how to start wholesaling foreclosure properties and what that might look like.
To start wholesaling pre-foreclosed properties, you’ll need to position your investment business as a solution for the homeowner’s problem. Due to the highly-emotional state that someone going through a foreclosure can be in, it’s important that you balance getting the best deal with solving the problem the homeowner faces.
That sounds pretty intense, I know. Luckily, I’ve got a great breakdown below that covers the ins and outs of wholesaling and what to do if you want to target foreclosed or pre-foreclosed properties before they hit the auction block. Let’s dive in.
What is Wholesaling?
New real estate investors see wholesaling as an easy way to break into the market. To be fair, it is, at least in concept. The truth is while the principle of wholesaling is pretty straightforward, it still takes a lot of work to become successful.
Wholesaling properties is a type of real estate investing that makes you the middleman of a real estate deal. You as the “buyer” source potential properties and submit an offer. Once the offer is accepted, you and the seller move into the contract stage. During the contract stage, rather than taking on all of the tasks that come along with closing a deal (due diligence, inspections, getting a mortgage, etc.) you find a new buyer who takes over the contract in your place.
The contract is flipped for a profit and ideally involves you putting little-to-no money down. It’s like running a business where you collect finders fees for other potential investors or even homeowners.
What Do You Need to Begin Wholesaling Real Estate?
Wholesaling is the method with the lowest barrier of entry when it comes to real estate investing. Since you won’t need to get a mortgage, the hurdles of having a good credit score and solid employment history aren’t a factor. Those with felony records can also find success in wholesaling, thanks to this.
The best part of wholesaling real estate is that it requires very little investment on your end, so it’s a great way for investors who don’t have a lot of capital to break into the industry. You should expect to have a few thousand saved to put down as earnest money in the beginning. Luckily, this is reimbursed when selling the contract to the new buyer.
That’s the good news. The bad news is that wholesaling on its own doesn’t generate a lot of profit as you’re not taking on much risk. You may be able to generate a few thousand dollars in profit per contract, but don’t expect to become rich quickly.
Successful wholesaling real estate investors develop a system that keeps a steady stream of new properties coming in and sold contracts going out. This requires a business owner who is really good at organization and detail or has someone like that on their team. If you’re just starting, it’s best to stick to one or two deals at a time until you get into the swing of things.
A Few Considerations When it Comes to Wholesaling
Wholesaling overall is a quick process when you’re in a seller’s market. However, if the market turns, you may be left holding the bag, so I want you to walk into this with your eyes open.
Typically, real estate contracts have milestone deadlines that ensure the process continues at a good clip. These milestones usually include things like due diligence, loan approvals, and appraisals. During each milestone, you may be able to walk away from the contract and get back your earnest money, but if you miss those deadlines, it could be trouble. Some sellers may let you out of the deal, but you’ll be out your earnest money. If a seller is really stringent, you may be required to continue, though this is pretty rare.
Who Should I Sell My Contract To?
The ideal buyer for your contract is a potential homeowner, as they’ll give you the best deal. That said, some “retail” buyers are wary of trusting the wholesaling process and will prefer to deal with just real estate agents and the original seller.
Most of the time, your buyer will instead be another real estate investor. Not all investors will expect the same type of deal, though, as they’ll have different price points that need to be hit.
Investors looking to become landlords and rent out the property will usually pay the best price, as they can recoup their costs over time. However, these may be hard to come by as most landlords will have their own system for finding new deals.
Fix & flip buyers are often the most eager to find a good wholesale deal as they’re on a tighter deadline for realizing a profit. The downside to fix & flippers is that they’ll be looking for the maximum amount of profit in the shortest time, so they won’t be willing to pay as much for the contract as a landlord would. If you can remove the pain point of them constantly having to source new properties, you might have a great new business partner on your hands.
Where Can I Find Properties to Wholesale?
Finding potential wholesale deals means looking for properties that are undervalued or untapped. You’re rarely going to find good deals for wholesaling on the MLS; it’s going to take a little more ingenuity on your end.
The most successful method I’ve found is what I call “Driving for Dollars” – it’s THE main strategy that I teach my students. We have videos about how Driving for Dollars works, but essentially it works like this:
- Jump in your car and start driving around neighborhoods
- Look for homes that are in some state of disrepair. Typically, this is due to homeowners who don’t have the time, money, or inclination to maintain the property.
- Reach out to them and introduce yourself, then ask if they’d be willing to sell their home to you.
- If yes, begin negotiations.
- If no, thank them for their time and ask if you can touch base in a few months. I also like to ask if they know of anyone else who might be interested in selling. Tapping into other people’s networks is a great way to find hidden gems.
Unique Factors for Wholesaling Foreclosure Properties
So now that we’ve covered the basic run-over of real estate wholesaling let’s talk about the specific considerations that come along with foreclosures.
Foreclosing on a property is both an event and a process, so it can get a little confusing. A foreclosure timeline usually runs like this:
- A homeowner gets behind on their mortgage payments.
- The mortgage lender issues a missed payment notice, which is basically the official document that says, “You’re behind on your payments. What’s up? Contact us to work this out ASAP.” While it may sound scary, it’s more about the bank trying to find a way to resolve this with the homeowner before it has to go any further. Foreclosure is time-consuming for everyone involved, so if the bank can work something out in a way that resolves the issue instead of moving forward, they most likely will.
- If it has to move forward and the homeowner is now over 90 days late on payments, the lender issues a Notice of Default (NOD). NODs are bad news for homeowners because this is the official beginning of the foreclosure process, and there’s very little chance of turning back now.
- If the homeowner is another 90 days late after that, a Notice of Trustee Sale is issued. This notice is listed through some public means (like a local newspaper) and lets others know the property will be auctioned off at a certain date.
- The foreclosure auction happens after this. At this time, anyone can place a bid, including the bank. Whoever bids the highest wins.
- Ownership is transferred to the highest bidder.
- If the original homeowner is still in the house, the eviction process begins.
As a real estate investor, if you can get to the homeowner before the public auction, you may be able to avoid a bidding war and get a great deal. How can you get to the homeowner before a foreclosure auction? It’s simple.
While Notice of Trustee Sales are obviously public records since they’re posted in newspapers, Notices of Default are also public records. Finding a NOD and doing research on the property (like a skip trace) can give you contact information for the homeowner.
The Types of Foreclosed Properties
When looking for homeowners who are in pre-foreclosure, you’ll be dealing with one of these scenarios:
Pre-foreclosure With Equity – These are the easiest to wholesale as the amount owed to the bank won’t be the full mortgage. As an example, say the homeowner has a $150,000 mortgage and has been paying diligently for the past decade but has fallen on hard times. For the sake of simplicity, let’s say the home is valued at $160,000 at the time of pre-foreclosure. That decade of payments has knocked the mortgage down to $60,000. The homeowner, therefore, has $100k in equity and is only defaulting on $60k. You come in to solve their problem by offering $60,000 for the home and have just bought a $160,000 home at a $100k discount. The contract is then sold to a fix & flipper for $90,000, giving you a $30k “finders fee.”
Pre-foreclosure Without Equity – Not only are these more difficult to wholesale, but they’re also way more common. I’ll use the same scenario for this example: a $160k home with a $150k mortgage. This time, though, the homeowner has only been in the house for two years and has paid $15,000 off. While they have a little bit of equity ($25k), it’s not enough to generate a significant profit for you. In this case, you’d want to look for a landlord type of investor as a fix & flipper wouldn’t touch this.
A Few Considerations When Working with Homeowners in Foreclosure
No matter the method, real estate investing means finding a great deal, usually at the homeowner’s loss. This is especially true in pre-foreclosure, so there are some things you should recognize before diving into wholesaling pre-foreclosures.
- This will be a very emotional process. There are some scary statistics out there that show how fragile a tightrope homeownership can be. Many homeowners are only one paycheck away from missing payments. Consequently, this will be a tough time for the homeowner, and it’s important to respect that. Truth be told, it can become very drama-filled due to the high emotion, so be aware that you might have more of an emotional transaction than you were expecting.
- Homeowners in pre-foreclosure will often be in denial of their situation. Don’t take it personally if they lash out or, again, get emotional. It’s part of the process.
- Position yourself as a problem solver, not someone taking advantage of their situation. Try to show how you offering to buy their home ahead of foreclosure gets them out of a sticky situation that can involve big hits to their credit scores. Don’t do this in a condescending way, though, as you won’t get very far. Try to be sympathetic and helpful.
- If the home is in good shape, offer the homeowner a better deal. This is up to you, of course, but I find that if the house would be easy to sell and doesn’t require many repairs, it’s worth it to give them a higher price for their home. Remember that you still need to generate a profit, but offering an additional $2k might make the process run more smoothly than low-balling them.
- Avoid short sales. We have a lot of content about short sales, so I won’t get too deep into this. Suffice to say, short sales mean you’re negotiating with the homeowner and the bank, which becomes a much more drawn-out process. You can absolutely get a great deal with a short sale, but adding more people to the transaction just makes things more complicated than they need to be.
Are There Enough Foreclosures for Wholesaling to Be Profitable?
Fortunately (or unfortunately, depending on your position), foreclosures are always a steady stream of opportunities for real estate investing. With the eviction moratorium on its last leg here in the US, it’s safe to say you should expect an influx of pre-foreclosure opportunities soon.
I’ve pulled together a list of foreclosure rates for the states Do Hard Money operates in to give you an idea. While the range fluctuates on a per-state basis, you can see that it really doesn’t matter where you live; foreclosures are an abundant source of investment opportunities.
|State||Foreclosure Rate, 2021|
|Alabama||1 for every 11,931 homes|
|Georgia||1 for every 11,392 homes|
|Illinois||1 for every 6,381 homes|
|Louisiana||1 for every 12,955 homes|
|Maryland||1 for every 10,375 homes|
|Michigan||1 for every 16,241 homes|
|Minnesota||1 for every 26,217 homes|
|Missouri||1 for every 11,117 homes|
|New Jersey||1 for every 4,809 homes|
|New Mexico||1 for every 9,379 homes|
|North Carolina||1 for every 12,853 homes|
|Ohio||1 for every 7,040 homes|
|Pennsylvania||1 for every 16,174 homes|
|Texas||1 for every 13,420 homes|
|Virginia||1 for every 18,893 homes|
Both wholesaling and foreclosure investing can be great ways for real estate investors to gain experience while generating profit. Keep in mind the considerations I’ve mentioned above and start slowly. The better understanding you have of the process, the higher the chance you’ll walk away with a nice chunk of change to fund more real estate ventures.