Countless real estate investing strategies exist – some more complicated and capital-intensive than others. For new investors, the wholesaling strategy often makes sense. It requires little up-front capital, and it can provide new investors a ton of valuable experience. As such, people often ask me how to start wholesaling real estate.
When you wholesale a property, you don’t actually buy the home. Instead, you put it under contract and then assign the contract to an investor who does buy it, making a profit in the process. To start wholesaling real estate, you first need to learn how to analyze and find great off-market deals.
In the rest of the article, I’ll explain how to get started wholesaling real estate. Specifically, I’ll cover the below topics:
- What is Real Estate Wholesaling?
- Wholesaling Pros and Cons
- How to Start Wholesaling Real Estate
- Additional Wholesaling Considerations
- Final Thoughts
What is Real Estate Wholesaling?
When wholesaling houses, you don’t purchase an investment property. Instead, wholesalers find off-market properties, and they enter contracts to purchase these properties. Rather than close on the purchases, they assign the contracts to a third party, typically a fix & flip investor. And, they assign these contracts for a fee. In a nutshell, wholesalers find deals, connect the sellers with investors, and collect a fee in the process – all without dealing with the headaches of doing any rehab work themselves. In other words, wholesalers complete these four steps in every deal:
- Step 1: Find solid off-market deals, ones that will appeal to fix & flip investors.
- Step 2: The wholesaler then goes under contract to purchase the home, typically a distressed property.
- Step 3: The wholesaler then shops the contract/deal around to potential buyers, generally house flippers.
- Step 4: With a third-party buyer confirmed, the wholesaler assigns the new buyer the contract rights and obligations – for a fee. This new buyer then carries out the remainder of the closing process and actually purchases the home.
When you wholesale, you learn very quickly how to spot good deals for fix & flip investors. If you don’t find good deals, you won’t be able to assign contracts to these people. Simply put, you learn what to look for in a property. Additionally, you have to work closely with house flippers. This gives you the added benefit of learning from them. Pick these people’s brains. They have tons of experience, and you can learn from it. Lastly, wholesaling puts money in your pocket. If disciplined, you can allocate a portion of these funds for a down payment to purchase your own investment property.
Wholesaling Pros and Cons
Pro #1: Gain Real Estate Investing Experience
One of the primary advantages to wholesaling is that it provides new investors an incredible amount of experience – while limiting risk. Typically, wholesalers assign their contracts to fix & flip investors. As such, wholesalers need to understand exactly what these investors look for in a successful flip deal. If wholesalers put a property under contract that doesn’t meet fix & flip investment criteria, they won’t be able to assign the contract.
This reality means that wholesalers need to learn how to research and analyze deals in the same fashion as fix & flip investors. Actually, they need to find better deals, as the numbers need to support the wholesaler’s and flipper’s profit margins. But, wholesalers have the benefit of finding these deals without the added rehab, holding, and resale risk that comes with a full flip deal.
Pro #2: Less Time and Risk
As stated above, wholesalers gain a tremendous amount of experience finding the sort of deals that fix & flip investors pursue. And, finding these deals takes a lot of time and effort, regardless of whether you’re doing so as a wholesaler or a flipper. But, wholesaling houses requires far less total time than a house flip deal.
House flippers close on a deal then must spend the next six months to a year 1) renovating the property, and 2) marketing it for sale. Conversely, once a wholesaler assigns a contract, that’s the end of the deal. This system means that wholesalers can complete far more deals in a given year than a house flipper could. The process simply requires far less time.
And, the reduced time relates directly to reduced risk. When you flip a house, you incur two major risks. First, a lot can go wrong during the rehab period. And, a poorly planned – or just unlucky – renovation can quickly bust your flip budget, cutting into or eliminating a deal’s profit. Similarly, during the rehab period, flippers face market risks. That is, if the housing market drops significantly during the rehab, you may not be able to sell for the initial ARV, leading to a loss on the deal.
Wholesalers, on the other hand, face extremely low risk, as they don’t actually buy a home. Frankly, the only risk faced by wholesalers is that their contract assignment falls apart. But, even in this situation, a well-structured contract will allow a wholesaler to still exit the deal. Depending on the circumstances, you may lose your earnest money deposit, but that’s a far smaller risk than the amount of money and financing that goes into a house flip.
Pro #3: Little Up-front Cash Required
Additionally, wholesalers need very little cash to begin this strategy. I won’t say they don’t need any cash. Realistically, wholesalers will need $2,000 to $3,000 for up-front software, marketing, and other admin costs. But, they definitely don’t need tens or hundreds of thousands of dollars to pursue this strategy.
This low financial barrier to entry makes wholesaling extremely appealing to new investors. You can get your foot in the real estate door, gain some experience, and put some money in your pocket – all without needing a ton of initial capital.
Pro #4: Can Wholesale with Bad Credit
Wholesaling also opens investing doors to people with bad credit. Most traditional lenders won’t approve loans for people with poor credit scores. This makes strategies like buy and hold real estate next to impossible if you don’t have great credit.
On the other hand, with wholesaling, you don’t actually purchase an investment property. This means you have no need to apply and qualify for financing. Instead, wholesalers find deals, connect the sellers with investors, and collect a fee in the process – all without dealing with the headaches and credit requirements of qualifying for a mortgage.
Con #1: Lower Margins
Unfortunately, the lower risk and reduced time translate to lower margins for wholesale deals. Profits on a house flip significantly vary based on market and property type. But, on average, house flippers can expect to earn profits between $20k to $30k on a successful deal. While wholesalers can earn five-figure profits on deals, this is rare. On average, a successful wholesale deal will have a profit between $3k to $6k – far less than a flip.
However, savvy wholesalers can turn this con into an advantage. Yes, a single wholesale deal will result in lower profits than flipping that same property. But, the average house flipper completes one to two deals per year, whereas a wholesaler can complete dozens of deals. Accordingly, what you lose in the profits on single wholesale deals can be outweighed by the number of deals you do. And, if you recruit a bird dogger to help you find deals, you can do even more as a wholesaler.
Con #2: Need to Find Great Deals
House flippers only need to find good deals. That is, even if you don’t find an incredible deal that your hard money loan will 100% cover, you can still command a strong profit with a well-analyzed, good deal.
Wholesalers, on the other hand, need to find great deals. Whereas house flippers only need to account for their own profits, wholesalers must plan for their and a house flipper’s profit margins. This reality leads to either one of two options:
- Option 1, Find a Good Deal: In this situation, the house flipper and wholesaler both accept smaller profits than they otherwise would. But, as the saying goes, something is often better than nothing. That is, sometimes taking a smaller profit on a good deal beats waiting for the perfect deal.
- Option 2, Find a Great Deal: Alternatively, if you find a great deal as a wholesaler, both you and the house flipper to whom you assign the contract can earn your target profit margins. While this is the ideal outcome, finding these incredible deals can be challenging.
How to Start Wholesaling Real Estate
Step 1: Look at Deals as a House Flipper
When looking for deals, wholesalers need to view potential properties through the eyes of a house flipper. These are the people to whom wholesalers generally assign contracts, so the deals need to support a flipper’s investment criteria. As a result, to find a good deal, investors first need to understand the basic house flip profit formula:
Final sales price
MINUS
Total costs (Purchase price PLUS rehab costs PLUS holding costs PLUS transaction costs)
EQUALS
Deal profit or loss
This formula frames any deal analysis. Simply put, investors look for deals that A) result in a final profit, and B) ideally, have total costs less than 70% of ARV, which allows for 100% hard money financing.
Step 2: Find Off-market Deals
Typically, wholesalers will not find distressed properties that meet these criteria on the Multiple Listing Service, or MLS. These properties generally list at retail and require little to no renovation, making them a poor fit for house flippers. Consequently, successful wholesalers build strategies to 1) find potential off-market deals, 2) market to owners, 3) set up interviews, and 4) convince owners to actually sell their properties.
To find these off-market deals, I absolutely love a strategy I call “driving for dollars.” Simply put, you hop in your car, drive around some neighborhoods, and identify homes that look like potential deals. You may find a distressed property or one that looks abandoned. Regardless what type of property you’re seeking, driving around for a couple hours every week will help you find plenty of opportunities. And, we’re so confident in the potential of this technique that we’ve built a Driving for Dollars app to help!
This app helps achieve two major objectives: 1) find potential deals, and 2) connect with motivated sellers. With respect to the first, the app tracks your progress through a geographic area, helping make sure you don’t miss any streets – or potential deals! Second, the app seamlessly integrates with our Investor’s Edge database of over 160 million potential deals, which gives you the ability to connect with the owners of homes you identify while driving for dollars.
More precisely, with Investor’s Edge and the Driving for Dollars app, you can market instantly to homeowners via printed postcards with pre-filled addresses or automated voicemails. This system helps you efficiently bridge the gap between a potential deal and putting a property under contract.
Step 3: Act as a Problem Solver
Once you connect with a potential seller, you still need to convince him or her to sell. I like to look at this as problem solving. Typically, motivated sellers have a need that they must meet. Frequently, they need cash for something or other but can’t sell their house due to its current condition. It may be significantly distressed, or it may just require a major repair that the owner cannot afford.
As a result, these owners can only sell to all-cash or hard money loan investors. Enter you as the problem solver. You can put this property under contract, and the house flipper then provides the owner the cash he or she needs. But, I always want to emphasize to new investors: don’t pretend you’re doing this out of the goodness of your heart. This is disingenuous, as you’re doing it to profit – not for charity. Rather, you’re looking for a win-win situation. By putting the home under contract, you solve the owner’s cash-need problem. But, you also gain a good wholesale deal in the process. Win-win.
Here’s the major takeaway: when looking for properties, remember that you’re a problem solver. But, to solve problems, you must first understand the seller’s needs. If you take the time and effort to do this – which requires a little empathy and communication – you’ll find great deals. And, you’ll help people out in the process.
As you research potential deals, you’ll eventually find one that looks like a winner. At this point, you’ll estimate a flip budget using rough numbers. For wholesalers, it’s not critical that the numbers be precise. Instead, your back-of-the-napkin budget will let you know whether you should put the property under contract. The house flipper will then confirm a refined rehab budget once he or she takes over your contract.
Additional Wholesaling Considerations
It should be clear by now: successful wholesale deals depend on lining up an investor. If you can’t assign your contract, you can’t earn your wholesaling fee. Recognizing this reality, I recommend the following two strategies for marketing deals to fix & flip investors:
Marketing Technique #1: Cash Buyers List
With traditional mortgages, lenders will not approve the financing of a distressed property. These sorts of homes pose too much collateral risk for lenders, so investors need to either A) use hard money loans, or B) purchase distressed properties with cash.
Recognizing that many fix & flip investors purchase homes with cash, wholesalers can create a cash buyers list. Basically, this is a tracker of all people who’ve bought properties for cash in the same zip code over the last year. Armed with this information, wholesalers can narrow down their list of potential buyers to motivated leads – people looking for similar properties. And, once they find a deal, wholesalers can reach out to these cash buyers directly, a far more efficient process than marketing to all potential buyers.
Marketing Technique #2: Reverse Marketing
With this technique, you reverse the sequencing of a deal. Instead of finding a deal and then finding a buyer, you find the buyer and then find the deal. Essentially, reverse marketing means finding motivated buyers – typically fix & flip investors – and asking what they’re looking for in terms of property and price, and then going out to find those deals. That way, you’ve already secured a buyer before putting a property under contract. As soon as you sign the contract, you contact the buyer, explain that you’ve found a property meeting his or her requirements, and then you assign the contract.
Final Thoughts
While beyond the scope of this article, I want to emphasize to future wholesalers the importance of legal compliance. Every state (and sometimes municipality) has different requirements and laws for wholesaling. Before completing your first deal, I highly recommend speaking with a local real estate attorney to confirm you fully comply with these laws.
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