Though our paths diverged in many ways after school, me and my closest high school buddies have stayed in touch. My old pal, Tom, and I even make a point to meet up at least once a year. On the surface, our lives couldn’t be more different. He became a high-powered—and highly stressed—lawyer on the west coast while I started buying and selling houses as a business back east. But, we actually have the most in common. We’re driven, meticulous in our work, and both family and community-oriented. We each have a passion for real estate, too.
So, it was no surprise when Tom told me that he was finally ready to stop talking about changing jobs and start investing in real estate as a career, too. He already knew from past conversations that I did wholesaling as a way to jump-start my business. What he needed to know was how to do the same. Of course, I was happy to give him the usual step-by-step instructions for wholesaling real estate—and how I was really able to pick up the pace for getting my career on track.
Step-by-Step Instructions for Wholesaling Real Estate
There’s a good reason why I chose wholesaling as a way to start my investing career years ago and why it still makes for a great real estate investment strategy for new investors today. You don’t need extensive training as a real estate investor, know how to renovate a major fixer, or have access to a large pool of cash so that you can close on that first investment house. Of all the paths you might take to build your business, wholesaling is the easiest because it’s less time and money intensive.
That’s not to say that wholesaling is a walk in the park, however. Getting a property at a low enough price point so that you can sell it quickly to another buyer who wants to rehab it and sell it with enough upside, too, takes skill. It also takes an appetite for a certain amount of risk, not to mention a bit of patience. Wholesaling homes is not a get-rich-quick scheme. In fact, profit margins are usually small.
But, with enough wholesales under your belt, you can build capital for your business while also expanding your industry knowledge. It’s not a bad direction to take when you’re just starting out.
Here’s how you can get started wholesaling as a new investor:
1. Build a strong network of buyers
Tom had the benefit of knowing at least one other real estate investor: me. In order to regularly wholesale investment property to other investor-buyers, however, he’d need a bigger network of real estate professionals with the means—and the ability—to buy a house to renovate and sell or hold as a rental. The same goes for you. Since you’ll want to wholesale your houses quickly after closing escrow, finding and securing another buyer has to happen fast, too. That’s not possible when you’ve got no one to market the home to.
Building a network of real estate investors and other industry pros who may know more buyers can take time, though. Still, it’s a step you cannot skip. Luckily, you’ve got options for potentially building strong investor connections:
- Real estate investing seminars
- Industry-related Meetup groups
- Associations designed for real estate professionals
Networking heavily at any of these can help to grow your list of buyers. Just remember: gather contact information in addition to names and get permission to pitch the properties you’re in the market to sell.
2. Find distressed properties owned by motivated sellers
While building your network of reliable buyers, you’ve also got to work on a strategy for finding distressed homeowner leads. Crafting, then executing, a plan for finding homes that need rehabbing and are priced well below market value can take a lot of time. And, unfortunately, some of the solutions out there don’t always work—not consistently, anyway. That’s why most real estate investors end up implementing multiple strategies. The sooner you start experimenting with what works for you, the faster you can devise a plan that generates leads on investment properties to wholesale.
Some of the most common methods that many real estate investors use to find fixer-upper homes for sale include:
- Lead lists
- Foreclosure auctions
- Paid advertising
- Driving around up-and-coming neighborhoods
- Social media
The best method for finding houses to wholesale, however, is getting distressed homeowners to reach out directly to you. They’re ready to sell and usually want to do it fast. And, since they’re happy for your help, you can feel good about how you got the home.
3. Buy at a price that leaves upside for two buyers
For you to make money with a wholesale, your investor-buyer has to be able to make money, too. That starts with you offering the homeowner a price that leaves plenty of room for returns without turning the seller off with a number that is too low. The only way to keep all parties happy—and to keep you in the green no matter what—is to have a sophisticated real estate investment valuation method.
You have to be able to correctly calculate all the numbers from the get-go even though you have no intention of performing the rehab. Knowing how much repairs cost and what the potential after repair value (ARV) will be is how to determine the maximum number your buyer can afford to pay—and, thus, the initial purchase price you’ll need to offer.
4. Fund the earnest money deposit once you’ve got a signed contract
Once your seller signs the purchase agreement, you’ll need to fund the earnest money deposit required by your state property code, timely, to secure the deal—usually within a few days. Otherwise, the seller has the right to cancel the contract. Deposits can be as much as 10% of the purchase price, depending on what you’ve negotiated with the seller. So, it’s important to have cash on hand that you can transfer to escrow fast. Remember that using money from investment accounts, like a self-directed IRA, to fund real estate transactions may take a few days, too. That means you’ve got to prepare in advance when you start shopping for deals.
Also, it’s not a bad idea to have proof of funds (POF) ready to present if asked by the seller. Your intention to sell the home to another buyer won’t necessarily exempt you from showing that you’ve got access to plenty of funding. If you don’t have enough money to provide POF, consider getting a pre-approval letter from one of the nation’s best hard money lenders. Many will get back to you within one day and you’ll have something to show the seller so that you can move on towards finding your buyer.
5. Pitch the property to your network at a price that makes sense
It’s important that both you and your buyer stand to realize returns on the deal, which is why you’ve got to pitch the house to your network at a price that makes sense. Obviously, you won’t be randomly picking a number that’s sure to attract a lot of buyers, nor should you artificially inflate it to ensure at least you make a tidy profit. You have to assume the investors in your network know what they’re doing and that they take the time—and have the tools—to properly analyze real estate deals. If you pitch a number too low, you may get a lot of bites. But, you may also miss out on the chance to pad your own pockets. Pitch a number that’s too high and no one will want the deal at all.
6. Enter into contract with your buyer and double close on the deal
Wholesaling homes is a process familiar to escrow, so quickly turning the house over to another buyer shouldn’t be a problem. Once you’ve agreed on a price from your buyer, simply enter into a new purchase agreement. This deal has to be contingent upon the original deal closing and you must state as much in your new contract. In the service of full disclosure, you have to share the details about the first contract in your second one, too. Beyond that, the process is pretty simple. After all, you’re really just conducting two different transactions: one in which you’re the buyer and one in which you’re the seller. But, this process of double closing happens faster than other deals—the second deal generally closing within a day, sometimes hours, of the first.
7. Collect payment
There are two points during the transaction in which you’ll be collecting a payment. First, as a show of good faith, your buyer has to provide an earnest money deposit by reimbursing the deposit you already gave to your seller. This should happen within the timeframe listed in the terms of the second purchase agreement. After both deals close, you’ll get your next payment—the difference between your bought and sold price for the investment house. This is often referred to as an ‘assignment fee.’ Either payment can be made by check or wire transfer through escrow.
8. Reinvest your proceeds by purchasing another house
Though the returns from your first wholesale won’t get you on the fast track towards wealth, it should be enough to help you put a deposit down on at least one other house. And, that’s how you begin building a business investing in distressed real estate: buying and selling one property at a time. Eventually, you’ll have the skill set to perform the rehabs yourself and potentially be able to buy multiple investment properties at once.
Taking the process of wholesaling real estate step by step is a great way to reduce stress and ensure you don’t miss a beat. Until you really get going, however, getting that first—even second—house under your belt can simply take time. The fact is, as easy as wholesaling may be when compared to other investment strategies, starting a real estate investing company on your own can also be hard work. That’s why I began my wholesaling career with a team that helped me get set up.
Begin Your Career With a Team That Has All the Tools You Need
Though I’m years ahead of Tom in my real estate investing career, it was a little slow-going back when I first started. To some degree, that’s to be expected. As I mentioned, building any career from scratch can take a lot of effort. But, for all the time it was taking to generate leads on houses that I could wholesale, not to mention build a network of investors who’d want to buy the homes from me, I started to feel that I should have been further along. With the right tools and resources, I knew I could be.
Once I became an independently owned and operated HomeVestors® franchisee, that’s exactly what I got. I gained access to some of the best tools and resources I needed to fast track my best wholesaling efforts. I have the marketing tools that bring distressed homeowners to me with the nationally-known and trusted “We Buy Ugly Houses®” campaign. And, I keep the proprietary valuation tool, ValueChek®, that accurately runs the numbers on a house in my back pocket. I can even sell my wholesale deals on the online listing portal, DealVestors®™, which reaches investor-buyers across the country.
Take your first step towards investing in real estate by becoming a HomeVestors® franchisee. Franchises are limited, so request more information about getting access to some of the best tools and resources for wholesaling homes today!