Real estate wholesaling.
What is it?
You may have heard of because it’s one of the most popular ways to get into real estate investing and can literally be done with no money and very little experience.
But that doesn’t mean it’s easy.
After being a real estate investor for almost a decade, I thought I’d write an “ultimate guide” on wholesaling so when people ask me about it, instead of spending 20 hours explaining it to them, I can just send them to this post. This post will serve you well if you apply what I’m about to tell you vigorously and could lead to a lucrative 6-figure wholesaling business in just a few months.
I want to be thorough and give you everything you need to make this work. all the steps. So I’ve included links to some of my other content and videos along the way and I encourage you to click on them, watch the videos, take notes, and then do it all over again.
It will take a few hours, for sure.
But, if you can build a profitable real estate wholesaling business afterwards for next to nothing, isn’t it worth a few hours of your time? If not- stop reading now. This isn’t for you.
And know this too. I could write a 20,000 word post on this and still not cover every, single, thing there is to know about wholesaling. You still have to put in the work, time, ask questions, find a mentor and if you really want to dive in, go sign up for my real estate investing course here (I gave readers of this blog a special discount too so check it out), join some forums, talk to people in the industry, and put in the time…and you WILL succeed.
Well enough of that, let’s get into it.
Real Estate Wholesaling. The Basics.
Wholesaling is a word that real estate investors and house flippers use when they’re talking about the process of connecting the dots between sellers and buyers and getting paid for it (kind of like a finders fee). And when you do it legally, you can make a lot of money (ask me how I know).
So instead of me explaining it in detail right now, I’ll show you an example that might help you get it:
A Wholesaling Story
Rick is a wholesaler.
He spends his week finding awesome real estate deals, but doesn’t want to actually get into them. So one day while he’s at the pub, Rick gets a call from Jane. Jane wants to sell her house, but doesn’t want to go through the hassle of using an agent. She tells Rick that her house needs some work, and she just wants to get rid of it because she doesn’t want to put money into fixing it up herself.
She just wants out.
Rick sees the house and after looking around and seeing what the house needs, he offers Jane $75,000 for her house. Jane says “you have a deal,” and they sign a purchase agreement. The agreement states that Rick or anyone else he “assigns the contract to” will buy the home for $75,000 within the next 14 days.
Then Rick gives his buddy Fred a call (well, he probably called him before he signed the purchase agreement). Fred is a very active house flipper who Rick knows well. He already talked to Fred about the house, what it needs as far as rehab goes, and how much it’s worth after it’s fixed up (also known as the After Repair Value, or A.R.V.). In fact, watch this quick video I made explaining that before you keep reading:
Rick offers to sell the property to Fred for $80,000.
Fred knows he can turn a healthy profit at that price after he fixes it up (a.k.a. he knows the A.R.V.). So, after looking everything over, they agree on the price and move forward. Rick and Fred sign an “assignment contract” which legally means that Rick is letting Fred buy the house from Jane. That’s it. Rick can do this because he already signed a purchase agreement with Jane saying that either Rick or someone else will buy the home in 14 days.
Rick drives downtown and gives all the paperwork to “Pioneer Title” to process (the title company). So how does this play out you ask? When all's said and done, Fred pays Jane $75,000 for her house, and Rick keeps the additional $5,000 difference as his finder's fee (but in the industry we just call it a “wholesale fee”).
Do you see how powerful this is?
Rick never owned the house for a second but he made $5,000 on it because he connected Jane (the seller) with Fred (the buyer/house flipper). And this is just one way (probably the most common one) that wholesalers structure deals and make money.
So…now that you have a general understanding of what wholesaling is and how it works, I want to address a question you might be asking right now- “is real estate wholesaling illegal?”
Is Wholesaling Illegal?
**Be aware- I’m not a lawyer and this isn’t considered legal advice. To legally practice wholesaling, make sure you know the laws in your area before doing any deals.**
A topic that gets debated more than anything in real estate investing is the legality of wholesaling. Some say it’s ok, some say it’s not, and some people are in between. Truth is, there isn’t a black and white answer here because the laws and regulations differ in every state.
So before I give you my take on it, I would encourage you to take $250 and use it to pay a real estate attorney in your area to let you know what you can and can’t do legally.
What’s the Deal With Wholesaling?
The wholesaling debate all revolves around what real estate people call “brokering.” Now every state has it’s own definition of the term but what it essentially means in any state is this: someone who puts a real estate deal together. Pretty simple eh? And of course, vague.
Here in the great state of Idaho (where I live and do business), a broker is defined this way:
“Any person other than a real estate salesperson, who, directly or indirectly, while acting for another, for compensation or a promise or an expectation thereof, en- gages in any of the following: sells, lists, buys, or negotiates, or offers to sell, list, buy or negotiate the purchase, sale, option or exchange of real estate or any interest therein or business opportunity or interest therein for others;”
So, a broker is one who engages in brokering (obviously) and those who would say that wholesaling is illegal say so because, they say, the wholesaler is acting as a “broker” in the deal without having a real estate license.
Those who say that wholesaling without a real estate license is legal and okay, say so because, they say, wholesaling isn’t considered “brokering” because all the wholesaler is doing is just signing a contract and assigning it to someone else, not acting as an agent. So they’d say that the law does apply to wholesalers in this regard because they’re not selling a house, they’re just selling a contract.
The lines get really blurry here to tell you the truth because both sides of this argument have valid points.
To muddy the waters even more (as if they weren’t already muddied enough), those who think wholesaling is illegal say you can’t legally market a house that you don’t even own. In our example deal from earlier, Rick the wholesaler bought a house from Jane then sold it to Fred. But, some would argue, if Rick put an ad online to try and find buyers, he’d be “marketing the property” and that would be illegal because he has no legal authority to do that. It’s not his house.
So some questions pop up and there isn’t a clear cut answer to any of them:
- What exactly defines “marketing a property?” It’s vague at best.
- If Rick knew Tom personally (which in this case, he did) and told him about the deal beforehand (which in our example deal, he did), would that be considered “marketing?”
Now to be clear, a lot of wholesalers operate legally, and a lot of them operate illegally. If you sign a purchase agreement with a motivated seller, than post an ad on Craigslist to try and find a buyer, and then assign it to a buyer you find, you have to be careful. Depending on where you live and how you go about doing the deal, you could be be doing something illegal.
Do you feel comfortable explaining your reasoning and intentions in front of a real estate commission? how about a judge? You have to know the law here, I can't stress that enough.
A Better Way to Wholesale
Here’s what I advise everyone to do who wants to get into wholesaling so they protect themselves no matter where they live:
- Talk to a Real Estate Attorney
- Get Your Real Estate License: Kind of a no-brainer huh? If you have a real estate license, you can legally wholesale all day long without penalty. No one can accuse you of brokering without a license if you have a your license.
- Actually Buy and Sell the Property: Instead of assigning a contract to someone, buy the house the old fashioned way and then re-sell it. Just a few more hoops to jump through which you can actually do all in one sitting anyways (i.e. you can own the house for 10 minutes and sign it over to someone).
You’re an adult so I’ll let you decide what to do and how to go forward in your area. Like I said, it's a gray area in almost every situation so whatever you do and however you do it, use good judgement. But the easiest way again is to get your real estate license or buy the house (or lot, or multi unit building, whatever it is), get the title, and then sell it afterwards.
Where to Find Cash Buyers
Now your cash buyers are going to be local investors and/or house flippers. You don't need a list or huge roster of them either, you just need one, maybe two guys or gals and you can do this all year long, month after month.
You have to network.
Get out and meet people, joining the local REI club, look around online (there are a lot of cash buyers on Craigslist), ask realtors for a list of recent cash deals that have closed in your area (or find them yourself on the MLS).
Buyers are easy to find You just have to put in some time. Heck, you might already be friends with someone who knows a cash buyer or house flipper, you just have to access your network to find out. This short video below explains the power of “weak ties” which I first read about in Malcolm Gladwell’s book, The Tipping Point (which you should go buy and read ASAP if you haven’t read it already).
A “weak tie” is somebody who is your friend's friends or acquaintance.
Check it out:
So now that you know how many people are in your network, access it. Start asking around. Use Facebook, email, other social media channels, personal conversations, all of it. Let people know what you’re looking to do, and I assure you, you’ll get connected with cash buyers who are very interested in the deals that you’re going to bring them.
Wholesaling is Hard Work
If you’re looking for the easy way to make money, wholesaling isn’t it.
As a real estate wholesaler you have to be good at a lot of stuff and you have to be diligent. There are other investors who can outbid you and offer better deals than you. In the example scenario I gave you earlier, Fred ended up paying $80,000 for the property. But what if he just found Jane first, and if Rick and Fred ended up competing, Fred could just outbid him. So…who do you think Jane is going to go with in that scenario? Obviously, she’s going with Fred (the flipper) and Rick (the wholesaler) gets nothing. He can’t compete.
So as a wholesaler, you need to work incredibly hard to find these deals. And the ONE WAY to do that- you have to hustle. You just have to. This isn't for lazy or unmotivated people. It's for people with a vision and drive.
This is a business.
And every successful business takes hard work.
If you’re still reading (and you are), know this: good wholesalers make good money because they do multiple deals a month and you can do it too and at $5,000 a deal (the average price for wholesale fees), you only need a few deals to make a good living. But you have to know your buyers and investors and know what they're looking for:
- You have to interview buyers AND sellers
- You have to take notes to know what the buyer/flipper wants (specifically)
- You have to ask questions, do your homework, and make it happen
- You have to be AMAZING with people
- You have to be a networker
- You have to know how to sell
- You have to know how to connect the dots
- You have to pound the pavement, chase leads, and make it happen
So if you have time and motivation, (the two things everyone needs to make it as a real estate wholesaler), get ready to do very well.
A Quick Story
A few years back a woman approached me about wholesaling who went to a seminar and was super adamant about wholesaling. But she wasn’t motivated, didn't want to really put in the time and work, dressed like a slob, and had zero business savvy or sales skills. Needless to say, she never made one deal. She was looking for an easy way to make money and real estate wholesaling is NOT it.
Finding Great Deals
Your goal as a wholesaler isn’t to do just one deal, but to do a lot. So to make that happen, you always want to have a full pipeline. That means that when one deals closes, another falls in line and takes its place.
But this takes time. So to have a consistently full pipeline you have to find the leads, make the calls, send the letters, build rapport with sellers and investors, doing due diligence, know your numbers, prepare documents, and make sure everything goes well at closing. Real estate wholesalers who hustle can have over 20 deals going at one time.
So do the math on that one. $5000 x 20 = $100,000 in profit.
Not bad for just connecting some dots.
And this is just the beginning…what if you did a deal a week?
So how are you gonna get these deals in the pipeline in the first place? Where are you supposed to find sellers anyways? There are several ways to find deals so I just want to outline a few of the more common ones below. These will give you a great place to start and remember- creativity is essential. The more outside the box you think, the more likely you’ll be able to find sellers.
1. The MLS
The MLS is where every investor, realtor, and wholesaler likes to hang out so please listen to me when I say- don’t bother. If you approach a house flipper with a deal you saw on the MLS, chances are they’ve already seen it. Although you can find distressed properties on it and connect with sellers, it’s VERY competitive and won't be your best way to connect with motivated sellers. But keep it in your back pocket and use it when you have to.
2. Take a Drive
Take a drive in your area and look for distressed properties that are for sale. You know a run down house when you see one. If it looks like it might be something someone wants taken off their hands, find out who owns it and see if they want to make a deal.
3. Snail Mail
This is how I got started when I was a full-time wholesaler. When you send our highly targeted letters to motivated sellers, you’ll be shocked at how many of them call you back. You can purchase leads online, find them by looking up public records, (probate, divorce, trustee auctions, etc.), or use a program like Agent Pro 247. Bottom line, there are a thousand ways to get the names of people who might be in a position to sell quickly (e.g. someone who is delinquent on their property taxes). When you find these people, send them a letter and let them know you’re interested in buying.
A sample general letter could say something like this (and of course you’ll want to modify it per the situation). You can also try sending postcards as they’re usually cheaper. But whatever you do, make sure you include a phone number (don’t use your cell phone, use a free Google Voice number instead. This way you can track calls easier, and your personal number won't be out there).
My name is Nate Pyles. I’m a local real estate cash buyer and I understand that 123 Main St. might be for sale. I’m not a real estate agent and I was thinking that we could both save ourselves some money on paying out real estate commissions. I can close quickly (in days, not months) and purchase the house as is, where is, with no inspection.
If you're interested in talking, can you give me a call at (123) 456-7890?
Now you might send out 1,000 letters and spend five hundred dollars doing it, but if it results in even one sale (or a few) it’ll be well worth it.
You can also use Craigslist, put signs up (you’ve seen those before right? They're called “bandit signs), and my favorite method- co-wholesaling. What’s co-wholesaling? It’s when you find a seller and have no buyer(s) lined up. [Show video of me driving around in the truck with that wholesale deal] So what do you do? You get in touch with the house flippers and investors you know and just ask them, “Hey do you know anybody who’s looking to buy? I found a sweet deal over at 123 Main St…”
>> Related Video I Made (5:36 min.): How to Make Money House Flipping by Wholesaling <<
Now, chances are they know someone who’s looking for deals or they want to buy it themselves and if they’re the ones connecting you with the buyer, they get a piece of your wholesale fee too. So instead of making $5000, you split it at $2500 a piece, and hand off the deal to the other guy.
Easy money right? Now do that several times a month, along with the other methods I’ve mentioned and your phone WILL ring.
A Good Deal?
If you don't know how to work with numbers, you better. Otherwise, this won't work and you shouldn't pursue being a wholesaler. But once you get in a rhythm, the numbers and formulas are easy and you won’t even think twice about them.
So, here we go.
How Much Should You Offer?
Since you’re only making money when other people make money, you have to reverse engineer this entire thing. The house flipper has to make money on the eal or they won't buy it from you. So, you have to know what they want and what their margins are.
It all starts with with the ARV, or After Repair Value (which we discussed earlier). Once you have that number in mind, you need to work backwards:
- How much the house flipper wants to ame on each deal
- Rehab costs
- Misc costs (fees, holding costs, etc)
- Your profit (how much you want to make)
Now, once you have that number, you’ll know the most you can pay on the deal. It looks like this:
Your offering price = The A.R.V. – The total of the (4) cost areas above
Here’s the numbers from a recent deal I made with a wholesaler to show you how the numbers work:
John (the wholesaler) found a property up here in and because he knew how to check comps, found out that the A.R.V. of the house he called me about was about $190,000. He also knew that I usually like to make around $30,000 profit on all my flips. Because he did his research and walked through the house, he determined that the misc. costs (i.e. closing costs, commissions, etc.) would be about $26,000,and that after walking through the house with a contractor, determined that it needed about $40,000 in rehab. Lastly, John wanted to make $5,000 for his wholesale fee.
So John’s price to to offer the seller was determined like this:
His offering price = $190,000 – $30,000 – $26,000 – 40,000 – $5,000
The price he gives the seller = $89,000 (or less)
But how did John know that the misc. (or “fixed”) costs would be $26,000 ? And how did he know that it would need $40k in rehab? Well you can get my course where I explain this in detail, and/or you can spend some time learning your numbers, writing down your formulas, and making sure you understand this before you talk to even one potential seller. there’ a lot of money to be made, but also a lot to be lost if you approach this wrongly.
Talking to the Seller & Making Your Offer
Time to make the offer and put your selling hat on.
You need to sell yourself and simultaneously devalue the property to make the owner realize that what you’re offering them is in fact a great deal. You’re also going to offer to buy the property “as is, where is, with no inspection.” This means that no matter what’s wrong with it or how much work it needs, they don't have to pay (or wait for) an inspection, and there won't be any rehab or repair costs on their part.
You’re assuming all the risk in this deal and you’re paying cash quickly (like, next week). Basically, you need to give them an offer they can’t refuse. Nobody wants to pay repair costs or fix their house before they sell it. They just want it off their plate with money in the bank right? So, help them out and let them know you’re helping them out.
Now traditional purchase agreements have an “inspection contingency” built in. This means that a potential buyer (you in this case) can back out of the deal if they don’t like what they see or hear post-inspection.
This is a huge hassle for the seller too (if a buyer backs out). Now they have to find someone else to jump through all the hoops in the purchasing process.
…what if other sellers back out too?
…what if the seller won’t be able to sell their house unless they take care of some repairs first?
…what if they can’t afford to?
Did you know that the entire home inspection process can tie up their house for 2 weeks, and most traditional deals take 30-45 days to close? That’s means that the seller won't see any money for about 60 days, PLUS, they might have to pay for repairs on the house just to get someone to buy it. And oh yeah- the buyer can still back out anytime. So these are the things you need to press when you’re making your pitch. Which will sound something like this:
You approach the buyer who wants $120K and say something like this:
“I know you’re asking $120K for your house but I’m countering at $89K and here’s why: I can pay you cash on Thursday and I’ll buy your house as is, where is, with no inspection. This way you don’t have to worry about repairing anything that needs fixed, don't have to jump through all the inspection hoops, and you’ll literally have cash in hand next week.”
Of course every deal and situation is different, but you get the idea. You HAVE TO sell yourself. Be confident, prepared, know your numbers, and go make that deal.
When you assign the contract to someone else, most sellers won't care. All they want is to get paid and have the property off their plate. But just to be safe, you should always let the seller know what you’re going to be doing so there won’t be any surprises at closing. At closing, you the seller, and the buyer all show up, everyone signs, and the deal is done.
Now, it’s time to get paid.
All you need to do to get paid after the deal is give the title company your info and purchase agreement and then you just wait. Some states use attorneys instead of title companies, so whichever it is, they just need to see the contract and they’ll give you your money.
Now that you did your first deal, and it was a win for everyone- go out and do it again, and again, and again. Go fill up the gas tank, go out to eat, and do what you need to do but please don't go out and blow your money on stuff you don’t need.
Not yet anyways.
Push your profit back into your business and use it to get more leads, more deals, and keep your pipeline full (remember those mailers cost money). One deal won’t set you up for long-term success. But doing 4-5 a month (or more) will.
I hope you enjoyed reading this guide. If you want to build a business and a life for yourself, this will help you. I know it will because it’s how I got started myself.
And if you want to get even further into house flipping and real estate investing, you need to check out my course, “How to Flip Houses With Incredibly Dangerous Power.” I made it insanely affordable specifically for the readers of this blog only (that means you) so go get it while it’s still up at the discounted price. I’m also giving away (2) free memberships to my course, so make sure to enter the contest here.
My course covers not just wholesaling, but EVERYTHING you need to make a boatload of cash as a real estate investor. If I can do it, so can you.
If you like this post can you do me a favor and share it? And make sure to jump in the comments and let me know what you think or if you have any questions. I’d be happy to answer them.
To your success,
Nate Pyles is a long term Real Estate Investor who made it through the crash in 2008 and spends his week buying and selling houses for profit in the Boise, ID area. He runs House Flip Mentor, has 4 kids, a gorgeous wife, owns 2 airplanes, loves to fly, and even built his own Irish pub on his property.
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