Have you ever seen the late night infomercials for making money in real estate with no money down? What about a local event in your hometown from a guru pitching real estate courses? What is wholesaling and does it work in all markets? Everyone understands that it takes money to make money. Is it true that I can flip a house without ever touching a hammer?
Wholesaling is a very common topic in real estate circles. It can also be referred to as flipping paper for a profit. Gurus like to complicate the subject but here is a very explanation. An investor would approach a seller to purchase their home. The buyer and seller agree on a price and set a closing date. The buyer, with equitable interest, then finds another end buyer to sell the property to. The first buyer does this buy “assigning” his interest in the contract to the second buyer for a fee typically called an assignment fee. The end buyer as it is usually called is the individual who will purchase the property at the closing table for their personal use, keep it for rental income or fix and flip it.
The two biggest factors one must consider is where can I find motivated sellers and where can I find end buyers? In any market there are hundreds of transactions occurring like this monthly that are not on your local realtor service. Common tactics can be used such as craigslist ads, Facebook posts, direct mail, bandit signs, and internet leads to name a few. The objective is to locate and set appointments with motivated sellers. The top three lead sources are likely to be direct mail, skip tracing and bandit signs. Skip tracing is using a service like beenverified.com or whitepages.com to search for the phone numbers of a seller to call them. Bandit signs are signs on the corners of the street that might say “We Buy Houses Cash”. Different marketing strategies need to be tested and tried to determine what works best in your market.
Your cash buyers list can be built over time from local real estate meetups, REIA (Real Estate Investing Association) meetings and bandit signs that advertise “3/2 Fixer Upper, MUST SELL, CASH ONLY, 123-444-5555 just to name a few.
When one has leads and has buyers they need to know how to tell if the deal is a good one. This comes down to one factor and that is the numbers. You can utilize Zillow, Tulia and other services to compile data of sold statistics to come up with an accurate repair number for a home. To have the most accurate numbers connect with an investor friendly Realtor. Every market is going to be different as well as the market cycles and areas of town. You need to educate yourself on the local statistics.
Lastly, as a quick example assume a house totally fixed up with a new kitchen, bathrooms, flooring, etc. would sell for $100,000. Here is a simple breakdown that may work in your market. Again these numbers will change drastically from area to area. This helps you identify how you as a wholesaler, determines what to offer a seller for a property.
$100,000 – Fixed Up Value or ARV (After Repair Value)
x.7 (Multiply by a ratio in your market, this includes the end buyer’s profits)
= $70,000
– $20,000 (We had a general contractor come inspect or you learn rehab numbers yourself to get a close estimate for what the repairs would cost)
= $50,000 (This is the maximum price an investor who would buy, fix and sell this property would pay)
As a wholesaler any contract you obtain with a seller for less than that amount is profit. That means if you get a contract for $45,000 you will “assign” your contract to the end buyer for a $5,000 profit. If you get it under contract for $10,000 you still can sell it for $50,000 and make $40,000!
The ratio you use will vary as your market changes.
Wholesalers can make money quickly by making the spread without ever touching the property. Due to you assigning your contract you do not need any money to do this because your end buyer is the one paying the funds. You may need an escrow deposit but most of the time a seller is ok without one. An escrow deposit is like a security deposit that you get back if you cancel the contract within the timeframe allotted. If you pass the timeframe of your inspection period then the seller would keep it. As long as you either assign the contract prior to the inspection period ending or back out, you have little liability!
If one wants to just fix and flip properties they may consider meeting wholesalers for off market, discounted deals. This saves time for you as an investor from having to find the motivated sellers since it is a full time job.
There is a lot more material to cover on the subject. If you have more questions please e-mail myself or give me a call.
For more information about the Tampa Bay Real Estate Investing Association (TBREIA) and their wholesaling boot camp contact admin@tbreia.com.
Jeremy Kloter
COO – Asset Manager – Realtor
C: (813) 610-0015
Jeremy.Kloter@OutFastRealty.com
