The Three Basic Components to a Wholesale Real Estate Deal
One of the most popular ways people enter real estate investing is through wholesaling. Wholesaling is such an attractive prospect because the end investor is the one who carries the majority of the risk. In wholesaling, you find properties that are discounted, then pass that property off to another investor who pays a predetermined fee for your work. Typically, the entire process takes about 30 days or less, and while the pay may not be as large as rehabbing homes, you get a great deal more exposure due to the amount of deals you can close quickly. Interested in wholesaling? Check out the three basic components to a wholesale deal.
The Deal
No matter what area of the real estate business you are in, you always want to get a good deal, but as a wholesaler getting a good deal is vital. Every deal that you consider must have enough room for potential profit in order for an end investor to find it appealing. Deals like this won’t just fall into your lap, you will have to put in a great deal of work to find them. Look for motivated sellers or properties that come with enough defects to warrant a deep discount. Motivated sellers may be homeowners who have listed their home multiple times but without a sale, lenders who are looking to avoid foreclosure or landlords that are tired of the rental process. Whoever you buy from, learning how to negotiate the deal is crucial to successful wholesaling.
The Property
Simply getting a property at a discounted rate may not be enough to attract an end buyer; you have to find properties in which you can add value. Improvements are the quickest way to add value to a home and it’s important that you have a good idea of how much money improvements will cost – even if you have never rehabbed a home before. Rehab costs have a direct impact on the bottom line and can be a complete dealbreaker. Before presenting a property to an end investor, it’s imperative that you have an idea of how much repairs will cost and you should also have an estimate for the property’s after repair value (ARV). To do this, take a look at recent sales and current listings and use the properties that are most comparable to yours as a guide. The three most important factors are the square footage and the bedroom and bathroom counts. Have as much information about the property as possible and be sure to look for any information that may not be disclosed by the seller.
The End Buyer
You need to search for end buyers with the same vigor that you scour markets for good deals, because a wholesaler is only as good as his buyer’s list. The quicker you are able to unload your current deal, the quicker you can move on to your next deal. The good news is that there are more end buyers now than ever before. However, the bad news is that many of them have very specific property wants and desires. Treat every investor you come into contact with as a potential buyer and when you meet new contacts through a networking group or investment club, be sure to save their information in a database. Learn the types of locations buyers are looking for, what their price point is and how quickly they can close and then look up their info in your database when you have a property that is a good fit for them. With real estate demand on the rise, it is especially important that you treat every buyer exceptionally well and that you deliver quality products. Simple things like returning calls or emails promptly, answering questions and being upfront with your numbers and information all go a long way in impressing end buyers. Be sure to nurture relationships once they are made, because it’s always easier to deal with an existing contact than it is to create a whole new one.
While the profit margins for a wholesaler are smaller than for other real estate investors, there are many positives in going this route in the real estate business. You are able to get in and out of deals quickly, you won’t have to wait for weeks on end for work to be completed and you have a significantly reduced risk factor to your investment. If you are looking to get started as a wholesaler, be sure that you fully understand these three basic components before buying your first property.