If you are out hunting for wholesale deals and think that you are finding really great stuff, yet you can’t seem to get other investors interested, then maybe your deals just aren’t good enough.
We see many deals come across our desk that really are not investor friendly, though they may have some equity in them.
Two of the big mistakes that we regularly see are deals above the median price range and deals that lack at least 30% or more of a discount.
First off, occasionally you may find a really stellar deal that is above your market’s median price, but generally speaking, most investors aren’t interested in going into this higher price range. If they are, the discount needs to be significant. Think of it this way: if they are looking for a long-term rental, then higher priced properties are much less likely to cash flow. If they are looking for a fix and flip deal, then there needs to be a healthy cushion of equity in the deal for unexpected costs in repairs, longer than anticipated holding time and of course their profit. Especially in the current market where prices in some areas have dropped dramatically, investors don’t want to get caught in the upper end of the market with properties that are no longer worth what they used to be.
Second, having an adequate discount is essential. If you were trying to wholesale a house worth $200,000, then at the very least, an investor would like to pick up that deal for $140,000. A larger discount is always better and makes it much more likely that your deal will get scooped up quickly. Also, remember that in our current market, you can’t rely on the price that a property sold for two years ago or even last year. You need to be sure that your equity assessment reflects current values.
So, a $100,000 discount may sound really great to you, but if the house is worth $600,000 very few investors will want to take that on. Trying to wholesale upper end properties and/or properties that lack a 30% or better discount is like taking shots from half court. You might land a rouge shot, but it’s going to take a ridiculous number of attempts to score that way. Instead, I recommend that you go for the lay-up. It’s hard to miss when you pick the right deals: greater than a 30% discount and below the median price.
Until my next post,
James
P.S. Are you ready to take your real estate investing business to the next level? Upgrade to our Real Estate Investor Bronze Membership today.
Let’s discuss the sales process for selling your wholesale deal, but before we do that, let’s review how we got to this critical point.
Through marketing to find motivated sellers you’ve found a great real estate deal. While finding your deal you’ve been actively building your real estate investors buyers list so that you’ll be able to sell your property quickly with minimal expense.
You’ve placed this great real estate deal under contract with the seller. You’ve used either a purchase agreement or an option so that you have the right to buy the property at a pre-agreed price, for a specified duration of time (either the inspection period or option period depending on the type of paperwork you’ve used). You have the right to assign your rights in your agreement to another investor for a fee. This will be your wholesale fee.
After you gained control of the deal, you started to market it actively to your buyers list. Additionally, you are marketing it using yard signs (if you’ve received permission to do so), CraigsList, direct mail to Absentee Owners, a classified ad in the newspaper and perhaps even flyers to neighbors.
Now you have found an investor buyer who has driven by the property, viewed your photos of the property on your website, checked your comparable sales data versus his own research and is ready to inspect the property. You coordinate with your seller to get your buyer to walk through the property with you. Once your buyer has done that, you both agree that you’re ready to complete the assignment of contract paperwork. This is the paperwork that assigns your rights to buy the property to your buyer for a wholesale fee.
At this time you collect an earnest money deposit, part or all of which you will most likely be giving to the seller to cover your earnest money requirement.
Finally, you will turn in your paperwork, and any other required documents to your closing/escrow agent or title company. With their help, you will receive your wholesale closing fee when your investor buyer closes on the property with your original seller.
Until my next post,
James
P.S. You know how to do it, are you ready to implement? Become a Real Estate Investor Bronze Member.
Lately, I have been working with more and more real estate investor wholesalers. One of the first questions I am asked by people who are new to the business is exactly how wholesalers actually make money.
First, I want to describe what a wholesaler does and does not do and then I will cover how they actually make a profit when they wholesale a deal.
When we are talking about wholesaling real estate, we are specifically referring to you finding a great deal, placing a contract on the property and then selling your rights in the contract to another investor or someone who will be living in the property.
Specifically, you are not “helping people sell their home,” like you would be with a real estate license.
So, how do wholesalers make money? They make money by selling their rights to the contract. Here’s an example of how a wholesale deal might work.
You find a property that is worth $100,000. You talk with the seller, and they agree to sell you the property for $55,000. You then write up a contract to purchase the house in the next 45 days for $55,000. You also include that you have the right to assign your contract to someone else if you want to.
Next, you go and find another investor who wants to purchase the house or someone who wants to live in the house. For this discussion, we will call them your buyer.
You and your buyer agree that they are willing to pay $65,000 for the house. So, you buy it for $55,000 and you are selling it for $65,000. You have a gross profit of $10,000 (not including your expenses to find the seller, find the buyer and any closing costs you might have).
In future articles, I will cover the mechanics of how the transaction works, but for now realize that your buyer will be purchasing the property for $65,000 and the seller will receive their price of $55,000. This leaves you with a gross profit of $10,000 on the deal.
If your buyer comes from a real estate agent or broker on your dream team, you may also need to pay a real estate commission from your profits. On this particular deal, if you agreed to pay a 3% real estate commission for your real estate agent or broker to bring you a buyer, you would pay them 3% of the $65,000 purchase price or $1,950. In that case, instead of grossing $10,000 on the deal, your profit (before other expenses) would be about $8,050.
The big picture is simple: wholesalers are paid for finding truly great deals, placing them under contract and then selling their rights to purchase the property at the contracted price.
Until my next post,
James
P.S. Wholesaling is an important strategy for new investors that need to generate quick cash flow into their business (and personal finances) and that is why I spend a lot of time and training teaching this to our Bronze Members and specifically with the free consulting and mentoring they get as well. If you want to get access to our training materials and consulting and mentoring, please upgrade to a Bronze Member today.
