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Wholesaling homes is one of the easiest ways to begin your career as a real-estate investor. You can begin with limited knowledge of real estate, and with advancements in technology you can wholesale virtually anywhere.
So what is wholesaling and what do wholesalers actually do?
As a wholesaler, your goal is to find a motivated seller and negotiate a favorable price for their home. Once you have an executed purchase agreement between you and the homeowner, you’ll attempt to sell that agreement to an “end buyer”. The end buyer or cash buyer is the investor that will ultimately be closing on the property.
There are three basic steps to all wholesale transactions.
1. Finding a motivated seller
In step one, the wholesaler needs to find a homeowner that is motivated to sell their house. Motivation is a key element to the wholesaling process because it allows the wholesaler to negotiate a favorable price for the home. This is imperative because the entire wholesaling process hinges on the wholesaler selling the home to a cash buyer at a discount from the current market values. The wholesaler must negotiate a good enough deal to be able to add their profit to the price and still sell it as a discounted property to an end buyer.
Finding a motivated seller can be a difficult task. Normally this requires a calculated marketing campaign focused on a variety of problems that a quick sale would solve. For instance, a wholesaler may target homes that are inherited and in need of major repairs. Those particular homeowners wouldn’t necessarily be able to sell that type of house on the open market. Most retail buyers are not looking for houses that need repairs, and most banks will not loan on that type of house — making it a perfect house for a wholesaler.
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2. Negotiating the deal
In step two, the wholesaler will negotiate a purchase price with the homeowner. The offer can’t just be low enough for the wholesaler to sell it to an end buyer, but it also needs to add money on top to make a profit. Here’s an example of a wholesaler offer:
Let’s say the current market value for a “turn-key” (ready to move in, no updating needed) home is $200,000.
A wholesaler would need to calculate the repair, remodeling and rehabbing costs as well as the transaction costs (closing costs, etc). They would also need to include their profit and the investor’s possible profits.
The process may look like this:
- $200,000 market value
- $40,000 rehabbing, transaction, etc.
- $40,000 profit for the end buyer after rehab
- $5,000 wholesaler profit
- $115,000 may be the offer that the wholesaler gives the seller.
If the seller agreed to a $115,000 offer, the wholesaler would attempt to sell the house to a cash buyer for $120,000. If successful, the wholesaler would make a profit of $5,000.
This example is a very simplified version of the computations needed to make an offer. However, it should assist in understanding the process.
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3. Finding a cash or end buyer
In step three, the wholesaler needs to find a cash buyer — also called an “end buyer” — for their deal. As the wholesaler, you have no intention of closing the deal. Your job is to get the property under contract and sell it to an end buyer. An end buyer or cash buyer is the investor that will be closing and funding the transaction. The reason they are called cash buyers is because they must be able to purchase the home with cash. This will avoid the need for a financial institution’s involvement in the transaction.
When a financial institution is involved (i.e. bank or credit union) there are multiple requirements for the loan process. Appraisals and inspections are required to obtain a loan to purchase a home. Most financial institutions will not loan on houses that need major repairs, so in order to avoid problems, wholesalers only sell houses to cash buyers.
Many very successful real-estate investors started as wholesalers. As a wholesaler, you’ll be able to learn how to invest in real estate with very little liability in the transactions. This is important for newcomers because simple mistakes can be very expensive. The wholesaling process gives you the ability to learn while you earn.