What is Real Estate Wholesaling - Real Examples

Think of real estate wholesaling as flipping houses, minus the renovations. It's about finding great deals on properties and selling those contracts to investors for a profit. Wholesalers are the deal-finders of the real estate world. They hunt for undervalued properties, secure them under contract, and then sell those contracts to buyers willing to pay more. But how do they find these deals? What makes it work? And can anyone do it? In this article, we'll break down real estate wholesaling with concrete examples. Whether you're a curious investor or a potential wholesaler, get ready for an inside look at this fascinating corner of the real estate market.

What is real estate wholesaling?

Real estate wholesaling is a strategy where an individual, known as the wholesaler, contracts a property with a seller and then finds an end buyer for that same property at a higher price. The wholesaler doesn't actually purchase the property but instead sells their rights to the purchase contract to another buyer, typically an investor. This process allows the wholesaler to profit from the difference between the contracted price with the seller and the amount paid by the end buyer. Wholesaling requires minimal capital investment but demands strong networking skills, market knowledge, and the ability to quickly identify undervalued properties. It's a way to potentially earn money in real estate without taking on the responsibilities of property ownership or renovation.

Example of a Wholesale Real Estate Deal

Let's break down a wholesale deal using a concrete example. We'll start with a house that has an ARV of $500,000.

What is ARV? ARV stands for After Repair Value. It's the estimated value of a property after all necessary repairs and renovations have been completed. In our example, the ARV is $500,000.

The 75% Minus Repairs Rule Investors often use the "70% Rule" or variations like the "75% Rule" to quickly estimate a property's maximum purchase price. Here's how it works: 1. Take 75% of the ARV

2. Subtract the estimated repair costs

3. The result is the maximum purchase price for the investor to potentially profit 

Crunching the Numbers Let's say the property needs $50,000 in repairs. Here's how we'd calculate the maximum purchase price:

1. 75% of ARV: $500,000 x 0.75 = $375,000

2. Subtract repairs: $375,000 - $50,000 = $325,000

So, $325,000 is the maximum an investor would likely pay for this property.

The Wholesaler's Deal As a wholesaler aiming to make at least $15,000, you'd need to get the property under contract for no more than: $325,000 - $15,000 = $310,000

Deal Breakdown:

- ARV: $500,000
- Estimated Repairs: $50,000
- Max Investor Buy Price: $325,000
- Wholesaler Contract Price: $310,000
- Wholesale Fee: $15,000 In this scenario, you'd aim to get the property under contract for $310,000 or less. You'd then sell this contract to an investor for up to $325,000, pocketing the difference as your wholesale fee. Remember, these are just guidelines. Successful wholesaling also depends on negotiation skills, accurate repair estimates, and a solid understanding of your local market.

How to find wholesale deals with only a $1,000 marketing budget

Wholesaling real estate with minimal capital is possible by leveraging technology and targeting niche markets.

Here's a strategy to get started with under $1,000: 

1. Smartphone ($0-$500): Your most crucial tool. Use your existing phone or invest in a decent smartphone if you don't have one. This will be your primary device for communication, research, and deal-finding.

2. Facebook Marketplace (Free): - Regularly check Facebook Marketplace for potential deals. - Look for keywords like "motivated seller," "need to sell fast," or "fixer-upper. - Set up alerts for new listings in your target areas. - Engage with sellers directly through Facebook's messaging system.

3. Direct Mail ($200-$300): - Focus on small, niche lists rather than broad campaigns. - Target specific neighborhoods or property types (e.g., out-of-state owners, properties with code violations). - Use simple, handwritten postcards for a personal touch. - Send in small batches to test and refine your approach.

4. Cold Calling ($50-$100 for a basic dialer app): - Create or purchase small, focused lists of potential sellers. - Use a basic auto-dialer app to increase efficiency. - Script your calls but keep them conversational and genuine. - Follow up consistently with interested parties.

5. CRM System (Free to $50): Use a free or low-cost CRM to manage leads and follow-ups.

Key Strategies:
- Consistency is crucial. Check Marketplace daily and make a set number of calls each day.
- Build relationships. Even if someone isn't ready to sell now, they might be in the future.
- Learn to quickly assess deals and communicate value to both sellers and potential buyers.
- Network with local investors who might be interested in your deals. Remember, this approach relies heavily on your time and effort. Be prepared to put in significant work to identify and pursue potential deals.

Is wholesaling real estate legal?

Real estate wholesaling is generally legal in most states, but it's crucial to understand and comply with local laws and regulations. The key is to be transparent about your role as a wholesaler and to ensure all contracts and disclosures are properly handled. However, some states have specific requirements or restrictions on wholesaling practices, so it's always wise to consult with a local real estate attorney before engaging in wholesale deals.

How to Negotiate a Wholesale Deal

Negotiating a wholesale deal requires a blend of psychology, market knowledge, and communication skills. Here's how to approach it:

1. Do Your Homework - Know the property's ARV (After Repair Value) - Estimate repair costs accurately - Understand the seller's motivation

2. Build Rapport - Listen more than you talk - Show genuine interest in the seller's situation - Find common ground to establish trust

3. Focus on the Seller's Needs - Is it a quick sale they need? - Do they want to avoid realtor fees? - Are they looking for a hassle-free process?

4. Present Solutions, Not Just Offers - Explain how your offer solves their problem - Highlight the benefits of selling to you (speed, convenience, etc.)

5. Use the "Sandwich" Technique - Start with a positive about the property - Present your offer - End with another positive or benefit

6. Be Prepared to Walk Away - Don't get emotionally attached to any deal - Having alternatives gives you negotiating power

7. Handle Objections Smoothly - Anticipate common objections and prepare responses - Use objections as opportunities to provide more information

8. Create a Sense of Urgency - Without being pushy, emphasize the timeliness of your offer - Mention other opportunities you're considering

9. Be Transparent About Your Role - Explain that you're a wholesaler if asked - Focus on how this benefits the seller (quicker sale, no repairs needed)

10. Use Silence Effectively - After making an offer, resist the urge to keep talking - Let the seller break the silence; they might counter or accept Remember, the goal is to create a win-win situation. You want the seller to feel good about the deal, ensuring smooth transactions and potential referrals.

Pro Tip: Practice your negotiation skills regularly. Role-play with a partner or mentor to improve your technique and confidence.

How do wholesalers get paid

Wholesalers typically get paid through an assignment fee, which is the difference between the contract price with the seller and the amount the end buyer pays. Once the wholesaler finds a property and gets it under contract, they market the contract to potential buyers, often other investors. When a buyer is found, the wholesaler assigns the contract to them for a fee, which can range from a few thousand to tens of thousands of dollars, depending on the deal. The assignment fee is usually paid at closing, where the wholesaler, original seller, and end buyer come together to complete the transaction. In some cases, wholesalers might use a double close method, where they actually buy and immediately resell the property, with their profit being the difference between the two transactions.

Reverse Wholesaling Examples

Reverse wholesaling is a strategy where real estate investors build a buyers list first, then find properties matching those buyers' specific criteria. It's an attractive starting point for new wholesalers because it reduces risk - you have interested buyers before committing to a property. This approach allows beginners to learn what experienced investors want, helping them make smarter decisions when searching for deals. Additionally, reverse wholesaling can lead to faster transactions and stronger relationships with buyers, providing a solid foundation for a wholesaling career.

1. Build Your Buyers List First - Instead of starting with a property, begin by cultivating a robust list of cash buyers. - Understand what types of properties these buyers are looking for, including location, condition, and price range.

2. Gather Specific Criteria - Get detailed information from your buyers about their ideal investments. - This might include ARV (After Repair Value), maximum purchase price, preferred neighborhoods, and property types.

3. Hunt for Matching Properties - With your buyers' criteria in hand, search for properties that fit these specific needs. - This focused approach increases your chances of a quick sale once you secure a property.

4. Secure the Property - When you find a property matching your buyers' criteria, get it under contract. - You're now working with a "warm" buyer pool, reducing the risk of not being able to assign the contract.

5. Quick Turnaround - Present the property to your pre-qualified buyers. - Since you know their criteria, the sale process is often faster and smoother.

Benefits of Reverse Wholesaling: - Lower risk as you have buyers lined up before securing properties. - More efficient use of time and resources. - Potential for higher assignment fees due to meeting specific buyer needs. - Builds stronger relationships with repeat buyers.

Challenges: - Requires more upfront work in building and maintaining a quality buyers list. - Need to balance multiple buyers' potentially competing interests. - May miss out on good deals that don't fit current buyers' criteria. Remember: The key to successful reverse wholesaling is maintaining strong relationships with your buyers and having an in-depth understanding of their needs and preferences. Reverse wholesaling is an interesting strategy that can potentially reduce risk and increase efficiency for wholesalers. By focusing on building a strong buyers list first, wholesalers can more confidently pursue properties, knowing they have interested parties ready to buy.

Real Estate Wholesaling: Examples and Key Takeaways

Throughout this article, we've explored various aspects of real estate wholesaling, providing concrete examples to illustrate this investment strategy. Let's recap the key points:

1. Wholesaling Defined: We've seen how wholesaling involves finding undervalued properties and selling the purchase rights to other investors for a fee. Our $500,000 ARV example demonstrated how wholesalers can potentially earn $15,000 or more on a single deal.

2. Low-Cost Entry: We explored strategies for starting with under $1,000, focusing on leveraging tools like smartphones, Facebook Marketplace, and targeted mailings. This shows that wholesaling can be accessible even with limited capital.

3. Negotiation Tactics: Our discussion on negotiation highlighted the importance of understanding both property values and seller motivations. Successful wholesalers create win-win situations through effective communication and problem-solving.

4. Payment Structure: We clarified how wholesalers typically get paid through assignment fees, earning the difference between their contract price and the end buyer's purchase price.

5. Reverse Wholesaling: This strategy of building a buyers list first before finding properties offers a lower-risk entry point for newcomers, as illustrated in our reverse wholesaling example. These examples showcase the versatility of wholesaling strategies. Whether you're working with minimal capital, leveraging technology, or focusing on building a strong buyer network first, wholesaling offers multiple paths to potentially profitable real estate investments. Remember, successful wholesaling requires a blend of market knowledge, negotiation skills, and ethical practices. As with any investment strategy, due diligence and continuous learning are key to long-term success in real estate wholesaling.