Terms Real Estate

Wholesale Real Estate

Whole Sale Real Estate

It is impossible to consider real estate zero-down investment techniques without considering Wholesaling Real Estate. Wholesaling real estate can be a very lucrative means of making money with just a small amount of initial capital. But it is not as easy as most real estate gurus will have you believe. It requires at least some decent level of dedication and understanding.

We know this, which is why this article seeks to answer most of the questions you might have about the subject.

What is Wholesaling Real Estate?

Wholesaling real estate is pretty straightforward in theory, but in reality, it is slightly more complicated. It is based on the practice of purchasing and selling properties quickly without repairs. The process is simple – you (the wholesaler) knows of a property owner looking to sell their property. You approach the property owner and enter into a contract with him at a set price. You then sell the contract you have with the owner of the property to another investor willing to purchase the property for a higher price and pocket the difference.

From the above, we can see that the wholesale real estate process involves three major participants:

  • The property owner
  • The wholesaler, and
  • The final buyer

One crucial thing to note here is that wholesalers do not sell properties as technically; they do not purchase any property. What they do is sell the contract they have with the owner of the property. So, at the end of a successful wholesale real estate transaction, the property owner gets the amount agreed with the wholesaler. In contrast, the wholesaler receives the difference between the price agreed with the property owner, and the price agreed with the buyer of the contract.

Sometimes, investors use their own money to purchase properties at undervalued prices. Then they hire contractors to fix it and sell them at higher retail prices. This is called a Fix and Flip. Fix, and flip investors are also considered wholesalers because they purchase properties at wholesale prices.

Types of Wholesale Real Estate Transactions

There are three fundamental ways through which real estate transactions can be performed. These include “dry closings,” double assignments, and contract assignments. It is important to know always make sure the title company you wish to use handles all three transaction types as most title companies do not. Avoid wholesaling properties through companies that do not handle all three agreements to account for any uncertainties that may arise during closing.

Let’s go ahead and discuss the different types of wholesale real estate transactions in detail.

Dry closing

A dry closing occurs when the requirements for a real estate closing are fulfilled but for the transfer of funds. This may be due to delays in loan proceedings, making it impossible for funds to be available on the closing day. Parties involved in a dry closing still agree to move forward with the closing with the transfer of funds slated for a later date.

Usually, sellers prefer their money on the closing day, which is why dry closings are used occasionally.  Most people prefer standard closings for apparent reasons since sellers want their money, and buyers want to enter their new homes immediately after closing.

Double Closing

Double closing occurs when a wholesaler simply sells his contract with the property owner to the cash buyer for a fee. This type of wholesale real estate transaction is easy and straightforward and can be completed within a short time. Escrow offices usually charge double for this type of closing, since two contracts are being sold. This explains why it is called a “double close.”

Contract Assignment

With a contract assignment, the wholesaler takes the contract with the property owner to an escrow office and sells it to an end buyer. Upon purchase, the end buyer becomes responsible for the rest of the deal. The wholesaler assigns the agreement to the end buyer allowing him to step in and take charge of all remaining contractual obligations.

Before choosing your escrow office, it is important to screen them properly. Make sure they handle all three transaction types before dealing with them. Remember that a normal close can quickly become a dry close if the funds are delayed. Your escrow office should be able to adapt accordingly.

Assignment versus Double Closing

The two most common approaches to ending a wholesale contract are the Double Close and the Assignment Close. Understanding these two approaches will play a crucial part in your maximizing your profits.

An assignment close is cheap and very simple. It merely involves the assigning of a contract to purchase a property to a third party for a fee. This can be done without the use of a middleman or via an escrow office. Assignment closing involves two contracts—the contract with the property owner and the property with the third party. Both contracts need to be closed when using an escrow office since the second transaction needs to be used to fund the first one.

Sometimes, you’ll meet a buyer who is interested in making a deal with you until they see how much you are making. Suddenly, the agreement makes no sense to them anymore, and they back out.

Double closing is ideal for avoiding this type of situation. With this option, your profit amount is known only by you as the final buyer sees only the contract at the price you are selling to them. Here, the wholesaler purchases the property and then resell it to the final buyer. This keeps the original deal private. However, this method has a catch—two different transactions must be managed in a timely and efficient manner.

Choosing which type of closing to use depends entirely on you. If the end buyer comes off as reasonable, you may consider the assignment close. However, for wholesale real estate transactions earning you at least $10,000, use the double close and prevent any last-minute issues.

Understanding and Playing the Game

When getting a property under contract, it is essential to note that investors will buy contracts that guarantee high earnings. So, get a property at the lowest rate possible to make money via assignment. The numbers must add up for investors to spend their money.

Note that different investors have different return margins. Usually, most final investors require a 20-25% return on their investment. So, if you get a contract promising a return of 30%-35%, the contract will practically sell itself. Attend real estate meetings in your area to find cash buyers—alternatively, network with “investor-friendly” attorneys, realtors, and mortgage brokers via social platforms. Always try to work with familiar faces but never assign the contract without collecting your money first.

Remember the adage, “Prevention is better than cure.”

Building Your Network

A sagacious man once said, “your network is your net worth.”

There is more truth to this quote than you can fathom. Every real estate investor needs an “investor-friendly” real estate attorney and a growing list of end buyers. Some real estate attorneys don’t understand such deals, and others just consider it a waste of time.

So, you need to search for an attorney that handles both assignment closings and double closings. Some title offices offer wholesale real estate services, but using an actual attorney is better, especially if you need a contract to be prepared.

Make use of the networking prowess of Facebook, LinkedIn, Twitter, and even Instagram. Check sites that relate to real estate. Attend local Real Estate Investing (REI) meetings. Most towns host these types of gatherings where investors can gather in and learn from each. Also, REIs are a great way to network and work with professionals in the field.

As an investor, especially a new one, you need all the help you can get.

Building Your Buyer’s List

Your buyer’s list is critical—it is your cash cow. Building it requires the use of all the techniques available to you. Attending REI meetings can be an excellent place to start. Interact with realtors and ask them for buyer recommendations. Sell yourself by making them know that you get good deals consistently and would like to work with them.

Ask your real estate attorney about buyers in your area. Usually, they will give you some information. Most attorneys will see the value in connecting with you, since your interest is investment-related. Finally, you should make use of social media platforms and online forums. Advertise your contracts on social media platforms and various online forums. Once again, if the numbers add up, you only need just a little bit of marketing.

Determining the Value of a Property

Knowing how much a property is worth is the first step towards a successful wholesale transaction. There is no better way of knowing this than by researching and discovering the values of comparable properties.

Comparable properties are properties similar to the one you are considering. This could be in terms of the number of bedrooms, bathrooms, square footage, or year built. Your comparable property must also be in a neighborhood close to that of the property you are looking at. Even better if both properties are in the same area.

Properties on different sides of a highway or lake are usually not regarded as valid comparable properties. To use such properties, you should account for the differential that may arise. Take this example. You are looking to sell a 1,300 square foot 3-bedroom, 2-bathroom property. But to determine its value, you should compare it with the 1,400 square foot property with the same number of bedrooms and bathrooms from across the street. You discover that the building sold for $150,000.

In determining the price of your property, you must account for the extra 100 square foot differential, so you might consider reducing $5,000-$10,000 from the value of the comparable property. In this example, the value of your property should range from $140,000 to $145,000.

I Real Estate

Wholesaling real estate is a relatively cheap and easy way to start your real estate investing career. You can use it to build capital for further investments. The process itself is simple and straightforward. You get a property under contract, assign it to an end buyer for a fee, and you are done. You can charge $10,000 to $15,000 on top of your contract price and close your transaction. Of course, if you can push for more, go for it.

It depends on the amount you have the property under contract for. From that stage, you can discern how much profit potential is there.

Please don’t push too much that the buyer becomes jealous. It is a sad reality. Always note that you might have to bear some extra closing costs to protect your deal.

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