This article is intended as a ‘What is wholesaling’ article for beginners… experienced readers beware!

My wife and I have been going through several classes and seminars, and have been consuming real estate books by the dozens over the last year. We’ve also joined up with a coaching program, and have been members of our local REIA for the last 3 months. We are active wholesalers, with a fledgling company that we’re just getting off the ground. We’ve learned quite a bit along the way.

Wholesaling properties can be easily described as contracting properties at 50 to 60 cents on the dollar, and then selling the contract to another buyer at 70 to 75 cents on the dollar. When we first got started, we wondered… ‘Why would anyone sell their house for that?’

The types of properties that we contract are usually in trouble, or the owners are in trouble:

Fire Damage
Divorce (Quit Claim)
Foreclosure / Pre-Foreclosure
Probate / Inheritance
Vacant Properties
Properties in need of serious Rehabilitation / Renovation

Generally speaking, we’re looking for ‘Motivated Sellers’ with a problem or with a property that has a problem that we’re able to fix.

One of the things that is appealing to most people about wholesaling when they first get into real estate is the low risk involved. During the wholesale process, the wholesaler never actually purchases the property themselves, they are only putting it under contract with the intent of selling that contract to another investor. This means that a wholesaler can be involved in the real estate transaction without having any of their own money at risk.

Wholesalers get paid from the actual buyer by what is called an ‘Assignment Fee’ that ranges anywhere between $5000 and $20,000. This contract assignment fee is essentially the fee that is paid by the buyer (usually another investor) for the right to buy the property. Wholesalers are in the business of selling ‘paper’ (the contract that gives them the right to buy a property at a discounted price)… they are not selling ‘property’. Though there are some instances where they would (like double-closings), as long as the wholesaler never actually takes ownership of the property, they also avoid any of the associated closing costs.

While none of the wholesaler’s money is involved in the actual wholesaling transaction, the process of obtaining the property in the first place can involve quite a bit of marketing and infrastructure cost. Wholesaling is a business, and with any business… there is going to be overhead. The good news is that you can start fairly small with some effective marketing tools and sales techniques that don’t cost a lot of money, and still do very well as a wholesaler.

Some of the marketing that we use:

Bandit Signs
Direct Mail Campaigns
Door Knockers
Websites
Ebay Auctions
Craigslist
Networking

So… Let’s go through a simple case study of the average wholesale real estate transaction:

Step 1 : Motivated Seller Call-in
George is a home owner from Antioch with a 3 bedroom, 2 bath house that he is 2 months behind on payments with as a result of him losing his job 7 months ago. A friend of his saw one of our ‘We Buy Houses’ signs on his way into work and gave George our phone number. George calls our phone number, and we begin the interview process with him… asking him a series of questions intended to find out his reasons for selling and how motivated he is. The house needs a bit of work, possibly a new water heater, definitely some paint and carpet, and there is a roof leak in the bathroom. He estimates that the repairs will cost about $15,000, and says that the house just came off the market where it was listed at $165,000. It appraised 6 months ago for $172,000, and he’s had the house since 1990.

Step 2 : Initial Property Research / analysis
This process normally happens during the call with the seller. While we are talking with the seller, we will be online researching the property, checking out the original mortgage on the property… finding any existing liens, and generally making sure that the seller is being honest with us. we’ll also begin to pull some initial comps of other properties in the area in order to determine value. Our goal in this research is to find out if the property is actually a deal or not, and the main determining factor here is if there is any equity in the property at all. One indicator with this particular property is that the house was bought in 1990. Usually with close to 20 years worth in payments, there will be some equity in the property which will give us room to negotiate price, but in some cases, sellers will have home equity lines on the house that will have stripped out any equity they might have had.

It is during this process that we come up with our MAO or ‘Maximum Allowable Offer’. We do this by first determining the ARV or ‘After Repair Value’. This is determined by the estimate that the seller gave us… but also by double checking with the comps for similar properties that sold recently in the area. The calculation for finding our MAO is ARV minus Repair cost multiplied times 65%.

ARV: $170,000 * 0.65 = $110,500

Minus Repair Cost: $25,000 (I would rather be conservative) = $85,500
Minus our Profit (assignment fee): $10,000 = $75,500
Minus Closing Costs (if we are double closing): $15,000 = $60,500
MAO = $60,500

This is also where we figure out our (or our investor’s) exit strategy, if we’re going to attempt to rehab the property ourselves, or if we are going to double close on the property with another investor in order to make a bit more $ than just our assignment fee.

ARV: $170,000 * 0.75 = $127,500
Minus Repair Cost: $25,000 = $102,500
Minus our Profit: $10,000 = $92,500
Minus Closing Costs: $15,000 = $77,500
MAO = $77,500
Asking Price after repair: $170,000 * 0.80 = $136,000

As you can see… even after selling the property at a significant discount of 80% of fair market value, there is still $10,000 worth in profit remaining, with a possible inflated repair cost. If we’re buying the property at wholesale, and we carry the property through a rehab process ourselves, we actually stand to make:

Built-in profit: $10,000
Potential Repair Cost Savings as a result of overestimate: $10,000
After Sale profit: $10,000
Total potential profit: $30,000

The challenge is finding motivated sellers with enough equity in their house to make these types of numbers work!

Step 3 : Initial Property Inspection / Purchase and Sale Contract
Once we’ve determined that the property is a deal, we will actually go to the house to look it over with the goal of putting the property under contract with the seller at that point. Our contract has multiple ‘out’ clauses including a clause that allows us to have our contractor look at the property to estimate any major issues that we don’t want to step into. The key on the Purchase and Sale contract is that it is ‘assignable’. This gives us the ability to assign the contract to another investor. You also want to make sure that you are able to market the property, and that the seller understands that is what you are going to be doing.

Step 4 : Market the property
This is our process, and how we market properties we have under contract:

1. Call our top 5 investor buyers
2. Email our top 5 investor buyers
3. Email our entire investor buyer list
4. Place for-sale sign in property lawn (you should have this with you when you inspect)
5. Place property on Ebay
6. Place property on Craigslist
7. Bring property sheet to ‘deal table’ at local REIA

Step 5 : Collect your check!