What is wholesaling?
(Part 1 of 3)
You’ve probably heard the term “wholesaling” and know that it can be quick and profitable. If you’ve hung around me long enough, you should also know it’s the first step I recommend after acquiring a property, and it’s only after you attempt to wholesale a property should you fix and flip it.
But do you know how to wholesale a property? Do you really know what it is?
It may seem like a fundamental basic of investing for those of you who’ve been involved in the Lee Arnold System of Real Estate for a while. But with so many people looking to change career paths and improve their lives through real estate investing, it’s worth reviewing. Plus, I know many of you who’ve been with us for a while have never employed this strategy, and I understand it could be because you’re not entirely comfortable with it yet.
Let’s fix that.
Wholesaling a property is when a buyer (wholesaler) puts a property (usually distressed) under contract and assigns or resells the property to another investor. The end-buyer investor uses cash, lines of credit or hard money loans to close on the transaction, which allows for fast closing on properties that sometimes need repair.
Wholesaling a property is contracting to purchase and “locking up” a property, then turning around and selling your RIGHT to purchase that property to a third person.
You assign the property directly over to someone who purchases the property from you at a marked-up price.
When document verbiage says “Buyer: John Doe, and/or assigns,” the “assigns” would be anyone who you pass your purchase rights along to. In other words, you act as a middleman for the transaction by purchasing a home, finding a buyer for it (the “assigns”) and taking the difference.
Let’s say you purchase a property for $45,000 and list it immediately for $50,000. If the ARV (After Repair Value) is $90,000, there is still $40,000 in wiggle room for whomever you wholesaled/assigned the property to. They have the financial space to make money while you walked away with a cool $10,000 (before closing costs and fees). *
You walk away with a few grand for (likely) a few hours of work, and you pass the potential (and the risk) onto the next person.
What’s the best part about wholesaling? You, as the wholesaler, get paid at closing.
Your check comes to you right at the closing, and you’re out of the deal. You have quick money for your efforts without the risk involved in repairing a property for resale, and you get to move on to the next deal right away!
THEN, if you can’t wholesale a property after 3 weeks, you begin the process to fix and flip it to put it on the retail market and make the maximum amount of profit possible.
Once you know the basics (and by “know” I mean you’ve done a few successful deals; because experience = true knowledge), you can get creative with the way you structure wholesaling deals.
Although I never recommend jumping into a creative wholesaling deal without having experience (or a good coach), you could hear about deals like this, and it’s important to know that wholesaling can be simple, but it can be quite involved too.
Some investors use more advanced strategies by taking a portion of the wholesale assignment fee at closing. But then they will stay involved in the transaction by getting what’s called the “slice of the equity” or a cut of the profit. So, if the profit one a deal is going to be $40,000, you could arrange with the buyer that you want $5,000 now and 10% of the profit.
This is what we call an “Equity Rider,” which can be a grand strategy. It’s one of several more advanced techniques that you could learn and employ throughout your investing career to increase your income.
How many of wholesale deals could you do in any given period?
If you are never “buying” the property (meaning you buy and are assigning the property to another buyer), you’re never on the hook to take the fix and flip from start to finish. You just identify it, get it under contract, and wholesale it. Quick and simple.
“But don’t I WANT to fix and flip it if that’s where the big money is?”
Sure! Of course you want to fix and flip properties. We teach people every day how to do it successfully, and without the trial-and-error you’d encounter doing it alone. But let’s say you find one property. You could take that property from distressed to retail fruition in 4-5 months and make $20,000** on the deal.
Or, you could have the property under your control for 3 weeks and wholesale it to make a cool $5,000. In 5 months, averaging a wholesale deal every 3 weeks, you could put together about 7 deals. At $5,000 per deal, that would be $35,000, and with less risk.
I have met some very competent wholesalers who never take down a property. If they can’t sell within three to seven days, they back out of the deal. These guys can turn four to five deals a month. If you look at an average payout of $5,000 per transaction and times it by four or five, you’re making $20,000 to $25,000 a month without actually ever having to buy or own real estate. People love this for that very reason. It’s just nice cash flow and income without the liability of owning the property.
All creative deals begin with one thing; a problem. When you find someone with a real estate problem that a “normal” solution can’t resolve, you have an opportunity to turn that problem into a solution that will work out to benefit both parties.
You can help yourself by helping others. And, on a similar note, you can find more about working with Distressed Home Owners by CLICKING HERE.
For more information about generating cash flow from wholesaling property, contact one of our business development consultants at (800) 473-6051.
This week we discovered:
1. What wholesaling is.
2. Why it’s a sound investment strategy.
3. Creative Deal Structuring.
Next week we’ll talk in detail about:
1. Finding motivated sellers.
And the following week, we’ll discuss:
1. How to qualify the sellers.
2. How to find the best buyers.
Until Then, To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing
Follow me on Twitter: @CogoCapital and @LeeArnoldSystem
Have a deal under contract that you would like a quote on? Let us know. You can fill out a quick questionnaire at CogoCapital.com to receive a rate quote via email or you can call us anytime at (800) 747-1104 to talk to a loan officer. With millions deployed and millions to deploy, we want you to get the capital you need for your real estate investing.
*All numbers are for example purposes only and doesn’t denote the average profit on a wholesale deal. To find out what the average amount made is and to have any other questions you have answered, call a Business Development Consultant today at (800) 473-6051
**Another example. Some people make more, some less. Why don’t you try it for yourself to see how much YOU make?