(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
What is a real estate wholesaler?
The definition of a wholesaler is a middle-man who matches a seller's property with a potential buyer.
These properties are typically off-market, distressed, and the seller is often motivated to sell their property.
Once a wholesaler buys a property, he/she will try to flip the off market home to another buyer as soon as possible.
These buyers are either fix-and-flip investors or buy-and-hold investors.
Wholesalers are particularly skilled at the following:
Keen local knowledge of a specific area.
Skills and experience to identify undervalued, distressed, off market properties.
Ability to quickly identify motivated sellers.
Experienced with marketing campaigns aimed to convince distressed property owners to sell.
Ability to negotiate with property owners as well as with potential buyers.
Unlike real estate brokers, you do not need a license to become a real estate wholesaler.
This post teaches you the pros and cons of wholesaling real estate, how a wholesaling houses contract works, how to become a property wholesaler, and much more.
Let's get started.
How to be a real estate wholesaler
To be a real estate wholesaler, you first need to understand the basics.
That starts with understanding how wholesalers make money.
A wholesaler's profit is the difference between what they pay for a property and what they then sell it for.
Their goal is to find a seller that is willing to sell way below the fair market value and then resell to a buyer at a much higher price.
If it takes a wholesaler too long to find a buyer, they may end up paying out of pocket, as per the agreement terms.
A property wholesaler will sell to both fix-and-flip investors and long-term holders.
Let's walk through the differences of those two buyer personas below:
Selling to fix-and-flip investors
When wholesaling properties to fix & flip investors, wholesalers need to be aware of renovation and repair costs for the property. These costs are crucial for a fix-and-flip investor to know.
The first thing a fix-and-flip investor is going to look at is the after repair value or ARV, often starting with the 70% rule. A properties ARV tells them how much they'll be able to sell the property for after it's been renovated.
After repair value, or ARV, is the estimate of a property’s value after all repairs and upgrades are completed. It calculates the margin between a property's present day value, and the property's value once it's been renovated.
Selling to buy-and-hold investors
Selling to buy-and-hold investors is a completely different game.
Unlike fix-and-flip investors, buy-and-hold investors don't typically care about the ARV of a property. This is due to the fact that they're going to be holding the property for a while, not selling it right away.
To appeal to buy-and-hold buyers, a property wholesaler needs to be very familiar with the surrounding market demographics and population information.
Buy-and-hold investors will want to know the average rents in the area to determine cash flow, average occupancy rates, employment growth over the past few years, and much more.
These are all crucial factors to know when buy-and-hold investing, as most investors are looking to hold properties for at least 3+ years.
What is a wholesaling real estate contract?
Wholesale real estate contracts are put together to facilitate the buying and re-selling process.
There are 3 people involved in real estate wholesaling contracts:
Below is a step-by-step process of how contracts for wholesale real estate work:
Once the wholesaler finds a property, they sign a Purchase Agreement with the seller. The Purchase Agreement is a sub-agreement within the wholesale real estate contract.
The Wholesale Purchase Agreement states that the wholesaler can legally assign or sell the agreement to the buyer.
The wholesaler then finalizes an Assignment Agreement to legally transfer their ownership rights to the buyer.
Now, the buyer can purchase the property directly from the seller per the terms of the original Purchase Agreement.
When a wholesaler transfers ownership of the property to the new buyer, it eliminates the wholesaler’s legal liability and obligation towards the seller.
Pros of wholesaling
Earn quick profits - Wholesalers are able to turn profits on a deal typically within 30 days. Most wholesalers have plenty of deals going on at once, and are able to close 5-10 deals each month. Pretty good for a middle-man. Once you gain the experience and ability to find motivated sellers as well as build up your buyers' list, you can make a killing.
No credit checks & little cash needed - Even if you have bad credit, you can still wholesale properties because you don't actually purchase the property. Instead, you are assigning the Purchase Contract to another buyer. That buyer, not you, is one that has to go through the credit checks and fund the purchase of the property.
Learn about the real estate market quickly - Although wholesaling might sound scary to those new to real estate investing, it's really a great way to dive in and learn the nuances in a very short period of time. Wholesaling combines many of the other types of real estate transactions you'd encounter throughout your investing career. This includes legal documentation, marketing, calculating ARV, estimating rehab costs, negotiating, and much more.
Cons of wholesaling
Income isn't guaranteed - If you're looking for a steady gig with a guaranteed paycheck every few weeks, then wholesaling is most definitely not for you. Just because you find a distressed property from a motivated seller, doesn't mean you'll immediately find a buyer that wants to buy that property. Wholesalers, like real estate agents, are constantly on their toes and working both hard and smart to find the best deals. You'll find that, similarly to real estate agents, over 80% of the money made through wholesaling is brought in by less than 20% of wholesalers.
It takes time to build a buyers list - One of the keys of being a successful wholesaler is having a large, dependable buyers list. If you have no buyer, you have no deal. It's that simple. You want to have potential buyers lined up before making an offer to a seller, as it reduces your risk of potentially not selling. Almost all successful wholesalers work with repeat buyers. This is because they know that these buyers are serious because they've done deals with them in the past, and they pulled through. An experienced wholesaler can spot a window-shopper from a mile away.
Finding distressed properties can be tough - Wholesalers learn fairly quickly that they need to go outside their local market to find distressed sellers. There aren't many good ways to find motivated sellers with distressed properties. Most wholesalers will drive around and look for properties with newspapers and mail scattered in the front-yard with overgrown shrubbery and an unkept lawn. This tells them that this owner doesn't care about the property, and will most likely be motivated to sell. Wholesalers will also do direct mail campaigns to property owners, do email marketing campaigns, and post in wholesaling Facebook groups.
How to find motivated sellers with Lofty AI
At Lofty AI, we take a different approach to finding motivated sellers.
Our approach involves automatically searching for certain keywords in a property page's listing description to determine if the property owner is a motivated seller.
When we come across any of these 100+ keywords in a property listing, we've found that these properties tend to sell for for much less than their original listing price
A couple examples of these keywords include:
When these keywords are present in a listing description, properties will almost always sell for less than they're originally listed for.
Real estate agents will often use these keywords to try and be sneaky and subtly hint that their client is motivated, but it's actually quite transparent.
When they use these keywords, what they're really saying is:
"Low-ball my client and they'll probably accept it."
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