Three Basic Components Of A Wholesale Deal
One of the most popular forms of entry into the real estate business is wholesaling. What makes it such an attractive option is that the end investor carries most of the risk. With wholesaling you find a property at a discount and pass that property off to a fellow investor. For your troubles you are paid a predetermined fee. You are often in and out of the property within thirty days. The payday may not be as great as with a rehab but your exposure is greatly reduced. Closing just one wholesale deal a month will not only supplement your income but help build valuable contacts you can use to grow your real estate business. Here are the three basic components of a successful wholesale deal.
- The Deal. In every area of the real estate business getting good deals is important. As a wholesaler it is vital. Every deal you entertain has to have enough room for potential profit to make it enticing for an end investor. These deals will not just fall on your lap. You need to find motivated sellers or properties with enough defects that offer deep discounts. Motivated sellers could be homeowners who have had their home on the market for some time and may have had a buyer or two fall out. They could be lenders who want to avoid foreclosure in markets where buyers could be hard to come by. They could be landlords who are fed up with the rental process and simply want out of the property. However you find them getting the property at a discount rate is the key to any successful wholesaler. Not only do you have to find these deals but you have to learn how to negotiate them. You need to fight for every dollar without irritating the seller. This is not always an easy balance. The better you are at negotiating and acquiring good deals the better you wholesaling business become.
- The Property. Getting a property at a discount rate may not be enough to find an end buyer. You have to find properties where you can add value. The best way to quickly add value is through improvements. Even if you have never rehabbed a property yourself you should have an idea of the costs of repairs. These costs have a direct impact on the bottom line which can make or break a properties appeal. When presenting a property to an end investor you need to have an of your repair costs. Each investor will formulate their own budget but knowing this number will play into your offer. In addition to the cost of repairs you should also have some understanding on the after repair value (ARV). Take a look at recent sales and current listings. Use the properties that are most like your subject property as a guide. Items such as square footage, bedroom count and bathroom count are the most important factors. You also need to look for any items that may not be disclosed by the seller. Issues with the foundation, roof and windows quickly add up and can end up running the deal. The more you know about the property the easier it will be to sell it to an end investor.
- End Buyer. A good wholesaler is only as good as their buyers list. As you are scouring for deals you need to simultaneously look for end buyers. The quicker you can unload your current deal the faster you can move on to the next one. There are more end buyers out there than ever before. The downside is that many of them have specific property wants and desires. Every investor you come in contact with can be a potential buyer. Whenever you meet a new contact through a networking group or investment club you should put their information in a database. Find out what locations they are interested in, what price points and how quickly they can close. When you find a property that fits their target reach out to them and gage interest. You can also find potential buyers on bandit signs, craigslist, through your real estate agent and from your mortgage broker. With real estate demand on the rise it is important to treat every buyer like gold and deliver quality products. Little things like quickly answering questions, calling people back and being forthright with your numbers make a huge difference. Once you have an established relationship you should not neglect it. It is always easier dealing with an existing contact than to try and create a new one.
Although the profit margins are much smaller for a wholesaler there are a handful of positives. For one because you can get in and out of deals so quickly you can take on new ones more frequently. You don’t have to wait weeks for work to be done and for the property to sell to start a new project. Another factor is the risk is greatly reduced. With rehab deals the potential profit can be much greater but there is also the chance you lose money or barely break even. On a wholesale deal there is little to no risk on your end.
There are many investors who build up their bankroll and contacts through wholesaling. If you are looking to get started you should use these three components of a deal as a guide.