Wholesale Real Estate | 2 Key Facts To Consider Before Buying
Buying Wholesale Real Estate is a great way to earn money and to get immersed in the real estate community.
Becoming involved in real estate can an expensive venture, and many people often do not have enough expendable income to invest in properties. Luckily, there is a way to make money, without having to spend money, by buying wholesale real estate.
The negotiating of wholesale real estate, or “wholesaling” is the process in which you buy a property and receive a contract of ownership. What’s great about this is that you do not have to pay for the house up front.
The person who ends up paying for the property is the investor, who will close the house in your place. As the wholesaler, you will sell the contract to the investor at a higher price.
However, before starting a wholesaling project, there are a few aspects of the business you must learn about. These key points are essential to follow so that you can see a profit, instead of literally paying for your mistakes.
1. Find The Right Wholesale Real Estate Property
Generally, when you are looking to buy wholesale real estate, you want to find property that is not at its most perfect state. These pieces of real estate, called distressed properties, are often smart finds because they allow you to negotiate the price down from the retail market value more easily than properties in prime state.
However, this does not mean you should purchase a property with structural damage, like a cracked foundation or a termite infestation. Properties with problems like these often cost much more than other repairs. Most investors would not buy a property with structural damage, leaving you to pay for the worthless property out of your own money.
There are many ways to find these distressed properties besides finding help from realtors, like real estate clubs, ads both online and in the newspapers, your town’s once a month housing auction, MLS, and craigslist.
Finally, you must remember to take your time to find the right piece of real estate. Don’t buy properties that you won’t profit from. If you cannot find what you’re looking for immediately, give it time. Houses are constantly being put on sale and new ads are posted every week.
2. Calculate The Profit
When you think about profit, you are most likely considering how much money you will have earned after the project is done. However, something you might overlook is the profit that the investor will make after he resells the property. If the investor thinks you are asking for too much money he will try to negotiate down, meaning that you could end up making no money or even have to pay for part of the price out of your own pocket.
An easy way to avoid this mistake is by simply doing the math before you buy the piece of wholesale real estate. First, you must consider the after repair value, or ARV, of the home. Next, you see if the seller is willing to negotiate the price down, ideally to 70% of the ARV, if not less. Then, you decide how much you think you can wholesale the property for, which should still be well under the ARV but a few thousand dollars more than you purchased it. The difference between the wholesale value and the price you paid for the property will be your profit.
After that, you must add the cost of repairs that the investor will be paying for to the price of the wholesale, and subtract that sum from the ARV. This final number is the projected profit of the investor.
The Four Formulas Look Like This:
- Negotiated Value = ARV x 70% Rule
- Wholesale Value = Negotiated Value + A Few Thousand Dollars
- Your Profit = Wholesale Value - Negotiated Price of the Property
- Investor’s Profit = ARV - (Wholesale Value + Cost of Repairs)
For Example, If The ARV of The Property Is $200,000, The Projected Cost of Repairs Is $40,000, And You Hope To Make $5,000:
- ARV = $200,000
- Negotiated Value = $200,000 x 70% = $140,000
- Cost of Repairs = $40,000
- MAO for Investor = $100,000
- Your Wholesale Fee (variable) = $5,000
- Wholesale Acquisition Price (your acquisition price) = $95,000 (minimum)
- Your Profit = $100,000 - $95,000 = $5,000
Why Is Buying Wholesale Real Estate Great For Beginners?
If you are just starting out in the world of house flipping, buying wholesale real estate is a great steppingstone. Because you generally do not have to pay any money toward the property, wholesaling can be both safe and profitable. Moreover, since you generally resell the property within about a week, the process is not very time consuming. If done correctly, with the proper guidance, buying wholesale real estate can be immensely rewarding.