Are Wholesalers Getting a Bad Rep?
Well the short (and not so sweet) answer is YES. Real estate wholesalers are indeed getting a bad rep, at least based on what I've been hearing in the real estate investing community. So if you are a real estate wholesaler, or are looking to get into wholesaling real estate please listen up!
Real estate wholesaling is a great business to get into. Many wholesalers make a fine living for themselves and many more start as wholesalers, do a great job and then make the step to flipping houses. These are the real estate wholesalers that I like to surround myself with. These are the guys and ladies that will bring me lucrative deals that I am interested in.
On the flip side of the coin are wholesalers who think wholesaling real estate is like hitting the "easy button" - as our friends at Staples would call it. Unfortunately this brand of thinking will do nothing but sink your wholesaling business before you even set sail.
Wholesaling real estate is not easy. Wholesaling is just like any other business in that being successful requires a business plan, goals and specific actions. Reading a few blog posts about wholesaling deals and then setting off to try it out just wont' cut it. Most successful wholesalers I know began with a mentor and/or specific wholesaler training.
The most important ingredient to wholesaling success is placing yourself in the shoes of the investor you hope to wholesale your real estate to. A good real estate wholesaler understands what his investors want. He or she understands the numbers that the investor is going to have to see in order to buy a property. Wholesalers that I do business with have their numbers in line before approaching me with a potential deal.
So how can you be 100% certain that the wholesale real estate deal you are bringing to the table is actually a deal that will pique the interest of investors? Well this is exactly what I plan to address in the remainder of this blog post.
The Do's and Don'ts of Wholesale Real Estate Deals
Success in wholesale real estate investing falls back on executing an accurate 70% rule. We talk a lot about this rule with regards to house flipping, however it is extra important for wholesaling. The entire wholesale real estate deal hinges on accurately completing the 70% rule formula.
If you are a wholesaler looking at a property, your first step is to determine the ARV, or after repair value. If you do not know the after repair value off the top of your head (and who does! LOL) you need to figure it out with the help of a real estate agent or broker.
Run the comps on other properties in the same neighborhood to help gauge how much the property in question could be worth once it is rehabbed. Be sure to take certain anomalies into consideration as well. Does the house have a water view that could potentially increase the ARV? Or is the property located next to train tracks, which could diminish the ARV?
It is very important to run accurate comps and really spend some time with an expert real estate agent who can help you gauge the value of a house. Accurately projecting the ARV is incredibly important and cannot be overemphasized when wholesaling real estate.
So lets say that after spending time with an expert real estate agent you determine that the ARV for your property in question is $200,000. That is a great first step but you are not done yet! You now need to figure out the cost of repairs.
Estimating the cost of repairs can be tricky. I myself am rarely 100% spot on with my cost of repairs estimate. Sometimes I come in under my estimate and sometimes I come in over. This is why it is super important to consult with an expert and trustworthy contractor when establishing your cost of repairs. If you are unsure about something, it is imperative to find someone who is confident in their estimate of how much money a repair will cost.
Lets say that after examining the property with your team of experts, you determine that the cost of repairs for this particular house is $40,000. Congrats! You now have the critical numbers you need to piece together a wholesale real estate deal.
How Much Money Can I Make Wholesaling Real Estate?
Here comes the fun part - figuring out how much money you can make, and how much money you can make for your investor. For simplicity's sake, we will stick with the above example.
First, take 70% of ARV which you figured out to $200,000 by talking with your expert real estate agent.
.70 x $200,000 = $140,000
Next, subtract your estimated cost of repairs which you and your expert contractor figured out to be $40,000.
$140,000 - $40,000 = $100,000
That $100,000 value is the maximum amount of money you can expect an investor to pay for the property - granted of course all your estimates are done accurately.
So what does this mean for you, the wholesaler? Well it means that you better lock up that property for under $100,000 so you can make a profit on the deal. A reasonable amount to expect to pay for the property would be $95,000.
So, $100,000 (amount investor pays you) minus $95,000 (amount you paid for the property) equals $5,000, which is your wholesaling profit on the deal.
If you present a wholesale deal like this to an investor, you can rest assured that the investor will take you seriously. You will effectively set yourself apart from other wholesalers who are developing a bad rep for themselves by taking shortcuts.
House flippers want to make money, so you as a wholesaler have to present investors with a deal that will indeed make them money. As a wholesaler just starting out, you will have to put in some effort to get to know these house flippers and get their attention. Go to REIA meetings, call investors on the phone (yes, on the phone not email!) and take them out to lunch. Get to know them so they like and trust you.
If you can do this, you will set yourself apart from the rest of the wholesaling crowd, and put yourself on the fast track to wholesale real estate investing success.
See you at the top!