Have you heard of the term Wholesaling and thought what is that? I am referring to wholesaling in the real estate industry. This is now a very popular topic and career in real estate.
I am going to go over these three topics;
What is Wholesaling?
How to Wholesale.
Is Wholesaling legal?
First, I want to say that wholesaling is not a new idea. It has been done for years, but it has only become popular in the last couple years. Now it is to the point that everyone wants to do it and there are plenty of people actually doing it.
For these two reasons it has become more difficult to make money wholesaling. Another reason it is hard to make money this way is because the housing market is way up and it is currently a buyers’ market. This reduces the number of “Desperate” owners out there.
What is Wholesaling?
Wholesaling is when someone puts a property under contract to purchase and then they either sell the contract or resell to property at the same time they purchase it. When wholesaling you never actually take possession of the property.
When you sell the property before closing that is called Assigning the contract.
When you sell the property the day you close on it that is called a double closing.
How to Wholesale
There are two different approaches to take when trying to wholesale properties. You can either assign the contracts before closing or you can do double closings. You will also need to decide if you are going to approach potential sellers and disclose that you are a wholesaler. Personally, I could never mislead people but there are plenty of wholesalers that never tell the seller what they are actually doing.
- How to Find the Right Property
This is the where all the work is done. Finding the properties will be where you spend most of your time. There are many ways to find properties, but you will mainly be aiming for distressed properties.
These are properties that may be in disrepair, behind on their mortgage or taxes. Finding properties that are in disrepair will require driving around and looking for houses that have been neglected.
You will have to do a little investigating to find properties that are behind on their taxes and or mortgage. If you are a Realtor this won’t be too hard for you, if you’re not then you could always try to find a Realtor that is willing to help you out.
If you decide to do this yourself don’t worry you can do it. You will need to go to your county auditor’s website and find a link to a delinquent tax list. You Can also use Zillow for this, but their information is not that reliable and usually outdated.
Also, you can check out your county sheriff’s website for foreclosure auction.
- What do you do When You Found a Good Property
First, do your homework. You need to find out everything you can about the property and the owner. Find out what the ARV (After Repair Value) is on the home, estimate the cost to repair, find out how much the owner paid for the property and if they have a mortgage on it. If they have a mortgage you will need to estimate what they still owe.
You now need to write down all the numbers and see if the deal works for everyone involved, the owner, the cash buyer (the one you assign the contract to), and you. If everyone is able to make some money on the deal, then you should pursue it.
- How to Approach the Homeowner
This is tricky and controversial. Some wholesalers don’t ever tell the owner that they are a wholesaler. They just promise them a cash purchase and write it up, then they do the assigning of the contract without the owner knowing. I personally do not like this method, it’s misleading, dishonest and not the way I would ever do business.
The other method is to disclose everything to the owner upfront and be honest with them. Some owners will just dismiss you and not want tot deal with you but there are plenty of owners that will be willing to give it a try if your deal works for them.
You will need to speak directly to the owner. The best and fastest way to do this is to simply knock on their door. If they don’t answer leave your information on a nice brochure and follow up with them.
- How to Write up a Wholesale Contract
The best thing you can do is hire a real estate lawyer that is familiar with the process. Try to get him draw up a fill in the blank contract for you that you can reuse.
You will need to make sure the contract is assignable. The lawyer will know exactly how to make that happen.
Trust me, it will be worth the money to pay a lawyer to do this for you and avoid getting sued for “Practicing” law because you tried to do it yourself.
- How to Find Cash Buyers
You will need to find a cash buyer to assign the contract to or to be the buyer on the double closing. There are many ways to find cash buyers. You can simply check Craig’s List or put an ad on Craig’s List stating that you need cash buyers for your properties. You can go to house auctions or sheriff’s sales and speak to the other buyers. Call the “We Buy Houses” signs.
If you look hard enough you will find the Cash Buyers. Once you find them make a list and keep track of who you do business with. You will find some will work better with you then others.
It is best to get a list of 10-20 cash buyers before you put your first property under contract.
- How Does this Wholesale Deal Work?
Let me give you an example…
You find a home with an ARV of $100,000.
The owners bought it for $80,000 15 years ago.
You know that they will owe roughly $40,000 to $50,000 on it.
You estimate the repairs to cost $20,000.
You put it under contract with the owner for $60,000.
You find a cash buyer for $65,000 and assign or double close.
You made $5,000.
The owner makes $10,000.
The cash buyer makes $15,000 after they repair and sell the property.
This deal works for everyone involved. The key is to find an owner that is desperate and needs to sell quickly. If you put enough Earnest Money down the owner will be more likely to take your deal.
Is Wholesaling Legal?
This is extremely hard to answer because laws have not caught up to this topic yet. My first response would be “Wholesaling is illegal”, but that’s not completely true. There are ways to do this legally, but you must be very careful.
The most common illegal action that wholesalers take is Advertising the Property. In the state of Ohio, you can NOT legally advertise a property that you do not currently have title to. The only way around this is to get a Real Estate Sales License but this may cause you more issues with disclosing you’re a Realtor and taking advantage of owners and you could end up getting sued.
To stay out of legal trouble do NOT advertise the property. Remember you are trying to sell a contract and not a property anyways. The lines of what is advertising and what’s not is a little blurry so error on the side of caution.
The second most common illegal action that wholesalers take is Entering a Contract with NO Intent or Ability to Perform on the Contract. In simpler terms, you can not enter a contract to purchase a home with out having the money to actually purchase it and you can not enter a contract to purchase a home with no intention of actually buying it.
This makes it really hard to actually wholesale, but it is still possible. The best way to steer clear of legal trouble when wholesaling is to actually close on a property, in other words do a double closing. Doing this will get you legal title to the property and allow you to fulfill the terms of the contract you entered with the homeowner.
I realize that you may be interested in wholesaling because you don’t have the cash to purchase and flip the properties but there are ways of purchasing properties with out having all the cash in your savings. You will need to find a lender that will lend you the money to purchase investment properties or you could even use a business partner for this.
My article “How to Start Investing in Real Estate” covers the topic of finding funding for investing in real estate. Check out the article for more information.
This article should not be considered legal advice. I am not a lawyer. For legal advice you should consult a lawyer.