How to Work with Wholesalers
First a little background so you’ll understand later how to fit in and profit.
Wholesaling For Profit
What is wholesaling? The short answer is that you can get a property under contract and then sell the contract to another buyer. Here is a brief explanation in practical terms. Assume the owner of a property is Party A. Another person, Party B, makes an offer on that property. Party A and Party B come to terms and execute a legally binding contract for the sale of that property. So far so good!
Party B does not intend to actually buy the property. He would like to profit from his efforts in identifying a good deal so he, Party B, sells the contract he has to Party C. He does this for a fee. In other words Party B charges a wholesale fee to Party C in exchange for Party C purchasing the rights of the buyer in the sales agreement to buy the property form Party A. Party C actually follows through and buys the property from Party A.
Graphically this looks like:
A -> B = original sales agreement
B -> C = Wholesale Deal
A -> C = C buys property from A
Here are two examples of wholesale deals I was involved in. In the first example I was Party B.
Smithton Avenue was my first experience wholesaling properties. It was almost accidental the way it came about. I was out looking for properties for myself. As usual I had found more than I could take on and was dreading the thought of deciding which one to turn loose when I got a call form one of my fellow investors who had a friend looking for an investment in my neck of the woods. This other person was a dentist and didn’t have a lot of discretionary time to spend looking for investments. I was literally standing in the very property I was to eventually wholesale to this other investor. I had gone back to go over my notes and reassure myself that of all the good deals I had this was the one I could most easily let go of and miss the least. I knew what wholesaling was at the time, I just simply hadn’t done one yet. I wanted to buy every one that I had determined to be a good deal. Sound familiar? After I hung up the phone with my friend the dentist called me. We struck a deal right there on the spot. So, I got the property under control with my own offer. My offer had an assignment clause in it so that I could assign the contract to someone else.
And that’s what I did. I assigned the contract to the dentist and asked for and received a $2,500.00 fee. It was truly as simple as that. I had to do almost no work to strike that deal. $2,500.00 may not seem like a lot of money but keep in mind that at the time I knew nothing about wholesaling. I had not yet been in a wholesale transaction.
I did no advertising. The end buyer landed in my lap. All I did was locate the property and do the financial analysis on it to determine that it was a good deal. I certainly should have asked for a larger fee but being that I didn’t know any better I thought I was doing pretty good by getting $2,500.00. I never even had to go to a closing for this one. The end buyer (C) bought directly from the seller (A) and sent the check for $2,500.00 directly to me in the mail!
There a few lessons in here that we will expand upon further, but first I want to give you an example of another wholesale deal where I was the other party.
1304 Superior came across my radar screen at a time when I was investing quite heavily. It was located in a part of town I was not completely familiar with yet but it was in my sights as an area to explore for future investing. The way it came to me was through another fellow investor who had his real estate license with the same brokerage company that I did. He and his brother, who happened to be running for city council at the time, were well known local investors. They had come across an estate sale that involved multiple properties.
They only wanted and could afford two of the three properties that were being sold as part of the estate. They had all three properties under contract as a package deal. They called me because they had heard I was an active investor in the area. This third property was actually pretty nice. It was completely sided with all the trim wrapped in aluminum. It sat on a large corner double lot. It had a great front porch and new windows. In other words it had great curb appeal. The inside had all the original hardwood floors, crown molding, chair rails, and hand rails. Even though it didn’t have separate gas, and it was being used a single family home, it did have separate electric and could easily be setup as a two-unit. And that’s exactly what I did.
I asked the other investors what they wanted for the property. They wanted only $16,000.00. It took me exactly .001 second to accept their terms. I spent another $16,000.00 splitting and renovating the property. When I was all done I refinanced it at 80% loan to value on a $75,000.00 appraisal. You do the math. As you can see I made $60,000.00 cash on a $32,000.00 purchase plus rehab. That’s a $28,000.00 cash gain plus another $15,000.00 in equity all because I bought a property wholesale for $16,000.00. In other words, I more than doubled my money PLUS I had $1,200.00 per month in rent coming in.
We actually did the entire transaction at the closing table at one time. In other words : A -> B, B -> C, and A -> C all occurred in one sitting involving the seller (A), the wholesaler (B), and me the end buyer (C). Wholesaling allows you to have some control over, and therefore, profit from, Real Estate without actually taking ownership of it.
Why It Works
Wholesaling works because of two important factors. 1. Some people have available time but not available money and 2. Some people have available money but not available time. Everyone fits in one of these two categories. There are exceptions. Some people have available time and money. Your goal is If you are in category 1 (Party B) then you can serve those in category 2 (Party C).
How It Works
If you have a short term memory then make sure you implant permanently what I am about to tell you. The way wholesaling works, in fact, the only way it can work so that everybody wins, is that you, as the wholesaler (Party B) must find your buyers first! That’s right. You first market, advertise, capture and nurture a growing list of people who are interested in finding great real estate deals, whether they be flips or rentals, and have the money but don’t have the time to do it. Then and only then do you go out and find great real estate deals and get them under contract. Nothing could be more damaging to your reputation than getting properties under contract than not being able to sell the contract or follow through on the purchase of the property.
Those who teach that it is easy to get out of a contract if you can’t sell it (so it is not something to be overly concerned about), are damaging to the world of investing and wholesaling in particular. This implies a lack of proper execution of the principles and if you have to break a contract then you violate the principle of “Everybody Wins”. In this case the sellers (Party A) lose. And you lose too because you will develop a reputation of someone NOT to be dealt with.
Don’t fall into this trap. Follow the easy, simple processes I teach and you will profit so that everybody wins! All you are doing is filling orders. Part of nurturing your buyer clients is asking them questions, listening to their answers and understanding what types of properties they want. Then you go out and find those properties, get them under contract and sell the contract to your buyer.
To learn more about wholesaling please visit www.myinvestmentservices.com. You can also call 1-800-931-2605 and email Gary@winrealtyadvisors.com.
How Do I Find Buyers for my Wholesale Deals?
Marketing and Advertising! That’s right. You market yourself as the Go To guy or girl in your area who knows how to sniff out those awesome real estate deals. You can easily market yourself by creating an impressive image on Facebook, LinkedIn, Google+, Twitter, and even more social media venues. You should also create your own website. All of this is simple. It may not be fast because it does take time, but it is easy.
You advertise by sending messages through LinkedIn, and posting messages on Facebook, to those who are following you, showing them the deals you have done and promoting the one(s) you currently have. You can also use Postlets to advertise your current deals. Furthermore, you can identify (through public records) those who are regularly buying properties in your area. You can send them, through the US mail, your latest deals and entice them to sign up with you as their provider of great real estate deals. Of course you can use Craigslist, Bask Page, bulletin boards in your church or grocery store, and yard signs.
Wholesaling Business Structure
Note: I am not a lawyer. I recommend that you seek the advice of a competent lawyer when deciding on which entity to use when growing. When it comes to wholesaling you have to beware of the rules and regulations regarding the transfer of real estate, and for the subject of this blog, specifically those rules and regulations dealing with the subject of a net listing.
In certain states, like Pennsylvania, if you are a licensed real estate agent, you can use the existing real estate rules and regulations in your state to participate in wholesaling. The way this works is that if you area a licensed real estate agent you can play the role of Party (B) from within the context of serving as a real estate agent to Party (A). This is how it works. Assuming that you are a licensed real estate agent and you are also an investor you (B) can approach the seller (A) with the concept that you will list their property for sale under the following conditions: 1. The seller determines what final sale price they would like to see, 2. You enter into a listing contract for that price, 3. You agree that your compensation will be any amount of money that is over and above the final sales price that the seller is looking for, and you list the house for a price that you believe it could actually sell for. Here is an example:
Seller (A) wants $100,000.00 for the sale of his house. You agent/investor (B) enter into as listing agreement that will net the seller $100,000.00. You advertise the house for $125,000.000. You sell the house for $120,000.00. The seller gets $100,000.00 and you get $20,000.00 as your commission on selling the house. If you are a savvy agent/investor and the buyer of this house is going to remodel this house and sell it for profit (Flip) you will propose that when he buys the house from your seller that he also agrees to sell it with you as his agent when the remodeling is complete and the house is ready for resale. I’m sure you can see the tremendous potential in this if you are a licensed agent in a state that recognizes net listings. If you are licensed agent in a state that does not recognize net listings or you simply are not a licensed real estate agent then I recommend you set up an LLC to conduct your wholesaling business.
One more thing, in most states, if you do more than 5 wholesale deals a year you could be viewed by the taxing authorities as a dealer. You will have to check with your tax accountant and/or attorney to verify the federal tax rules and the state as well.
Always remember that when you are using a LLC to conduct business that you always sign your name with “, member (your LLC name here), LLC” after your personal name> Here is an example:
John Smith, member ABC, LLC. Do this on any of your business documents involving your LLC, wherever you would normally sign your personal name. If you don’t do this and you sign your name personally, it could expose you to liability if there is a problem down the road with this particular transaction.
How You Fit In
Because of the risk of dealer status and the desire for separation of duties I recommend that wholesalers have an agent represent the original seller and potentially represent the ultimate buyer. This separates the buyer form the transaction side of the deal. It allows you to act as an agent and earn one or more commissions and uses the established rules of real estate brokerage. It allows the wholesaler to still profit as the investor and separates him or her from potential liability should the original seller or ultimate buyer file a complaint. It is simply a more legitimate way to wholesale where everybody wins and the consumers are protected under brokerage law. You can actually use this as a selling proposition.
Selling the Contract
You have established a database of buyers and now you have filled an order for the buyers in your database who have indicated they want to buy this type of property. So, now you have to tell them about it. You have to sell it so that the current owner gets his price, the buyer gets a great deal and you make a wholesaling. Remember this classic description by Bill Cosby: “If you give me a prime rib complete with a potato and sour cream and chives and a side salad served on a trash can lid I won’t want what you are offering me. However, if you present this same meal to me on fine china and silverware then I will want it.”
When you are wholesaling you want to create an investor package showcasing your wholesale deal in such a way that it gets attention and appeals to your buyer(s) enough so that they will want to buy it. I suggest creating a brief portfolio with photos, a written description of the property and the surrounding area, and a pro-forma projection of financial results for the buyer of this property. You can initially create a flyer to pique the interest of several buyers and only provide the portfolio to the buyer who is interested. You will want to showcase this juicy deal on your website and even post a Facebook ad and a LinkedIn post to attract your buyers. There is a free system called Postlets you can use to drive buyers to your website along with the Facebook and LinkedIn traffic. If you have done a good job building your database of buyers, and you have found and secured a great deal, then built an appealing presentation and communicated it to your buyers using the channels available to you, then you should make a profit for all of your effort.
For more information please call 1-800-931-2605 or email Gary@winrealtyadvisors.com or you can visit MyInvestmentServices.com
Written by Gary Wilson, June 13, 2014