The Process of Wholesaling
Wholesaling is becoming an increasingly popular practice among those new to real estate investment. A lot of people know about rentals and flipping, but those can be intimidating for new investors without a lot of money. Wholesaling isn’t magic, but it does work, especially for new investors with time on their hands.
Wholesaling is an investment process involving three people. As always, there are buyers and sellers looking to do business. The third-party, known as the wholesaler, purchases the property’s contract without buying the property. The wholesaler then sells the sales agreement to the buyer for a wholesale or assignment fee. The buyer then buys the property from the seller.
A common misstep that people new to wholesaling make is in the sales process. New wholesalers often attempt to buy contracts first and then sell those deals to buyers. When these fall through, the seller and the wholesaler both lose. To remedy this, ALWAYS find the buyers first. It’s just like filling an order. Once you have buyers, you can acquire contracts and sell them accordingly.
Wholesale Tips and Tricks
Finding buyers is often the tricky part of wholesaling. Fortunately, there are a number of techniques you can use to increase your reach to buyers and identify the right ones. A popular technique is using a booklet of bought and sold properties in the area similar to the properties you are trying to wholesale.
Once you have a booklet, using public data can help you target specific buyers who may be interested in your properties. Hosting public workshops can also attract potential buyers who can point out properties they are interested in. You can find and purchase the sales contracts for those properties and sell them to your newly established client base.
To find deals, including flips and rentals, online reports are the way to go. Public records can help you use the “letter technique” to see whether properties you’re interested in might go on the market soon due to legal issues for the current owners.
Avoiding Headaches
As I’ve said before, NEVER sign wholesale contracts using your own name. Use an LLC to get properties under contract to avoid excessive liability. As soon as you have an LLC and properties, create a website to promote your properties. For networking opportunities, join an investors’ club. Clubs such as REIA (Real Estate Investors of America) are great for meeting other wholesalers, learning from them, and growing your client base.
If you are looking to buy wholesale rather than become a wholesaler, be sure to always ask wholesalers for references of people who have bought from them before. Ask your wholesaler for examples of both properties that did work out AND properties that did not work out for the investors. An honest wholesaler will always shoot straight with you.
If a wholesaler makes more than five wholesales in a year, they are assigned “dealer status” by the IRS and are required to file a corporate tax return at both the federal and state levels. At this point, your state’s bureau for corporations may be notified, and they can fine you if you don’t have a license. Case in point: if you are going to wholesale, get a license! Getting through the process can be a pain, but you’ll be wholesaling contracts and building wealth before you know it.