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 of identifying a good deal by selling the contract 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. In the second example I was Party C. If you represent the buyer, you also get the buyer’s side of that commission. That’s how you fit in, but there’s more.
I just want to give you the basic formula. Three parties: the seller, the buyer and the wholesaler, the guy in the middle. A lot of wholesalers try to do this outside the market, and a lot of them fail. They stumble and fall. That’s because they’re not doing it the right way. We teach you how to do it the right way.
Here’s why it works. It works for two important reasons. Some people have available time, but not a lot of money. That’s usually party B. They have time but no money. They need to find some other way to participate in real estate, so they wholesale.
Your party C is the people who have lots of money, but not a lot of time. This is typically your chiropractors and dentists. They have a little bit of money they want to invest. They just don’t have the time. They’ll buy these wholesale deals from the wholesalers.
Why It Works
Wholesaling works because of two important factors. First, some people have available time but not available money. Second, some people have available money but not available time. Everyone fits in one of these two categories, with one exception. Some people have available time and money. Your goal is to be one of these people!
If you are in Category 1 (Party B), then you can serve those in Category 2 (Party C). Everyone fits into one of these three categories. There are some exceptions. Some people have time and money. They might not want to be wholesaling, so they’ll keep the property themselves.
If you’re an investor, you’re going to be one of these people. If you’re an agent, you want to work with these people. If you’re in category 1, you serve those in category 2. In other words, party B serves party C. I kind of gave you a little bit of a rundown of how it works. I won’t repeat that, but there is some stuff you need to know here.
What I will tell you is, in certain states, you can do what’s called a net listing. Pennsylvania is one of them. Virginia is not. Net listing is you as the agent can sort of play the role of a wholesaler. You’re still an agent providing broker services.
Let’s say you find party A and they want to sell their house and they say, “I just want $100,000 out of this property.” You know you can sell it for $120,000. What you can say is, “Mr. A, I’d be glad to sell your house. Would you be okay if I structured it a little bit different? Would you be okay if I get you your $100,000, and my commission is anything greater than $100,000?”
If you sell it for $101,000, you as the Agent make $1,000. If you sell it for $120,000, you as the Agent make $20,000. You can see where a net listing is allowed, you may prefer to do a net listing versus a straight commission of say 6%.
If you yourself decide to wholesale and not go through a brokerage, or do wholesale within the brokerage, then you need to find another Agent who will act on your behalf to list the property. If you find a buyer, find another Agent who will represent your buyer. You’re simply wholesaling at that point.
I strongly encourage you to, in a state that allows net listing, to just do the former approach so you get the listing and profit from it. The latter approach is necessary if you’re in a state like Virginia that doesn’t allow net listing, so you have to wholesale. Because you’re an Agent, you can act as a wholesaler, set up an LLC. We talk about that here.
One Agent on your team gets the listing, and he or she can represent the buyer. Another Agent brings in the seller. Both parties are represented by separate Agents. You’re simply a wholesaler, but you’re doing it through your LLC, so you’re not directly doing the wholesale. Your LLC is. Here’s some critical stuff you need to know about wholesaling. How do you find buyers for your wholesale deals?
The reason why a lot of wholesalers fail is they go and find the properties first before they find the buyers. What happens is their deals fall through. They get something under contract, but they can’t find a buyer in 30 days and so they have to cancel the contract. That means the seller is hurt because his property was off the market for 30 days.
The wholesaler shouldn’t be wholesaling because he’s doing it wrong. You should find the buyers first. Get the buyers in your pocket. Build up your list of buyers. Then all you do is fill orders. Find buyers who are your dentists and chiropractors and other professionals, who have money but no time.
Find out what they want. When they’re ready to go (prequalified), they’ll say, “I want a three bedroom home.” You go find a three-bedroom home, list it and sell it to them. That’s how you do wholesaling.
You can use all kinds of marketing techniques to find your buyers: Facebook, LinkedIn, Google,Twitter. You can do posts and advertising to show examples of deals you did before. You can also do nightly workshops. We’ll get into the marketing in Module Four. If you do wholesaling the right way, it’s very simple. It’s not complicated at all.
Wholesaling Business Structure
Note: I am not a lawyer. I recommend you seek the advice of a competent lawyer when deciding which entity to use when growing your real estate empire.
When it comes to wholesaling you have to beware of the rules and regulations regarding the transfer of real estate, and for the subject
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