Wholesaling: The cheapest way to invest in Real Estate ?
Is it possible to invest in real estate with little or no money? Absolutely. Is it simple…? Yes. Is it easy…..?
Imagine the newest iPhone is coming out at your local BestBuy next week. You know the wait will be absolutely crazy and you don’t have time to sit in line for hours – but you know you want that phone!
What if you knew someone who would stand in line for you, purchase the phone, and deliver it to you for a fee? Would you take that opportunity? Of course you would. If not you, someone definitely will! – after all, it’s an iPhone! (I have Android by the way).
Everybody wins. Best buy gets another sale, the person who you hired to wait in line for you gets paid a fee, and you get your shiny new iPhone.
Now imagine, instead, that best buy is a homeowner, you’re a real estate investor, and the person you paid a fee to was a wholesaler. That’s what a wholesaler does. They bring discounted property to investors for a fee.
You’ve probably heard of the popular strategies to invest in real estate such as flipping or buying rental property, but people often forget about another popular strategy: Wholesaling.
Ever hear of Costco or Sam’s club? Yup, they’re wholesaling companies. Organizations that sell products at wholesale prices.
So how does this apply to real estate? It’s essentially the same thing.
A wholesaler’s job is to find property that would be suitable for investors to purchase. In exchange, the investor pays the wholesaler a finder’s fee for bringing the deal to them. Just like you or another individual doesn’t have time to wait in line for the next iPhone, you may not have the time, energy, or the resources to actively search for real estate deals. You may however pay somebody to bring deals to you. That’s where the wholesaler comes into play.
Let’s look at a realistic scenario:
Chris is a retired homeowner who has lived at 123 Smith Street for the past 34 years. Desperately looking for a change of scenery, he creates a plan to move to Florida’s sunny beaches for the next chapter of his life.
He hasn’t updated the property in the past 30 years, he’s a little bit of a hoarder, and he doesn’t want real estate agents and prospective buyers all throughout his house. He just wants to sell and sell now so he can get on his way to Florida.
Diane is a wholesaler in the area who markets to the community that she buys home for cash and can close in as quickly as two weeks. Chris has been receiving her advertisements in the mail and even sees her advertising her business on facebook every now and again. Feeling like she may be able to help him, he decides to give her a call and they both agree to meet.
Diane takes a look at the distressed property in order to get an idea of how much repairs are needed to bring the home back to life. She estimates that repairs will cost around 75k and she knows that homes in the area are selling at $350k when newly renovated.
Her and Chris continue to talk about his motivation to sell and after a few negotiations Chris accepts Diane’s offer to purchase his home for $175k and close in two weeks. Chris is happy that he can now start packing his swimming trunks and was also able to pocket a good chunk of money to add to his existing retirement account. They sign the contract to purchase and Diane explains the “assignment clause” which allows Diane or someone else to assume the contract and continue on with the purchase of Chris’ home.
Diane, the wholesaler, now has the property under contract, but her intentions isn’t to purchase the home herself. She does however, know someone who will.
James is a full time attorney who flips homes in his spare time, but doesn’t have the time to meet with sellers or search for deals. He and Diane have a great business relationship and he often buys properties that Diane has.
Diane shares the details of 123 Smith St. and offers James the opportunity to purchase the home from Diane for $185k.
James looks at the numbers and notices that with a purchase price of $185k with $75k in repairs and an after repair value (ARV) of $350k, he’s looking at a profit of $90k – Definitely a good deal and he gladly accepts.
They proceed with the transaction and successfully close. Chris gets $175k and his one way ticket to paradise, James gets his next property to flip to keep his business going, and Diane gets her check worth $10k.
Do you see what happened ? Diane purchased the property for $175k and sold it to James for $185k. Therefore her “wholesale fee” was $10k. Remember, Diane never owned the property. She just had the property under contract. The assignment clause allows Diane to assign the rights of her existing contract with Chris to James. The attorneys and title company will handle the paperwork on the back end to reflect the assignment and assignment fee.
Do you also realize that Diane never took money out of own pocket to pay for anything? Diane participated in a real estate transaction without any of her own money! That’s the power of wholesaling. The potential to make a few thousand dollars without any money from your own pocket.
Is this possible…..? Yes! Is it that simple…..? Yes! Is it that easy…..?
While investing in real estate with no money is certainly possible, don’t expect that type of turnout day in and day out. After all, Diane was able to successfully market her business and what she does. That costs money in itself. Chris also saw her advertisements on Facebook – think that’s free ? What if Chris asked for a $5,000 deposit from Diane? After all, he was entrusting her with the sale of his home. What if out of all the talk, Diane couldn’t find a buyer for Chris’ home? Chris would have to recoup his lost time somehow. Diane’s deposit would be collateral for her to keep her word about purchasing Chris’ home.
You can offer a contract however you would like, it’s just that both parties have to agree. These are just some examples of why you should be prepared to have at least some money to invest with. After all, you are running a business. While you can definitely set up your business plan to invest with as little as possible to get started, that may change as you get bigger. Plan your work and work your plan!
Wholesaling is a great way to get started in Real Estate. You will see various articles, commentary, and gurus selling you that you can make a fortune wholesaling real estate. While that is true, they downplay how hard it actually is to accomplish those feats. Like anything, you have to work hard to get it. I would even argue that your foundation as a real estate investor should begin with wholesaling. Why? Because your sole job as a wholesaler is to market for deals. The better you become as a marketer, the more deals will come to you. At that point, you can journey into buying rental properties or choosing to flip – it won’t matter because you’ll always be able to market for those types of deals.
Lead generation is the name of the game and if you don’t have any leads, you won’t have a business! If you learn how to consistently generate leads, your business will be booming in no time. At that point, financial freedom is at your doorstep!