The Real Estate Game: Wholesaling 101

Wholesaling is one of the easiest ways to get started in real estate. I use the term “easy” loosely. It still requires work, focus, marketing, consistency, networking, and problem-solving.

However, it requires much less capital than, for example, rehabbing a property or buying & holding a rental.

I wholesaled two properties over a year ago before relocating to another city. Now having settled, and made a few connections in my current city, it’s time to get started back up.

To learn about my experience with my first two wholesale deals click here: Real Estate Wholesaling: How I Did My First Two Deals

How It Works

Here are the fundamentals of how wholesaling works with real estate.

1)      You get a property “under contract” at a deep discount

2)      You sell or “assign” that contract (& the right to buy the property) to another investor for a fee

1)  Getting the Property Under Contract

Getting a property under contact means the owner of the property has agreed in writing to selling it to you. You and the owner have each signed a Purchase Agreement in which they have agreed to selling you the property at a specified price within a specified amount of time.

During that time you locate an end-buyer – another investor or a landlord who is actually interested in rehabbing the property and/or holding the property and renting it out.

The Escape Clause

Within the Purchase Agreement you insert an escape clause that removes you from the obligation of executing the agreement if certain events don’t occur. In other words, if xyz doesn’t happen, then you don’t have to buy the property.

That way if you don’t find an end buyer, you don’t have to buy the property.

The escape clause can be that: The agreement is subject to an acceptable property inspection, the agreement is subject to you obtaining financing, or is subject to your “partner’s” approval. If any of those don’t occur, then you can “escape” from the contract.

2)  Assigning the Contract

Let’s say you find someone who needs to sell his property – call him Jon. Jon lost his job and is relocating to move back with his parents. He needs to get rid of his property as soon as possible. He hasn’t had the money to keep up with the property so it needs some work.

Let’s say, for example, after rehab the property would be worth $100k. But it currently needs $25k in repairs.

You offer Jon $35k to buy the property and he accepts. You each sign a purchase agreement.

You know an investor from attending your local REIA meetings (Real Estate Investors Association) . You reach out to this investor and offer her a great deal – you’ll assign your rights to buy this property to her for a $5k assignment fee.

She gladly accepts because she’ll be getting a property potentially worth $100k for only $40k ($5k to you for the rights to buy, plus $35k to Jon for the property itself).

Even after the $25k in repairs, she’ll have invested a grand total of $65k  for a $100k property.

Each good deal creates 3 winners.

Each good deal creates 3 winners. Jon really wanted to get rid of the property. He didn’t want to deal with the headache of it all and you were able to help him out of the situation. Your end buyer/investor got one heck of a deal. And you walk away with $5k for your effort in putting it together.

The ARV formula

ARV stands for After Repair Value. The ARV formula is important for understand the maximum amount you can offer to pay for a property. If you get a property under contract, but the purchase amount is too high, it will essentially be worthless. The ARV formula is the following:

The most an end buyer will pay for a property is…

(65%) * (ARV) – Repairs

In the above example:

The most your end buyer would pay for the property

= .65 * 100k – $25k = 40k.

So as a rule of thumb, you know the most an end buyer will be willing to pay for Jon’s property $40k. That means in this example, you must get the property under contact for less than $40k. That difference is going to be the amount you can charge as an assignment fee.

The Reality of It All

What I’ve provided you today is a very streamlined elementary example to illustrate the basic concept of wholesaling property. The reality is there are all sorts of “wrenches” that can get thrown into the plan.

Your success with wholesaling will really depend on your ability to maneuver the unknowns that get thrown your way.

For example:

What if there’s a mortgage on the property?

What if the borrower is behind on their mortgage payment?

What if there is someone else who has interest in the property who must agree to sell?

What if I can’t get the borrower to agree to the price I want?

These would all be handled in a different manner outside the scope of this article. So below are your next steps.

The Real Estate Game: Wholesaling 101 Next Steps….

The best thing you can do is educate yourself a) about your market and b) about the process. Look up the local REIA meetings in your city and start attending.
Network with other investors. Potentially find a mentor. There are also a lot of paid courses that can provide valuable information to help you get started.

In my experience you should be able to find a good course for a couple thousand or less. The commonly known Rich Dad Poor Dad courses, while providing good content, are extremely overpriced.
For more on this topic visit Real Estate Investing Courses: Am I Paying Too Much?

There are also tons of books on this topic. Start reading to get a better understanding about some of the nuances of wholesaling.

Caution: Don’t Get Analysis Paralysis

While, you’re doing your reading & studying…don’t get analysis paralysis. You don’t want to be in a “learning” stage for the next 2 years before you ever take action. You continue to learn new things while you are simultaneously  implementing what you’ve learned.

You definitely don’t want to make expensive mistakes, but hitting roadblocks and working your way through them is how you grow.

If you enjoyed this article, you may also be interested the Real Estate Ambition: The 7 Best Sources For Finding Motivated Sellers and Eager Buyers.
Best of luck with your Real Estate Ambition.

Live Life By Design,

Alice Dymally

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