Wholesaling Real Estate Definition
Wholesaling real estate is the act of getting a property under contract for a low enough price that you can sell it to someone else for profit. Occasionally you can find these deals listed on the multiple listing service (MLS), but they are most frequently off-market deals.
The trick is to find good enough deals that you can add a wholesale-fee and it will still be a solid deal for the buyer!
Wholesaling real estate definition according to Fortune Builders: “Real estate wholesaling is the process through which an individual, the ‘wholesaler,’ acquires a contract from the seller of the property and assigns that same contract to an end buyer.” (source)
Loved this picture from an Eventbrite event.
How do you find deals When Wholesaling Real Estate?
1. Driving for dollars
Driving for dollars is the act of driving through neighborhoods looking for abandoned or dilapidated properties. Ideally, you want to find the worst house in a nice neighborhood!
Once you locate a property that appears distressed, you write the address down in order to contact them later!
Once you get home you can either send them a letter (see the next bullet-point) or trace their phone number in order to call them.
The benefit of driving for dollars is that you become intimately familiar with local neighborhoods, and you’ll be able to see as neighborhoods turnover.
I recommend finding a friend or two who is interested in real estate as well. Driving for dollars on your own can get boring, fast! My friend Jin and I drive for dollars all the time, and we are able to make it into a fun evolution! We have even had four people pile into the Focus and driven all over town looking for junky houses…This is fun, and a great learning opportunity for everyone involved.
Ensure you discuss how you’re going to tackle deals found this way ahead of time though, don’t want to find a deal and then be arguing over who gets to profit from it. We always just decided to split it 50/50!
Door-knocking is similar to driving for dollars except that you’re going to walk up and knock on the door of any house that looks rundown. You could even leave a flyer, postcard, or door-hanger with your contact info on it in case they aren’t home!
I like to use this method in conjunction with driving for dollars. I will knock on the door of houses I think have a lot of potential…houses that make me excited!
You could also do this with “running for dollars” which is the exact same thing as driving for dollars, but with more exercise!
3. Bandit signs
Bandit signs, aptly named because they are illegal in many counties, are those yellow (or white) corrugated signs that you see all over town. Often handwritten, they bear messages such as “We buy houses cash, any condition! Call: 111-222-3333” or some deviation of this simple message. These signs are effective but check with your county to stay within the boundaries of the law.
I am not a fan of breaking the law or cluttering neighborhoods, so stay as classy as possible with these signs!
A good alternative to these signs might be a billboard, they are fairly inexpensive, much more visible, and classier! Also, you could easily place these signs in the yard of any property you own!
Building a website is a more recent technique for gaining attention. A website allows you to take advantage of search engine optimization (SEO) in order to generate leads while you sleep!
SEO is how Google decides what articles show up when you type keywords into the search bar. For example, if your website ranks for “How do I sell my house in X city” or “I need to sell my house fast” then you will gain the attention of anybody who searches for these keywords. That means they might look at your website, and contact you…without you doing anything (after setting up the site).
Another benefit to the website is credibility. I hate to say it, but in this day and age if you don’t have a website, you’re hurting your “street-cred.”
The absolute best way to set this up is with an Investor Carrot website. They are incredibly effective, and they produce all of the content for you!
For example, here is my personal Carrot website – but please do us both a favor and use the link above if you decide to sign up. I will get a small kickback, and you’ll get a discount!
Craigslist is the tried and true king of want-ads. As such, it is a good place to upload advertisements for what sort of properties you’re looking to buy. You could even make this ad as simple as the message you might put on a bandit sign or billboard.
Another opportunity on Craigslist is to call “for rent” advertisements. These for rent ads are often mom and pop landlords, and there is a decent chance they might be frustrated, or sick of being a landlord. Pick up the phone, call them, and ask if they’re interested in selling the property! If not, they may call you later on, when they are interested in selling!
Referrals are what happens as a result of solid networking, and being a good person! You need to tell everyone what you’re doing, and constantly build relationships.
Brandon Turner says that we often miss a valuable opportunity when someone asks “What’s up?” The knee-jerk answer is to say something to the effect of “not much” or “living the dream.” What if you took this opportunity to say “Actually, I’m looking for single-family homes that are in disrepair, or owners that need to sell quickly, do you know of any?” You may be surprised by the effectiveness of this strategy!
Be creative! There are so many ways to network, market, and hustle in order to find great deals…get out there and start looking!
How do you find buyers?
I’m a firm believer that finding a great deal is the most important piece of the puzzle. If you find a great deal, finding a buyer, financing, or private money won’t be too hard. Everybody wants to make money, so if you can find great deals consistently, you won’t have too much trouble finding willing buyers!
That being said, a great way to meet these buyers is at local real estate investor association (REIA) meetups! REIA’s and other real estate meetups are hubs for people to get together, network, and talk story about real estate investing. Take advantage of these opportunities to network, and meet local investors. You will often find potential buyers at these meetups, and if not, somebody at the meetup will undoubtedly know of a buyer that might be interested in your great deal.
*Side Note* if there is no local REIA or meetup, START ONE! There are so many benefits to starting your own meetup, check out this article I wrote for more information!
How do You Determine How Much the House is Worth?
Now that you’ve found a home driving for dollars you are ready for the next step in the wholesaling real estate process.
You need to be able to determine how much the home is worth so that you can avoid overpaying. You could find the best home in the world, but if you overpay for it, you’re probably going to lose money while wholesaling real estate.
The formula I use for wholesaling real estate is to find the after repair value (ARV). ARV is the amount a home will be worth after it has been completely updated. The best way to determine this is to use the multiple listing service (MLS) to determine how much homes in the area have been selling for. Look for homes that have sold within 6 months, and within a half-mile of the home you’re looking at that have the same amount of bedrooms and bathrooms, and are within 20% of the size in square feet.
If you don’t have access to the MLS through a real estate agent (or have your own license) then you could use Zillow and sort by recently sold properties, or use a service like Propstream.
Personally, I use Propstream and absolutely love it for this!
You can utilize Propstream for a lot more than just estimating ARV’s too! Propstream can be used to find deals and a ton of other features, I definitely recommend checking it out!
Now that you know the ARV you should use 70% of the ARV and subtract how much the renovation will cost, and how much profit you want to make. The remaining number = your maximum allowable offer on that home!
Maximum allowable offer (MAO) = 70% of the ARV – cost of renovation – profit you want to make for wholesaling the real estate!
So if the ARV is 100k your MAO would be 70,000 minus renovation costs, minus your profit.
How to find buyers while wholesaling real estate
The final piece of the real estate wholesaling process is to find someone to buy the home.
Honestly, this is probably the easiest step if the deal is a good one.
I recommend that you attend local real estate investor meetups and events and build some relationships networking there.
You can also use this super cool trick to figure out who your local cash buyers are.
Is it legal to wholesale real estate contracts?
This is an ongoing debate in many counties/states. The issue with wholesaling real estate is in the verbiage. When you contract to purchase a property, and then assign the contract to another buyer, some people argue that you are marketing a property (which is illegal if you’re not a licensed realtor). This is a grey area because if you just tell a buddy about it over lunch, are you really marketing the property?
The safest way to wholesale is to completely purchase the property, and then sell it to the buyer. This can happen via a double-closing, or in two separate transactions. A lot of people don’t like this method due to the additional commission/closing costs that may need to be paid.
I recommend looking into your local laws, asking other local wholesalers, and ultimately consulting an attorney to ensure you are 100% protected in the method you are using to assign properties. Better safe than sorry!
Wholesaling real estate as an exit strategy
Wholesaling is a great ace in the hole! Let’s say you are a BRRRR strategy investor (for more information on this strategy click HERE) but business has been so good that you can’t take on any more projects at this time. Why not wholesale the property to another investor so that you can make a little profit (rather than just passing on the deal) and another investor can make a profit too!
Real estate is a people business and the more money you can make for your team, and other investors, the more money you will make!
It is always important to have various exit strategies in mind when you begin investing, and wholesaling can be a great option!
WholeTailing Real Estate
Wholetailing real estate is a variation of wholesaling that is becoming more and more popular amongst investors.
The main difference between wholeSALING and wholeTAILING is that in wholetailing you actually purchase the property, whereas with wholesaling you generally just assign the contract, or conduct a double-closing. When you wholetail a property you will purchase it, and then you can turn around and sell it to another investor or a homeowner.
A good example of this would be when you find a “hoarder house” where somebody collected anything and everything in the home and absolutely trashed it. You could purchase this home and get rid of all the trash. Once you have the home cleaned up you could simply list it on the multiple listing service and “wholetail” it to another real estate investor or a homeowner.
Wholetailing real estate is great for a lot of reasons, but it is usually a longer process, and you could end up paying commissions to a real estate agent as well.
Make sure you weigh all of your options, but this could absolutely be a strategy worth checking out!
The formula for wholetailing real estate is the exact same as for wholesaling, except you also need to subtract any holding costs (mortgage, closing costs, agent commissions, etc.) from the ARV.
Should You Try Wholesaling Real Estate?
Wholesaling real estate is not my favorite investing strategy, but it is a great tool in the tool-belt! Learning to wholesale real estate deals is often toted as the best way to get started with real estate. That is because it is possible to wholesale without a lot of capital. This allows you to build capital, in order to make your first down-payment(s) on buy and hold properties.
No matter how you choose to employ the art of wholesaling, it is a great strategy to understand, and can be used many times throughout your real estate investing “career.”
Whether you decide to get into wholesaling real estate, and/or wholetailing, you can make a lot of money doing this!
For more information, BiggerPockets has an excellent beginners guide to wholesaling that you should take a look at!
Check out our article on Airbnb Hosting too if you like these breakdowns of real estate strategies!