It seems that most people that want to start flipping houses just come into it with the intention of buying, fixing and selling. We tend to focus on the information we are looking for and are not as receptive to things we aren't looking for. With this being the case, we may not really give much weight to the advice that wholesaling houses is a great way to get into house flipping.
How Do You Wholesale Houses?
I've had quite a few questions from people about the specifics of how wholesaling works. It just occurred to me that I've never written a post covering the details of wholesaling houses. We covered pieces of it and tips, but never the general overview. So here we go.
At its core, wholesaling involves selling houses as-is to another buyer. Typically the buyer is another investor that is going to fix up and either rent or resell the house. The best buyers are cash investors as they can move quickly and make the wholesale a piece of cake. Some people sell to owner occupants but that typically requires more work and does not work with some of the methods (which I will be discussing next).
- Market For Motivated Sellers - You've got to find good deals. The best place to do so is by marketing to motivated sellers. One of the most important things to do to be successful at flipping houses is consistently and persistently marketing to find deals. Without marketing, you won't get leads. Without leads, you won't get deals. Seems simple, but people just don't seem to focus on this, and when you are wholesaling houses, you've got to have a lot of leads to get the types of deals you need to get.
- Get a Lead That Has Potential - You don't want to waste your time looking at houses where there is no chance of making a deal that will work as a wholesale. Typically, your end buyer will want to buy at no more than 70% of the fixed-up, resale value of the houses. You need to buy at that price LESS what you want to make for a wholesale fee. So, if you want to make $8,000 on the wholesale, the house will be worth $100,000 fixed-up, and cost $10,000 to fix it up, you will need to buy it for no more than $52,000.$100,000 (fixed-up resale value) * 70% - $10,000 (repairs) - $8,000 (your wholesale fee) = $52,000 (max offer)Please don't waste your time or the seller's time by going and looking at houses where the seller owes too much for you to be able to buy at the price you would need to buy at. Of course, you won't know how much the repairs will be until you look at the house, but you can work the rest of the equation and get a good idea if a deal is possible.
- See House and Make Offer - So you've determined that a deal is possible and go and see the house. Once you walk through the house and determine the repair cost, you can determine your max offer. Offer less than your calculated max so that you have room to negotiate and possibly buy it for an even better price.A lot of people stress over determining repair values but the fact of the matter is that your end buyer will (or at least should) do their own due-diligence. They are the ones buying and fixing the house. Your estimate is to just give them an idea of whether the deal is something that is worth it for them to look at.
- Put House Under Contract and Receipt At Title Company - Once the seller agrees to a sales price, get an agreement (I prefer the term 'agreement' over 'contract') signed with the seller. Then take the signed agreement to a local title company (preferably one that you have found beforehand that handles double-closings or at least works with other investors) and have them 'receipt' it. This simply means that they open escrow and show receipt of your earnest money (the amount of which is specified in your agreement with the seller). They will then start the title search to determine if there are any title issues that need to be cleared up.
- Find a Buyer - Find a buyer to buy the deal or house from you. Cash buyers are preferred because you will have far fewer hassles. I would stay away from people needing to get conventional loans. You want investors that pay cash, hard money, private money, etc.
- Assign Contract, Simultaneous Close, or Double-Close - Whether you assign the contract (agreement you have with the seller) or do a double-closing depends upon the situation. More on that in a minute.
- Get Paid - You get paid once the deal is closed. If you assign the contract, you won't have to go to any closings and the title company will pay you your assignment fee.
Of course, the order can differ a little. You could close on the house and then find a buyer. In this case, you will have to be able to come up with the money to buy the house first. This could either be your own cash, bank loan, hard money loan, or a loan from a private money lender.
Should you build a buyers list first or after getting a deal?
You could and should also start looking for potential cash buyers before you get a deal. There are two schools of thought on this. Some feel that if you find a good enough deal, finding a buyer will be easy. I agree with that.
However, why not start looking for buyers as you are marketing and getting started? It will take some time before you will find a good wholesale deal (usually). This way you can find the buyers that are the most serious and that you feel you want to build a business relationship with. You see, most investors that are wholesaling houses have a handful of buyers that buy 90-95% of their deals. I feel it is better to start finding this group of VIP buyers as soon as possible.
Different Ways To Wholesale Houses
There are different methods used for wholesaling houses. Which one you choose depends upon the circumstances. Let's go over them.
- Assigning the Contract - This one is my favorite approach. It requires the least amount of work, liability, money, headaches, etc. The reason is, when you find a buyer for your deal, you simply assign the contract to them. The form to use for this is called an assignment of contract. Once assigned, they (your end-buyer) are then responsible for everything in the contract that was assigned. They are the ones that are closing on the house, not you. You won't ever own it. You are simply selling the agreement that you made with the seller of the house. When the new buyer closes the deal at the title company, your assignment fee will be paid to you from the title company (unless you got the end-buyer to give you your entire assignment fee upfront as a deposit for the deal).Speaking of deposits, you really want to get a good-sized ($1,000 at least) non-refundable deposit from your end-buyer. This helps to make sure they are very serious about the deal. You don't want someone that is flaky and may not actually close. The more they pay as non-refundable earnest money, the less likely they are to walk away from the deal. Wholesaling houses by simply assigning contracts is the best way to go.
- Simultaneous Close - A simultaneous close is where you have two transactions to do the deal. The first transaction (A) will be between you and the seller of the house. The second transaction (B) is between you and your buyer. Your buyer's funds from the B transaction will be used to close the first transaction (A). The two transactions usually happen within hours of each other. Some title companies will not do simultaneous closings and some will but they'll require it be disclosed to the lender (if there is one) for your end-buyer that the funds for the deal will go to pay for the first transaction (not a big deal if end-buyer's funds are hard money). The best thing to do is find out if the title company you intend to use will allow a simultaneous close and if so, what their requirements are.Don't ever just assume all title companies will handle them and handle them smoothly.A downside to this method of wholesaling is you will have extra costs. These extra costs include the closing costs involved in closing the transactions (which is spelled out in your agreements with the seller of the houses for the A transaction and the end-buyer for the B transaction). This can easily cost several thousand dollars depending on what you agree to pay for.
- Double Close - The double close is similar to the simultaneous close but differs in that your end-buyer's funds are not being used to close the A transaction. You need to fund the purchase (A) transaction and then sell the house to your end buyer. There are such a thing as bridge loans that are for this purpose. For a fee, a lender will lend money for the A transaction and be paid back on the B transaction. You could try to get one of the bridge loans or just use your own money or get a hard money loan or private money loan. All of these add a lot of cost to the deal, so you need to make sure there is a lot of room (good-sized wholesale fee) to cover the costs and still allow you a profit.The main reason to do a double close is to avoid letting your end-buyer know how much you are making. When you assign a contract, they can clearly see what you are making. When you double-close, you are signing a separate agreement to sell to them and they have no idea what you are paying for the house. This is done usually for deals where your wholesale fee is considered substantial (about $15,000 or more). Some buyers will just not like this and try to beat you up on price or cause problems. Once you find your group of VIP buyers, this will become less of an issue as they realize that you will be bringing them more deals.
With simultaneous and double closings, you don't use the assignment of contract form as you are not assigning your contract (the agreement you signed to purchase the house from the homeowner seller). Instead, you sign another purchase agreement with your end-buyer with you as the seller. You don't own the house but do have a vested interest in it and so can sign to sell the house as the new seller (of course, if your closing with the original seller doesn't happen, you won't be able to close the second transaction because you will not own the house).
Wholesaling Timelines and Tips
- Typical time frames - Typically, when I'm going to be wholesaling a house, I shoot for 3-4 weeks to close when I sign an agreement to buy a house from a seller. This gives me plenty of time to make sure I have a buyer lined up and for them to close the deal. The contracts usually say something like, "close on or before [date]", which allows closing before the date if possible.I have my main group of buyers that buy most of my properties so it doesn't usually take more than a day or two to have the wholesale deal assigned (as I try to assign the contract most of the time). If you have a decent deal, but not a lot of buyers on your buyers list, it may take you a couple weeks to find a buyer. This means you must work immediately, after receipting the contract at your title company, on finding a buyer and don't stop until you find one. The good news is that once you have a deal to push, you can grow your buyers list quickly as you advertise the deal and have buyers call you about it.
- Best places to find deals to wholesale - The best places to find deals to wholesale are the areas of town your end-buyers (cash buyers preferably) prefer. Ask the serious cash buyers where they want investment houses and focus on those areas. It's really as simple as that. Don't assume you know where people want deals. Typically, the best places are older, working class neighborhoods where more deals can be easily found. Newer, nicer neighborhoods are a lot harder to find good deals in.
- What to do when you can't find a buyer - There are a lot of reasons for not being able to find a buyer for your wholesale deal. Usually, it is from not having a 'real' deal. Not having a deal where the numbers worked for the investor buyers. Sometimes it's because the wholesaler didn't put in enough effort to find a buyer. If you can't find a buyer, there are a couple of options available to you. You could lower your wholesale fee and ask for less for the deal. You could renegotiate the deal from the seller to get the price down. Or, you could simply back out of the deal, if you put an escape clause (statement like, "This agreement is subject to agreement by my partner.") in the agreement. This is the worst option and I hope you never have to do it. Even if you don't make any money on the deal but can find a buyer to pay what you had agreed to pay the seller, get the deal done. You gave your word to the seller and you need to honor it.
What about wholesaling bank-owned REOs?
This post covered wholesaling houses as it pertains to buying from motivated sellers (private owners). So what about houses that are listed, like bank-owned REOs? You can read more about that here. There are quite a few differences. In the meantime, you can check out this article I wrote about How To Work With Wholesalers.
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