One of the most popular investment strategies among new investors entering the space is real estate wholesaling. Although this is a popular strategy for new investors, it is also a primary and only strategy for several experienced individuals in the space.
When it comes to wholesaling real estate, there are 2 standard ways it can be handled. The first is through an assignment and the second through a double close. Let's discuss the concepts at a high level.
1) Assignment of Contract - You, (individual A) will be placing a property under contract from a seller, who we will call (individual B). Once the property is under contract, you will assign your rights and obligations of the contract to another investor (individual C), for a fee.
2) Double Close Wholesale - You, (individual A) will be placing a property under contract from a seller, who we will call (individual B). Once the property is under contract, you will close on the property (using your money or transactional funding), then immediately resell the property to another investor (individual C), for a profit.
Real Estate wholesaling is basically your ability to find deeply discounted properties, contract these properties and sell these properties at wholesale costs to other investors. A real estate wholesaler is not truly an investor but someone who uses the commodity of real estate to churn a profit.
Real Estate wholesaling can be difficult to execute but if executed properly can be a great income source for you and your family. It is much easier to scale a wholesaling operation compared to other vehicles because there are far less variables that influence the deal and there are limited barriers to enter the market. In order to execute this strategy, you have to be very systematic with your approach to make the process of wholesaling repetitive in nature.
How To Execute A Real Estate Wholesale Deal
For the sake of this article, we are going to be discussing the concept of the assignment of contract.
1) Marketing
As we previously stated, real estate wholesaling depends on our ability to locate and source deeply discounted properties. In order for us to find these deeply discounted properties, we must have a systematic approach to our marketing. The first step of any successful real estate transaction, will be your ability to find deeply discounted property, so if you plan to move into other strategies, this is a great starting point.
When it comes to developing a marketing plan to execute for your real estate wholesaling business, there are several different mediums that you can begin testing to get your phone ringing. When it comes to marketing for any business, there are outbound strategies and inbound strategies. Every market will respond a little bit differently to your message, so it is your job as the business owner to test all of your marketing mediums to determine performance.
Inbound marketing is the process of attracting, engaging and converting clients through the use of online mediums. Implementing the marketing strategies online may take a longer than some of the outbound strategies that we discuss next. Although, the paid online mediums, will attract leads in a quick manner, the organic side of inbound marketing will take time to garner an impact.
Strategies
Content Marketing (vlogs, blogs, podcasts, ebooks, whitepapers, infographics)
Social Media
Paid Advertising
Email Marketing
SEO
Forms
Call 2 Actions
Landing Pages
CRM
b) Outbound Marketing
Outbound marketing is any kind of marketing where a business initiates the conversation and pushes there message onto an audience. While these marketing mediums sometimes get a bad wrap, we strongly believe in them if tested and used properly.
Strategies
Bandit Signs
TV Commercials
Radio Ads
Newspaper Ads
Direct Mail
Flyers
Brochures
Tradeshows
Billboards
Cold Calling
Door Knocking
Door Hangers
Driving For Dollars
It is your job as the business owner to use the strategies we discussed above to assemble a marketing plan that will allow you to execute and begin bringing leads into your pipeline. We recommend that you marketing plan consists of 3-5 strategies to allow you to test different strategies, messages, colors, etc to determine what is working in your specific area. Once we determine which mediums are working, we can begin adding marketing dollars to this medium and taking away from non producing mediums. The only way we will know what is working and what is not working is through tracking the results of the mediums that we are using.
2) Cash Buyers List
The next important step to successfully building and doing your first real estate wholesale deal, is your ability to build a quality and sizable buyers list to assign your discounted properties to. Your cash buyer's will essentially be the individuals/companies that will be purchasing the product that you have available. To build a successful buyers list, you will have to use similiar to strategies to get the word out that you indeed supply discounted properties. When you have created a quality buyers list, you are much more comfortable putting properties under contract because you know that you will be able to exit out of the product.
How To Build Your Buyers List
There are several different mediums that we can use to build our buyers list. Some of these tactics will involve being creative and others will involve monies. However, we need to do whatever we can to continue to build our buyers list, just like we source our deals.
1) Craigslist
You can utilize the free platform Craigslist a couple ways to find Cash Buyers in your market. You can utilize there search bar to search for keywords surrounding posts where cash buyers are either advertising that they are essentially cash buyers or you can reach out to other landlords who are advertising properties for rent. You can also utilize Craigslist when you have a deal under contract to advertise that deal on the platform. Through this ad, you will essentially get buyers to reach out to you with interest in the subject property. You can also advertise on Craigslist for other investors to join your Cash Buyers list by either emailing you or pushing them towards a landing page to sign up.
2) Facebook
In a similar manner that you utilized Craigslist, you can utilize the free features of Facebook. You can either create organic ads through your business page or your personal page to advertise your search for cash buyers and push them to send an email or to a landing page. You can also utilize free Facebook groups to post similiar ads to get interested parties to sign up to be on your list.
3) Paid Facebook Advertising
Utilizing Facebook's paid Facebook advertising feature maybe the best way to build your cash buyers list. On Facebook, you can create a very targeted ad specifically to your targeted persona to have them fill our a "Lead Form" which can essentially be linked to your MailChimp account, so that your new Cash Buyer leads automatically get updated to your list. If you have already completed a couple transactions, it is always best to utilize this information to create your ad to attract potential clients. Below, you will see an ad that we use to build our buyers list.
As with all marketing material, be sure to test different ad copy, colors, photos, etc to see which ads garner the best results!
4) Recent Cash Sales on MLS / Skip trace / Direct Mail or Cold Call
Another active approach to build your cash buyers list is to utilize your real estate agent if you are not one and have him send you a list of all of the cash purchases in the past 12 months. Once you get this data, you may have to skip trace this individual's information to find an address,phone number and email address. Once you gather this information, you can either send them a direct mail piece or give them a call to explain your service.
5) Title Companies / Real Estate Attorney's
Utilize your real estate attorney or title company that handles your real estate transactions. Most of the time they have been in the business for a long time and work with other real estate investors in your area. They should be able to provide you with a list of their clients that would be interested in this type of service.
6) Networking
Within in every county, there are always real estate groups. These groups are a good source for local investors who may be looking for off market product. Go to these meetings, introduce yourselves, gather there information and add them to your buyers list.
7) Biggerpockets
The largest real estate platform in America is Biggerpockets. On this site, you can connect with other real estate investors in your area, through a social media like platform. You can search for investors in your area and send them a direct message to see if they would like to be added to your cash buyers lists.
3) Property Analysis / Offers
Once we find a deeply discounted property and qualify the property owner to determine that there is enough motivation surrounding the property for them to sell at a steep discount, we will have to set up an appointment to meet the seller and take a look at the overall condition of the property. One of the major areas that most new wholesalers have trouble with is estimating the repair estimate on properties. Since they have trouble accurately producing repair estimates, they typically put properties under contract at too high of values which causes them trouble when it comes to assigning them to your cash buyers list.
When determining your offer price, you will have to have a good understanding of the primary exit strategy for the specific product that you are analyzing. In every market, there are specific area's that are predominately a place where investors will buy to hold and there are specific areas where investors are looking rehab and sell. You will have to have a good understanding of the exit because you will analyze the property differently depending on the exit.
a) Rehab and Sell
The analysis for a product that is in a location that the primary exit would be a flip, the analysis is fairly straight forward. You just have to make sure that you have accurate data/numbers when running your analysis so that you derive at a correct purchase price. Since each investor, will have a different renovation setup, we recommend that you run your renovation numbers as if the investor was going to be subbing out all of the labor on the project, which is typically the most expensive way to renovate a project. Another variable that most new wholesalers forget about, is the costs of borrowing money for these specific investors. Although we are building a "Cash Buyers List", the majority of these buyers are either using Hard Money or Private Money to fund these deals. When utilizing this type of financing, they will experience additional costs compared to if they were purchasing these properties in all cash. So make sure that you account for the origination fees, monthly interest costs and any additional closing costs fees that come with utilizing this type of financing.
ARV - Repair Costs - Holding Costs - Closing Costs - Commissions - Investor Profit - Wholesaling Fee = Maximum Purchase Price
$150,000 - $40,000 - $5,000 - $8,000 - $9,000 - $25,000 - $10,000 = $53,000 (Maximum Purchase Price)
b) Buy and Hold
As a general rule for wholesalers, buy and hold investors will typically pay a little more for a product than a fix and flip investor. Buy and hold investors will be purchasing your product based off of the NOI or ROI that the asset produces. A buy and hold investors, will look at the following metrics when making their decision to purchase a property.
Cap Rates
Net Operating Income
Cash Flow
Return on Investment
Cash on Cash Return
The Cap Rate is essentially the return the asset will produce if you were purchasing the property in all cash. Residential properties are not valued off of cap rates but comparables.
Buy and hold investors, will also pay attention to the operating expenses for a specific property, what the repair costs will be to get the product in rentable condition as well as what the ARV will be if they decide to sell the property down the road.
To determine your offer price, you will have to accurately produce these other numbers and know what type of returns your investors are looking for in these areas to play around with the purchase price figure. As always, make sure that you include your wholesaling fee in your purchase price number when submitting your offer to prospective clients.
4) Negotiations / Contract
After you have finished your due diligence and your analysis on the property, it is time to submit your offer, negotiate the deal and contract the client. When you are wholesaling a deal, it is very important to be upfront and honest with the seller that you will not be the one purchasing the property but reiterate that all of the terms of your contract will apply with the new buyer. Explain that the deal will run as smooth as if you were purchasing, you will be heavily involved and there will do your best to prevent any hiccups throughout the transaction.
Essentially, you have done all of the hard work up to this point in time. Placing a property under contract that you will be wholesaling is essentially the same as placing a property under contract that you will be purchasing. However, you do want to have your purchase contract reviewed by a reputable local attorney in your area to ensure that you can assign the contract that you have in place with the owner.
There are numerous ways to create a contract and get that specific contract into the seller's hands. With the amount of resources and tools we currently have available to us, it has never been easier. Here is the process that we recommend to create and send the offer to your client.
Notice: We utilize Podio to automate the contract creation process. We created a specific app within Podio and utilized Globiflow to automate this process.
1) Open up Podio and go to the Offers application
2) Fill in the necessary information within the application for both the buyer and seller in the contract.
3) Click "Create Wholesale Offer" in Podio to create a PDF that will pop up on the right side of your screen
4) Review and save PDF
5) Open up Docusign and upload the contract PDF
6) Assign all areas that need a signature from both buyer and seller
7) Include introduction in email and send out offer
At this point, you have sent out the contract to the seller. Most of the time, you should expect a counter-offer from the seller. This is something that you have to consider when you are placing your offer. Depending on the motivation level of the client as well as the competition will determine which percentage of the offer price that you will offer. Your first offer should be anywhere from 75% -90% of your maximum purchase offer. If there is a high level of competition, you may want to consider putting out your highest and best offer first. These are the business decisions that you have to make.
5) Assign Contract to Cash Buyers
Once we have finalized a price with our buyers, made the necessary adjustments to the contract and received a signed copy, it is time to get to work marketing the property to your cash buyers list and to the masses. If you have a great deal under contract with a sufficient buyers list, you should be in a good position to capitalize on the fee. In order to get the word out to your cash buyers about your property that you have contracted, you will need an email automation tool, such as MailChimp as well as a text blast tool to reach the folks on your Cash Buyers List.
On your end, you will need to add your wholesaling fee to the advertise purchase price to your Cash Buyers. If you have the property contract at $20,000 and ran your numbers off of a $10,000 wholesale fee, you will market your contract for sale at $30,000. We also recommend that you establish a open house date/time with the sellers, so that you can get all interested parties into the property on that date.
Within Mailchimp, you will be able to create a wholesaling template that you will used to portray all of the vital information about the deal to send out to your buyers list. Once you create your Mailchimp wholesaling template, you will create a specific campaign for the subject property that you are wholesaling. Fill in all of the vital information about the subject property and send the campaign out to your buyers. It is always good business to give your buyers atleast 24 hours to get a first crack at the deal before you begin advertising the contract for sale on other platforms.
If you do not get any bites through your cash buyers list, you can utilize this property to get additional cash buyers to add to your list as well as market on other platforms to get interested parties in the deal. Just make sure that you make the seller aware that you have the right to market there property on other platforms, so if they see it on Craigslist, they do not go crazy. Happen to us in the early days.
Some of the other platforms that you can advertise the property that you have under contract are:
Craigslist
Facebook
Paid Facebook
Facebook Groups
Facebook Business Page
Linkedin
BiggerPockets
Once you go through the open house and find an interested buyer, you will have to have them sign and fill out an assignment contract as well as submit and Earnest Money Deposit in order to make the contract binding. Make sure that you show the buyer the original contract that he will be taking on, so that there is no confusion of the terms of the original contract that you have in place that he will be assuming. We recommend that you have the buyer send the EMD and be made payable to your real estate attorney's office who will monitor the closing for you.
Once you have a signed assignment contract, you will send an introduction email out to all parties involved in the transaction. This would include:
Buyer
Buyers Attorney
Sellers Attorney
Your Attorney
Your Team
Conclusion
Congratulations, you just made it through the wholesaling process. As you can see acting as the middle man does require a bunch of steps, so you will have to create specific systems throughout this process in order to streamline your operation and make it scalable. If there are no title issues with your deal, you can expect the deal to close anywhere from 2-4 weeks after your assignment contract is submitted to the attorneys. We do recommend that you explain to the attorneys, that they should hold off on updating the title and survey for the property until you find a buyer to assign the contract to. This way you can prevent finding yourself with sunk costs on the deal.
Wholesaling real estate can be very lucrative but it has to be done the right way. You have to be upfront and honest throughout the the process so you can ensure a smooth transaction and that everyone is on the same page. Make sure that you treat your wholesaling operation like a business and always improve areas that are needed. Whenever you find a problem, create a system around that problem so that the problem does not happen again. Make sure you educate yourself on all of the different facets of wholesaling and the legalities surrounding the topic in your area so that you can be sure to hit the ground running when you find a deeply discounted property.
If you have any additional questions on the wholesaling process, you can reach out to us at info@copperlakescapital.com and we would be happy to help!