Ok as we talked about “Flipping” and what that process entails, we will now discuss another part of the making money in Real Estate. Wholesaling is the process of gaining procession of the property LEGALLY but not necessarily FINANCIALLY. How do you actually do that:
1. You find a “distressed buyer“. This means you find someone in a distressed position where they NEED to feel their home. There could be a number of reasons why someone needs to sell their home. Anything from: about to lose it due to taxes, need money for a family house that is just sitting, or the home is in bad shape and they can no longer stay in the home possibly due to the shape or condition of the property. Let’s say you folks decide on the price of $30,000.
2. You place the house under contract. Meaning you sign a Real Estate contract where you are the buyer (technically, I will get to that later) and the owner is the seller. You set a date to close on the house and you give them a deposit to “consummate” the deal. Money needs to be exchanged as collateral to the agreement between the two parties. This could range from as little as $10 to around $1000. This is to allow the seller some compensation in case the buyer (YOU) do not complete the sale.
3. Go find a BUYER. I know you are thinking WAIT, I thought I was the buyer? Well you ARE for ONE of the transactions but then in lies the Wholesaling process. Ok, back to finding a buyer. You need to find someone that will purchase the home for more than what you bought it for. Ok you are buying for 30k and now you need to look for some one to buy it for about 40-45,000. THERE IN LIES YOUR PROFIT. If the home is worth hopefully about $100,000 or even $90,000 you may be able to convince a person, most likely a rehabber (see Episode 1) to buy it for your price so you can make money.
4. You sign a contract with YOUR prospective buyer and YOU as the SELLER. Just as before, the contract is set for the SAME DATE as your closing because hey will both be on the same day. Your very deal depends on it!!
5. Now comes he closing date. This is the tricky part. The closing needs to be simultaneous because YOU DONT HAVE THE MONEY TO BUY IT YOURSELF !!!
Let me say that again so that it is clear.
YOU DON’T HAVE THE MONEY TO BUY IT YOURSELF.
You are wholesaling because you are not capable or willing to pay to actually own the property yourself. So you buy it from the initial owner then immediately sell it to the next owner that you found.
WAIT FOR IT….. WAIT FOR IT…..
Did you find anything wrong with this scenario? Hint… have you ever bought something without paying for it then, sold it? Well, that is actually what happens here.
People will sometimes say different but you have a simultaneous closing because the money used to “fund” your buying the property is technically the same money that you receive from the buyer when you are selling that very same property. I know… is that legal? Well, generally it is depending on having a Title or Escrow company that will accept “putting the cart before the horse”
Welcome to the world of business.
The actual difference in why this works in concept is because some people will pay for a home to rehab as long as it is still at a profitable price. People will sell your home to you if they are in desperate circumstances if you approach them correctly. I would not be honest if I did not say that there are some moral issues that some have with this. Included in this the fact that you very well may be in a closing where your initial seller may be made aware of your end purchaser and the price they are paying. Imagine, selling something for $10,000 and seeing the person that you sold it to sell it 1 hour later for 3 times as much.
I could write for days on this topic but I will also post a video as well as a link to a web group I am a member in that can also be helpful just.. promise to come back to me. !
Wholesaling is about work, building relationships and making the deal. It is about knowing the area, the comparables of an area and finding a buyer. This is THE CLOSEST THING TO REAL ESTATE INVESTING WITH NO MONEY DOWN.
Also try http://www.biggerpockets.com