We strive to assist sellers that are in distressed situations. But the truth of the matter is, sometimes it’s the best decision for our company, to pass on deals to other investors. This is referred to as wholesaling.
A wholesale transaction is when an investor buyer puts a distressed property under contract and then sells that contract to another investor. That second investor then will rehab the property and use it as a rental or put in on the market for sale. The key to a wholesale transaction is that it can close quickly; so the end buyer will need to use cash, or hard money loan.
An alternative to assigning a contract is the double-close transaction. In this type of deal, the first buyer buys the distressed property and then sells it to the second buyer; having had ownership of the property for as little as a few minutes. Keep in mind that this may cost a little more for the first buyer. They will have to use cash and sometimes cash costs money – for example transaction funding from a lender could cost 1 or 2 points for borrowing that money, even though it’s for a very little time.
To be a successful wholesaler, you must have the following:
- Ability to recognize a distressed property
- Ability to estimate cost of improvements
- Purchase the property at a low enough price to build in a wholesale fee
- Have a network of investors that could purchase a property from you
- An excellent title company that is able to perform this type of transaction and do so in a timely manner
This strategy is a great way to get started in the real estate investment business, because you don’t necessarily need money to purchase properties, as long as you can assign the contract it to a good buyer. What makes a good buyer:
- Someone that can provide Proof of the funds (bank statement or letter from hard money lender) that covers the cost of the purchase
- Someone that will put down a significant non-refundable deposit ($2500-$5000). This ensures their good faith that they will truly come through in purchasing the property at closing.
Networking is key! Marketing is key! This is not easy by any means, and it takes gumption, hard work, hours of persistence, and a positive attitude. But, it’s a great way to practice talking with sellers and becoming familiar with the terms and language of this business.
If you have questions or seek a mentorship, feel free to give us a call!