Updated: Oct 23, 2020
Real estate investing has never been more popular, and while that has made certain types of investing virtually impossible, it’s created the IDEAL landscape for wholesaling real estate.
In this comprehensive guide, we’re going to take you through every step of the wholesaling process.
You’ll learn how wholesaling works, how much money you can make, how much money you need, and whether it’s the right fit for your investing goals.
Let’s dive in!
What Does It Mean To “Wholesale Real Estate”?
Wholesaling real estate is the process of finding undervalued real estate deals and connecting them to cash buyers for what is essentially a finder’s fee.
Wholesaling is arguably the best short-term investing strategy in real estate. In some ways, it’s similar to house flipping, but you don’t have to do any of the hard work that flipping a home requires.
It’s also incredibly accessible for beginners, as it doesn’t require large amounts of capital or special skills like home rehabilitation. The only thing you need to wholesale real estate is the ability to find sellers and buyers, and we’ll teach you how to do both (including the hidden steps in between) in this guide.
If you are the type of person who is always finding great deals through thrift shops, craigslist, facebook marketplace, or other unique places, you can use those same exact skills to make a killing through wholesaling real estate.
How Does Wholesaling Real Estate Work?
Real estate wholesaling works in three parts.
First, the wholesaler seeks out an undervalued property that they can purchase. In many cases, these properties are in a state of disrepair and require some work, very similar to the types of homes that house flippers look for. This indicates that the owner doesn’t have a high value for the property or doesn’t have the cash to maintain the property and might be willing to sell it.
Second, the wholesaler negotiates with the owner to sell the home and enters into a contract to purchase the home for a fixed price within a certain timeline.
Third, the wholesaler finds a buyer to sell the contract to at a markup. This is usually a cash buyer, but they can also be a buyer using private lending or hard money lending. The wholesaler receives the markup amount without ever actually receiving the title to the property or becoming the owner.
A Simple Wholesaling Example
Laura is a wholesaler. Every week, she goes driving through local neighborhoods, looking for homes in disrepair.
Once she’s identified several homes that look like a good fit, she looks up the owners information via public record and sends each a letter.
One owner named James responds to her letter and says he’s interested in selling the home.
After some negotiation, they enter a contract where Laura agrees to purchase the home for $100,000 in 30 days.
Laura then reaches out to Doug, a serial house flipper she knows, shows him the home and numbers, and offers him the contract for $110,000.
Doug likes the price, so Laura signs over the contract to Doug for $110,000.
At 30 days, James receives $100,000 for his home, Doug gets the home, and Laura earns the extra $10,000 as her fee for bringing the two together and orchestrating the deal.
How Much Money Can You Make Wholesaling Real Estate?
A typical scenario for an experienced wholesaler is around 3-5 deals per month, earning around $5k per deal, resulting in between $180k-300k per year.
The typical markup percentage for a wholesaling deal is around 5%, and since most wholesaling deals happen on homes under $200k per month, the markups are rarely going to be more than $10k on any individual deal. That said, if you can find buyers with deep enough pockets, there is no limit to the value of home you can wholesale or the size of the markup you can cash in.
For most wholesalers, however, the path to income growth is more about the volume of deals they can close each month, rather than the value of any single deal.
The process for finding one undervalued real estate deal is the same as the process for finding 100 deals, so the best wholesalers are typically the ones with the most efficient method for finding numerous deals per month.
How Much Money Do You Need To Start Wholesaling Real Estate?
What makes real estate wholesaling so attractive to new investors is that you don’t need any money to get started. You can wholesale a house without spending a single $1.
That said, having some money available can definitely be helpful for a number of reasons.
First, it’s helpful to have capital on hand in case your buyer falls through and you have to purchase the contracted property yourself.
Second, some of the best methods for finding deals at scale require some upfront investment. The more you are able to spend, the more deals you can potentially find, and by extension, the larger your income will be.
But unlike other real estate investment methods that REQUIRE a significant amount of upfront capital, wholesaling gives you the unique ability to make money in the real estate space without needing to spend a dollar.
How To Wholesale Real Estate Like A Pro
Now that we have a good baseline understanding of wholesaling, it’s time to dive into the specifics and learn how to wholesale a house step by step.
There are four main steps to the wholesaling process:
Find undervalued real estate deals
Run the numbers on a potential deal
Negotiate a purchase with the owner
Find a cash buyer
While this process might seem relatively simple at a glance, each step requires its own set of unique skills.
1. Find Undervalued Real Estate Deals
This is THE most important job for a wholesaler. It’s ultimately what is going to determine their success at this investment strategy.
The rest of the steps are pretty black and white. Either the numbers work out or they don’t. Either you close the contract with with owner or you don’t. Either you find a buyer or you don’t.
But how many deals you can find is variable.
If you can find 2 successful deals per month, you can make $10k per month. If you can find 20 deals per month, you can make $100k per month.
So how do you go about finding real estate deals?
There are a TON of potential ways to find an undervalued real estate deal, but for the purposes of this guide, we are going to focus on our three favorite methods:
Driving for dollars
Direct mail campaign
Let’s take a closer look at each one.
Driving For Dollars
“Driving for dollars” is the process of driving through local neighborhoods and looking for homes that are not being maintained at a similar level to the rest of the neighborhood. Your goal here is to negotiate a purchase contract with the owners of these homes at a favorable rate.
You are looking for signs that the home is an afterthought to the owner, which increases the odds they will be willing to sell and will undervalue the property in your negotiation. Some of the best deals will come from absentee owners who don’t actually reside at the property but own for one reason or another.
Signs to look for include:
Overgrown grass and vegetation
Piled up newspapers or mail
Broken or boarded windows
Code enforcement on the door
Once you’ve identified some potential homes, record their addresses and look up the owners via your country’s Central Appraisal District (CAD) records.
Finally, reach out to the owners via card, mail, or whatever your preferred method of contact is and offer to purchase the home.
Driving for dollars is a great lost-cost strategy that you can do immediately without needing to learn any special skills.
Direct Mail Campaign
A direct mail campaign is a marketing campaign where you send out direct mail to a large number of homeowners with the goal of getting a small percentage to respond to you.
There are two parts to a direct mail campaign:
Identify good targets to send your mail to.
Send mail that grabs attention.
While you could simply mail every address in a local area, that would be fairly expensive and time consuming to do, and the additional volume of mail wouldn’t do much to increase your response numbers.
Instead, you want to send your campaign to a list of targets that check off one of several boxes, such as:
home in disrepair
high equity in home
late mortgage payments
You can populate lists based on some of these criteria manually, but in most cases, direct mailers purchase mailing lists from companies that specialize in compiling them.
Next, you’ll need to send out mail that grabs attention.
This could include:
Curiosity grabber on cover
“Lumpy” mail with physical object in it
Pictures of cash or other desirable things
Your initial goal is to grab attention, but from there, you aren’t trying to persuade the owner to sell. You are simply explaining why you can provide them with the best offer when they are ready to sell.
Let’s say you send out a thousand letters and only hear back from 2%. That’s 20 potential deals. Close just 10% of those and you’ve made $10,000.
Online advertising is the process of displaying ads to specific people as they spend time browsing online, usually with the goal of prompting them to take a specific action.
There are a ton of options for advertising today, and you can easily target people by location, demographic, interests, and all sorts of criteria for a relatively low cost.
This allows you to quickly get your offer as a wholesaler in front of thousands of potential sellers.
Unlike the previous two options, this method requires a bit of work to learn, and finding sellers tends to be harder than finding buyers.
That said, if you are serious about becoming a high volume wholesaler, it’s going to offer levels of scaling and automation that driving for dollars, direct mail, and pretty much all other methods can’t match.
2. Run The Numbers On A Potential Deal
Now that you’ve heard back from owners interested in selling, it’s time to run the numbers on the property and determine one key number in particular.
What is the maximum amount you can purchase this property for and still make the wholesaler fee you are looking to get from it?
The official term for this amount is the Maximum Allowable Offer (MAO).
But to get this number, we need to first figure out five other numbers:
After Repair Value (ARV) - how much will the home be worth after it’s repaired?
Buyer Profit - how much is the buyer expecting to profit from the home?
Repair Costs - how much will it cost to get the home into sellable condition?
Fixed Costs - what additional costs are there, including holding and transaction costs?
Wholesaler’s Fee - how much are you seeking to make from this deal?
Once we know these numbers, we can plug them into our MAO equation to determine the max amount we can offer for the property.
Here’s the equation:
MAO = ARV - Buyer Profit - Repair Costs - Fixed Costs - Wholesale Fee
Let’s look at an example.
A Simple MAO Example
After James responds to Laura, letting her know that he’s interested in selling his house, Laura sits down to run the numbers.
Looking at comparable homes sold in the neighborhood and using an ARV calculator, Laura calculates that the property will be worth $165,000 after it’s been fully restored.
She calculates that fixed costs will add up to around $10,000, estimates repair costs will add up to $20,000, and knows that Doug, her usual cash buyer and home flipper, aims for around $25,000 in profit for each flip he takes on.
Lastly, she is looking to earn $5,000 from this deal.
When we plug these numbers into our equation, we get the following:
MAO = $165,000 - $25,000 - $20,000 - $10,000 - $5,000
MAO = $105,000
This means that the maximum Laura will be willing to offer James for the home is $105,000. If she can negotiate him down to $100,000, however, she will walk away with $10,000 for the deal instead of only $5,000.
So how do we calculate all these numbers?
For your buyer’s profit margin and your own wholesaling fee, it’s just a matter of asking and stating.
What will the buyer need to make to be willing to take on the project?
What do you need to make in order to be willing to setup the deal?
Decide what you need and write it down.
For the other numbers, understand that when it comes to real estate investing, numbers like these aren’t set in stone. They are estimates and best guesses based on experience and probability.
For example, calculating ARV is like calculating the list price for a home. You can look at the market and comparable properties that have sold recently in order to get a solid estimate of what people will pay for the house, but ultimately, it’s a best guess. You might end up with people offering even higher. You might end up having to lower the list price to sell the home.
So while your ability to estimate accurately will improve with time, here’s some information to help you make a solid prediction with no prior experience.
How To Calculate ARV
The easiest and most reliable way to calculate ARV is to ask a good realtor who knows the area well. They have access to more information than you do and will be able to find the best comparable properties to help estimate ARV.
If you’ve already purchased or sold a home, the realtor you worked with will likely be happy to help you with something relatively simple from time to time.
If you are going to look for their help more frequently, you’ll want to find ways to make it worth their time. As an active wholesaler, there will be ways for you to help pass profitable projects over to a realtor. Some of the sellers you find won’t be a great fit for a wholesale deal but can be passed on to a realtor for a more traditional home sale that benefits the realtor and makes them happy to help you with your wholesaling.
Another way you can calculate ARV is to try and identify comparable properties yourself.
Search recently sold listings.
Find several that are similar to your home and within the same neighborhood or a similarly priced, reasonably close neighborhood.
Make pricing adjustments based on home differences.
This isn’t a hard science, just like people are not entirely rational in the way they make purchasing or selling decisions.
It’s a best guess, and you’ll get better at it with time.
How To Calculate Repair Costs
Repair and rehab costs are the most challenging to estimate, especially if you’ve never done this before.
There is not really a shortcut for this. You have to go through item by item and estimate costs.
Doors and door hardware
Windows and window hardware
As the wholesaler, you are more trying to predict these costs on behalf of the buyer. They will ultimately decide which costs they take on in rehabbing the home.
Accordingly, calculating these costs becomes easier if you are working directly with the buyer during the calculation phase and can let them estimate it for you.
How To Calculate Fixed Costs
Fixed costs are probably the simplest costs to estimate, but there’s quite a few to keep track of.
There are three categories of fixed costs that most buyers will need to account for:
Purchase costs include:
Inspection costs - average $300
Lender fees - average 1% if taking a loan
Other closing costs - average $1,000
Holding costs are going to depend on the time the buyer plans to hold onto the property prior to selling it:
Mortgage payments - average $500 per month for a $100k home
Property taxes - very location dependent
Insurance costs - average $1,500 per year for a $100k home
Utility costs - average $200 per month
Selling costs include:
Realtor commission - 5-6% of sale price
Closing costs - average $5,000 in a buyer’s market
As you’ve probably realized by this point, how many of these various costs need to be included in your calculations will depend heavily on the buyers you are working with.
3. Negotiate A Purchase With The Owner
Now that you know your MAO, it’s time to make your offer and negotiate with the homeowner.
You might be looking for some secret strategy here but negotiation works the same way in real estate as it does in any other industry.
If you have developed a good rapport with the homeowner and they seem like a very straightforward person, simply offer them your MAO.
Otherwise, make your opening offer anywhere from $10k-$30k below your MAO. They are more likely to counter with a higher price when you start low, but it gives you room to negotiate and concede ground as you try to meet in the middle.
For example, if your MAO was $100k and you offer them $80k, they might counter with $110. Then you’d counter with $90k, they’d say $100k, and you’d try to finalize the deal at $95k, giving you $5k profit on top of the fee you were hoping for at $100k (or giving you $5k more room to work with in negotiating with your buyer).
It’s really that simple.
Sure, there are a lot of things that can impact how well you do in negotiating the purchase price:
How motivated the seller is to sell
The seller’s expectation of what they’re property is worth
Your rapport with the seller
Your overall confidence and likeability
But it’s just a simple matter of making an offer and going from there.
At the end of the day, what’s going on in the seller’s life will likely have more of an impact on the sale than anything else. Your goal is to play the numbers game rather than try to create perfect conditions for any given deal.
Once you’ve settled on a price, you’ll need to fill out a purchase and sale document. This will be very state-dependent. The exact form you need and where you can get it from will be different in every state.
Google “[your state] purchase and sale agreement” to find what you need.