Wholesaling is a great way to make money – a lot of money – with real estate without actually buying or fixing up a house. When you drive around town, you probably see some old, run down usually vacant looking houses. Now, when you see those houses you need to think $$$$.
Here’s how a wholesaling works:
1. Build a buyers list
2. Find old run down houses or get others to find them for you
3. Track down the owner by talking to neighbors or sending a letter/postcard
4. Inspect the property to estimate the repair costs
5. Get a contract for as little as possible – it is better to ASK the seller what they will take instead of making an offer.
6. Then either sell your contract to a rehabber or sell the house
Here is an example of a real wholesale deal:
Rich found a house that was run down, vacant, and just plain nasty looking! There was no for sale sign in the yard. The grass was knee-high. There were at least six months of newspapers and junk mail piled up on the front porch. He walked up to the front door and knocked but there was no answer. He was able to peek in the window and could see that the house was vacant except for a lot of trash. It looked like perhaps a tenant had lived there and left the house a mess. Surely this owner must be motivated to sell. Through persistence and a little detective work, (he just asked the neighbor) Rich was able to locate the owner. Rich met with her the next day. He asked our “magic question” and negotiated a “risk free” agreement to buy the property at a little less than 50% below the after repaired value. He gave the owner a $5 earnest money deposit. The contract price was $50,000. The after-repaired value is the price the house would sell for “on the market” if it were in good, clean, and livable condition. In this case, the house would be worth about $100,000 once repaired.
Once he “locked up” the property with a contract or agreement, he then immediately called a few investors on his buyer’s list. Rich already had a list of these investors lined up before looking for houses. Rich offered to sell the investor the house that he just wrote a contract on for $56,700. An amazing, $6,700 MORE than his contract price. When the investor agreed, Rich filled out a two-page “Purchase and Sales Agreement” for $56,700 and collected a check for $500 as earnest money from the investor. The $500 check is made out to the title company. Rich turned the Agreement to Buy, the Agreement to Sell and the $500 check into the title company.
A few days later Rich went back to the title company or an attorney’s office to sign a few papers and walked away with a check for $6,700.00!
Note that Rich did not get a loan to buy the house, he did not fix it up before selling it, he only had $5 invested in this deal!
HOW TO DO A WHOLESALING
Wholesaling for Beginners
By Jackie Lange
If you’re just getting started in real estate and need to build your confidence and knowledge before moving on (but still need to make some extra cash), I suggest you start with wholesaling contracts (house flipping).
With wholesaling, you’ll be able to earn while you learn the ropes in real estate, and you don’t have to worry about risk if you do it right.
What is wholesaling? Very simply, it’s contracting to buy a property, then selling your right to buy to a third person.
Here’s an example of how house wholesaling works. You find a house that is run down and vacant; there’s no for sale sign in the yard.
Through persistence and a little detective work, you locate the owner and negotiate a “risk-free” contract to buy the property at 50% below the after repaired value with a very low earnest money deposit, also called an option consideration ($10).
You contact an investor who rehabs houses in the area, offer to sell him the house for $3,000 more than your contract amount. When he agrees, you fill out a one-page “Assignment of Contract” form and get $500 in earnest money.
The contract to purchase and the assignment contract are turned in to a title company.
A few days later, the transaction closes at a title company or an attorney’s office, and you get a check for $3,000 PLUS your $10 earnest money.
A word of caution . . .
You’ll need to be very persistent–it’s NOT always easy. Some months you may find two, three, or more houses you can flip. Other months you may not find any.
You’ll constantly develop new leads. Some leads will work out; some won’t. Some sellers will be very motivated, and some won’t. But remember, that time has a way of changing everything. You must learn to stick with it, even when you are discouraged.
Where do you begin?
Start with the end in mind, so you’ll know what to do after you find a motivated seller with a house you can buy well below market value. If you try to find the house first then figure out what to do with it, you’re in for a nightmare.
The first thing you need to do is line up your real estate investment team. You’ll need rehab investors to buy your contract, a title company to close the contract or perhaps an attorney. And the most important–a good contract or agreement. Let’s go over each of these in a little more detail.
How to find investors who will buy your contract
Read newspaper ads. Look in the daily and weekly newspapers for the “We buy houses” ads. You may even have some billboards around town that say “We buy houses.” Call each one of these ads and talk with the investor. Keep an information sheet on each investor.
Be honest and tell them that you are just starting out and will be looking for houses that need to be rehabbed. Ask if they would like to be contacted when you find one. I assure you they will all be very anxious for you to do the leg work for them.
You also need to find out where they want to buy houses and in what price range. Some will only work in certain areas and price ranges and others will say anywhere there is a deal! Ask if they are a cash buyer or if they will need some extra time to arrange financing.
Attend real estate investment club meetings. Another excellent source of buyers for the houses you find will be your local investment club. Most major metropolitan areas have at least one club that meets monthly. Join and attend every meeting.
The networking opportunities are endless. When you go to the meetings tell everyone what you are planning to do. Once again, collect names and information about people who are interested in buying houses.
Attend foreclosure auctions. Some investors hate to go out knocking on doors and dealing with emotional, distressed owners; they much prefer to buy at the foreclosure auction.
At most auctions, the property must be paid for with cash or a cashier’s check within hours of the sale. What a wonderful opportunity for you to meet cash buyers for the houses you find.
Introduce yourself to the investors and hand out business cards. Tell them you find houses just like the ones sold at the auction and ask if they would be interested in being contacted when you find something. Again, find out where and what price range they buy in.
Ask for their business card and make notes on the back or take along a notebook. Make sure and do this either before or after the auction because the investors will be focused on bidding during the auction and won’t appreciate distractions.
Keep telephone logs. Once word gets around that you flip contracts, you’ll get weekly phone calls from investors asking if you have anything. Keep a log of who calls, these will be the first investors to contact when you have a deal.
How to find a good title company or attorney
Ask other investors who they recommend. This is where all that networking comes in handy. By building a good relationship with the investors you call from ads, meet at the investor clubs or at the auction, you’ll develop a base of mentors that you can call anytime you need advice.
Don’t abuse the privilege though. Rarely will you make friends with someone if you call them frequently and keep them on the phone for a long time. Keep your phone calls brief and to the point. Or better yet, take advantage of the time at the investor club meetings for your questions.
The agreement or contract
Once you find that elusive motivated seller and the right house at just the right price, you’ll need a document to “tie up” or buy the house. A contract lets the seller know you’re serious about buying their house and it provides written instructions for the title company. All real estate contracts must be in writing.
Now is NOT the time to get creative about contracts. Most title companies will supply you with a purchase contract. You may also be able to get a good contract through your local real estate investment club. We also have some simple contracts in the FILE VAULT at CashFlowDepot.
Whichever agreement or contract you use make sure to add a clause that protects YOUR interest and allows you a way out of the contract. An example is:
This contract is subject to inspection and approval of the property by buyer’s associates.
If you cannot find a buyer for the contract, you notify the seller in writing that your partner did not approve the purchase of the house. Then you are no longer obligated to purchase the property. I’d suggest that you send the notice by certified mail. Or, you may be able to negotiate more time to sell the house or a lower purchase price to make the property more attractive to the people on your buyer’s list.
Everything you and the seller agree to must be written in the contract or agreement. If it’s not, the seller may develop a sudden case of amnesia.
If the property is vacant, I always ask the seller to provide me with a key or a combination to the lock box along with permission to enter the premises for estimating repairs and completing inspections.
You may even ask the seller to allow you to place a “For Sale” or “For Rent” sign in the yard prior to closing. Remember, whatever you agree to, put it in the contract.
It is essential that the contract does NOT have any clauses that would prevent you from assigning the contract. You could add a simple clause like, “Buyer may assign contract.” Or, next to your name, as the buyer, say and/or assigns. An example is Jackie Lange and/or assigns. This gives you permission to assign the contract.
Next I’ll discuss where to find houses owned by motivated sellers, how to evaluate a transaction, and how to negotiate a deal that’s good for all parties.
By now you’ve had time to: Locate three or more rehab investors to wholesale your contract to; have your contracts ready and thoroughly understand them; and know which title company or attorney you will use to close that first deal.
If not, take time to complete these steps before you start looking for houses.
Let’s discuss how you can increase your odds of finding and closing more deals in the least amount of time. Here are four ways to find houses:
Finding wholesale opportunities
Tell the world–recruit bird dogs
Research, research, research
Knock on doors
Bandit signs and magnetic signs on your car
Advertise on craigslist
To achieve maximum success you need to use a combination of ways to advertise. However, you may have other time constraints (like a full-time job) that limit what you can do. In that case, pick the methods that best fit your schedule or your budget.
Farming for houses
I recommend you start working within a 10 to 15 mile radius of your home (sometimes called “farm”). If you live in a major metropolitan area like I do, it will be hard to drive all over town to look for houses. Less expensive neighborhoods will have more opportunity. Remember, you are looking for old, run down houses.
For me, it can take one hour to get from one side of town to the other. You’ll quickly find that you are spending more time driving than actually looking at houses or talking to motivated sellers.
You should get to know your farm area like you know the back of your hand. It can easily be accomplished by working just a few hours on the weekends. Drive around each neighborhood in your farm area.
Keep a log or journal with information about your target neighborhoods. You need to identify neighborhoods with houses that are about 20 years old. Newer houses probably won’t have enough equity to allow for a profitable deal.
Are there “For Sale” signs in these neighborhoods? Write down the address and contact numbers in your log then call to find out the square footage, number of bedrooms and baths, how long it’s been on the market, and the asking price.
You have just established the approximate market value of houses in the neighborhood. If all the houses are newer or in good condition then you need to find a different farm area.
What to look for
While you’re driving your farm area, do you see some vacant houses? Occupied houses in need of repair? Write down the address in your log and other notes about the condition of the property.
How do you spot a vacant house? Tall grass is certainly a give away, as is a porch or doorway cluttered with phone books, flyers, and coupons from the local pizza parlor. Perhaps a mailbox stuffed with mail that has not been picked up. Boarded up windows are a sure sign of a vacant house.
When you find a vacant house, knock on the neighbors’ doors and ask if they know who owns the house. Try to find out how long they lived there, why they moved, how you can reach them, how long has it been vacant, etc. Get any information you can about the owner and the house.
Tell the neighbors that you are looking for houses to buy in the neighborhood, and you work with a group of investors (these are your “partners”) who will remodel the house then sell it to a good homeowner. Chances are they are very anxious to have a “good” neighbor and will cooperate.
Don’t forget to ask if they know of any other houses that are vacant or in need of repair in the neighborhood. Leave your business card. They may think of a house after you leave, and you want to make sure they know how to get in touch with you.
If neighbors won’t give you names and numbers of the owner, leave your business card and ask them to please get a message to the owner that you are interested in buying the house.
Next, check the tax records. Some city tax offices will give you the owner’s name and address with just a phone call; others require that you come in to check it yourself. Many counties’ tax records are on the Internet. This is the first place to investigate.
Once you find out who the owner is, you can send them a letter or postcard or try to get their phone number and call. Or, if they live locally, you could drive to their house then knock on their door. Tell the owners you saw their house at xxxx address and ask if they are interested in selling.
Ask if they are interested in selling and get as many details about the house as possible. Some things you need to find out are:
* How many bedrooms, bathrooms, garages. What is the approximate square footage? How old is the house? Does it have central heat and air? Why did they move? (These questions are just to warm them up for the important questions.)
* Is there a mortgage on the house? If so, what is the approximate payoff?
* Are there any liens or judgements against the property?
* What repairs need to be done? Estimated costs?
* How long have they owned the house?
From this information you can decide if the house is a good candidate or if you should just mark it off your list. For example:
From questions #2 & #4: What if they tell you they owe $40,000 and the house needs extensive repairs including foundation work? You know from the information in your log that homes in good condition in the neighborhood are selling for $55,000. You can quickly determine that this house just won’t work. Next!
From questions #2, #4 & #5: What if they tell you they lived in the house for 30 years and the mortgage is paid off, but it needs $10,000 in repairs, and they just don’t have the money for repairs?
You know from the information in your log that homes in good condition are selling for $55,000. Bingo! You’ve got a hot one! This has all the ingredients of a potential deal–lots of equity, a motivated seller, and a house that needs lots of work.
From question #5: What if they tell you they owned the house for one year but just couldn’t keep up with the payments? Because it’s such a new mortgage, you can determine that they probably owe about what the house is worth, and it’s not a candidate for a wholesale flip.
You are looking for houses with at least 50% equity–the more the better! So if houses in good condition are selling for $60,000, you want to find houses that have at least $30,000 in equity.
You are also looking for houses that need plenty of repairs. Sometimes you’ll be able to buy a house well below market that doesn’t need a lot of repairs, but that doesn’t happen very often.
It is the excessive repairs that will motivate a seller to sell below market because they think it will take $20,000 to fix the house, and they don’t have the money and have no way to ever get the money.
If you don’t have these two elements–lots of equity and lots of repairs, then it is unlikely that you will be able to buy far enough below market to flip the contract and make a profit for yourself.
But someone’s living in that junker
Sometimes the first sign of a motivated seller is a house that screams “Please help me!” when you drive by. Perhaps the owner is having financial difficulty and just can’t afford to maintain the house. Or perhaps that’s just the way they live. It could be a rental, and the landlord won’t put any money into fixing the house.
You’ll never know until you contact the homeowner. To do this, you can:
Knock on the door and tell the occupant you are looking for houses to buy in the neighborhood Ask if they would be interested in selling (or know someone who is). Make sure to leave a business card. If it’s a renter, try to get
the owner’s name and number.
Write down the address, look up the owner in the tax records, and send them a letter or postcard saying you are looking for houses to buy in the neighborhood and want to know if they would be interested in selling (or
know someone who is).
Look up the owner in the tax records, find out their phone number then call.
If you send a letter or postcard, you may not get a response the first time. So you’ll need to continue mailing to them every three to four weeks.
When you knock on the door, they may say they aren’t interested in selling right now. Follow up with a letter or postcard every three or four weeks. Stop by the house every once in awhile to remind them that you are still interested in buying. Leave a flyer on their door (and all the other doors in the neighborhood) saying:
I Buy Houses – Cash – Quick Close – Any Condition
If they show some interest in selling, then you need to ask the questions above to see if it is a candidate for a flip. The follow-up is VERY important. Time has a way of changing everything–even turning an unmotivated seller into a motivated seller.
Tell the world–recruit bird dogs
You can expand your farm area and not take up any more of your valuable time by telling everyone you come in contact with that you are looking for run-down houses to buy.
Tell all your co-workers, the people at the grocery store, everyone at church, your kid’s friend’s parents, your kid’s teachers, the guy that fixes your car, the people at the cleaners, the waitress at Denny’s, the people at the barber shop or beauty shop, etc, etc.
The more eyes and ears you have out there looking for you, the more deals you will do.
Hand out business cards when you tell people you are looking for houses to buy. The business card lets everyone know you are serious, and it insures they have a way to contact you when they find a house. I like to hand out pens with my www.SellYourHouseIn7Days.com URL and phone number. A pen is useful so people will keep it as long as it works. They may not save a business card unless they have an immediate need for your services.
You may even want to hand out flyers to recruit bird dogs. Leave flyers at the college, senior citizens center, local churches, the grocery store, etc.
Make sure everyone knows you pay a finder’s fee of $500 to $1,000 or more for each house that closes.
The very first wholesale deal I did was because I told my son’s best friend’s mother that I was going to get into real estate investing. I told her I was looking for houses to buy that were run down, and I’d pay a finder’s fee to anyone that found houses for me.
A few days later she just happened to overhear someone where she works talking about a house he inherited from his mother. It had been a rental and was so run down that he thought it could not be sold. She told him I was looking for run-down houses to buy. A few weeks later he had his house sold, a rehabber had a new project, my “bird dog” had $500, and I had a check for $8,000.
Get to know the mail carriers, UPS driver, and Fed Ex driver assigned to your farm area as well as people that do lawn work. These people travel all over town and can help to expand your farm area.
Research, research, research
A motivated seller is sometimes motivated because of some recent event that has happened in their lives. Many of these events, like a foreclosure, are time sensitive meaning you have a window of opportunity to act, and after a certain date, it is too late to buy the house from the owner.
Find out what the state laws are concerning these events, so you’ll know how much time you have. You can get information about all these properties at your county courthouse, tax office, or other city municipal offices. There may also be a legal newspaper where this information is posted daily or weekly.
About the Author:
Jackie Lange started her real estate investing career as a stay-at-home mom in 1994. She’s been successfully buying, selling, leasing, and investing in real estate for more than 20 years and have created a “not so small” fortune from real estate.
She’s made money with everything from a $400 mobile home to a $20 million dollar mansion to an 18,000 acre ranch and everything in between. She is creator and owner of www.CashFlowDepot.com, author of FLIP DEALS: Real Estate Profits on Steroids and Highest Bidder Sale Guide – which is unique way to make big profits with houses you don’t own.
Jackie says: “It does not matter what’s happening with the economy. There are always opportunities to make money with real estate and people will always need a house to live in. I’ve created my own economy and financial security. You can too!