There are a few ways to get started in the real estate biz.
Investors who have a capital to invest in the beginning might consider flipping houses or buying properties to rent out.
For those who don't, there is another, less traditional way to get started ... One that doesn't require a lot of money. It's known as real estate wholesaling.
Wholesaling real estate involves signing a contract with a motivated seller, then assigning the contract to another party who buys the property. A wholesaler makes money by selling the property for more than the amount they contracted for.
Wholesaling takes time and legwork, but you can make a decent profit from your wholesale transactions if you want to get started in the business without a lot of money.
Let's take a closer look, shall we?
As we already said, wholesaling is an excellent strategy if you're an investor who doesn't have much capital but wants to start investing in real estate.
Great wholesalers are good at finding sellers who are motivated to sell their distressed property, so if you don't have a lot of money to invest, you'll need to develop some sleuthing skills.
What is a "distressed" property, you ask? A distressed property is typically in need of repairs or is in danger of foreclosure. Owners of these properties are looking to get out from under their financial obligations and tend to sell quickly at a low price.
As a wholesaler, you step in and offer to buy the property. You then sign a contract with the seller, but instead of buying the property yourself, you sell that contract to a buyer.
This means you aren’t buying the real estate yourself; you’re deal hunting for a third-party purchase. If you close a deal, you receive a fee that might be $500-5,000 for each property. More significant deals come with a corresponding higher payout.
While wholesalers can sell these contracts to buyers, other types of investors make up the bulk of the wholesale market. One of the most common investor types is house flippers, who buy a distressed home and renovate it to sell for a profit.
Typically these investors are cash buyers, so the wholesaler will receive their fee much more quickly than if the funds for the purchase had to be approved by a lender first. As a wholesaler, you never buy or own the property, meaning you don’t have to worry about maintenance or repairs. There’s a minimal investment required upfront to be a successful wholesaler.
The process of wholesaling real estate is relatively straightforward: you find an excellent real estate deal, write a contract to acquire the property and charge a fee to sell that contract to a buyer. To begin real estate wholesaling, follow these steps.
Check websites where you can find listings from sellers who don’t want to work with real estate brokers. HomesByOwner and Craigslist might work for you, depending on your market. You can also send out letters to homeowners in the area, attend networking events, develop contacts in the real estate market, and advertise with signs to let motivated sellers know about your services.
Once you find a property, reach out to the owner. Find out what their situation is and explain the financial benefit of you buying their property. You may need to decide whether you'll inform the owner that you won’t be purchasing the home yourself or sign a contract without disclosing your process.
Try to determine the property value before or after speaking with the owner for the first time. Use Zillow or a realtor contact to determine how much the seller’s home is worth. To make it worth your time and effort, aim to speak with sellers who would accept about $20,000 below the home’s market value. This shows they are a good candidate for a distressed sale.
As you near the point of making a final offer, you’ll want to estimate the repairs that a potential buyer will need to make. This helps you justify the offer you make to the seller and determine your overall profit.
When you are ready to make an offer, it is important to crunch some numbers to ensure you offer the right amount. A useful formula is to calculate 75% of what the house will sell for after repairs. From this number, subtract the repair estimate and your fee of at least $5,000. The amount that is left is the most you’ll want to offer for the house.
After you get the house under contract, you have 30 days to find a buyer. Eventually, you will build a network of potential buyers to contact when you have a property to sell, but at first, you may have to do some networking, post flyers, or list the property yourself. Look for buyers who pay cash and want to close quickly; ideally, a person who buys and flips houses for a living.
The most important aspect of closing your deal is to work with a title company that understands real estate wholesaling. Look for a company that can complete a title search in a few days and put your buyer in touch with the title company early in the process. The sooner you close on the property, the faster you receive your fee.
A wholesaling business is considered an active business, not a passive activity like owning rental properties. For this reason, it is necessary to structure your wholesaling business as a limited liability company (LLC).
An LLC protects your personal assets if you become involved in litigation regarding your real estate transactions. There are also tax benefits to having an LLC because you avoid double taxation. Rather than filing a corporate tax return, you simply report your income from the business on your personal tax return. Setting up your business as an LLC can also provide a sense of professionalism and trustworthiness to potential sellers.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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