Author, Serial Entrepreneur, Real Estate Investor, Stock Trader & Co-Founder of The Ligon group.
As a real estate investor, your first priority is to find a good deal on an investment. This means developing a marketing campaign to find deals.
Some of the most common marketing techniques I see investors using are: cold calling, direct mailers, and online advertising. However, there is another option available for finding discounted real estate deals that I would like to highlight, and that is through a real estate wholesaler.
What is a real estate wholesaler?
A real estate wholesaler is a person who uses various marketing techniques to find homeowners who are motivated to sell their home. Usually they are looking for properties that are in disrepair and need modernization. These types of homes are more difficult to sell on the private market due to their condition, making it easier for the wholesaler to negotiate a favorable price on the home.
Once a wholesaler has found a desired home, they negotiate a price to purchase the home and place the home under contract with the seller. However, the wholesaler has no intention of purchasing the property and will immediately market the property to other investors (known as “end buyers”) for a quick sale. The goal is to quickly sell their contractual interest in the property to the end buyer for a profit.
What a wholesale transaction looks like
Here is an example of a wholesale transaction: The wholesaler finds a motivated seller and negotiates a purchase price with the seller. For this example, let’s use $200,000 as the purchase price. The seller accepts and signs a purchase agreement with the wholesaler.
The wholesaler then sells that property to other investors (known as end buyers) at a sale price that is higher than their current purchase price. For this example, let’s say they resell the property for $210,000. If an end buyer expresses interest and agrees to the sale price, the wholesaler makes a new agreement between them and the end buyer for $210,000. Once the transaction is complete, the wholesaler receives the difference between each match. In this example, that would be a profit of $10,000.
The process of a wholesale deal as an end buyer
As a final customer, the first thing you want to do is to contact wholesalers in your purchasing area. This can be done by visiting local real estate investment associations, conducting online searches for wholesalers and joining social media groups where wholesalers post deals. Give the wholesalers your contact details and they will send you their wholesale stock. If a property meets your buying criteria, you can request more information and access to view (if applicable). If you are interested in purchasing the property, please make your cash offer to the wholesaler.
Once an offer has been negotiated and accepted
Once the final customer’s offer has been accepted, the wholesaler will send all necessary documentation. This includes, but is not limited to, the purchase agreement, addenda and joint ventures if applicable. Once all documents are executed by all parties, they are sent to the title company for review for the closing process.
The two most common options a wholesaler will choose during the closing process are closing through a joint venture agreement or closing through a double closing.
A joint venture agreement (JV) would be drawn up stating the markup amount (profit) that the wholesaler wants to make. In the example above, it was $10,000 (the difference between what the end buyer is willing to pay and what the wholesaler contracted the property for). The end buyer would enter into the original contract but agree to the JV and pay the wholesaler the JV price once the purchase is complete.
A double close is when the wholesaler performs a simultaneous double close with the end buyer and the original seller. Essentially, this means that the wholesaler enters into its first agreement with the homeowner and immediately enters into the second agreement with the final customer. If the wholesaler doesn’t have the money to close the first deal, they can use transaction financing (also known as flash funds) to close.
Transaction financing is when a third party provides a short-term loan to simply close the first transaction which is immediately repaid with the money from the second closing. The transactions can only take a few minutes to complete, so there is very little risk for either party.
If a wholesaler chooses to double close the transaction instead of using a joint venture, an additional closing fee will be charged for each transaction. Usually a joint venture is the best option as there are no additional fees or charges involved. However, with a JV, the end customer can not only see what profit the wholesaler is making, but also try to renegotiate if they feel the markup was too high.
If the wholesaler opts for a double closure, the end customer has no idea what the wholesaler’s profit is because two separate closures are taking place. The end customer is only aware of his agreement with the wholesaler. Many wholesalers will choose this option if they have marked the property with a very large spread and fear that it could cause a problem if the end buyer sees the profit margin.
As someone who has been an end buyer of wholesales, I know how this can be an excellent stock source for seasoned investors looking to add properties to their portfolios. Wholesale real estate can also be a lucrative business practice for new investors. However, it is important that all parties involved do their due diligence to ensure they are happy with their position in any deal.
Since each state also has its own rules and regulations for how a real estate transaction should be handled, research the laws in your area before buying, selling, or wholesale selling a property.