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Wholesale homes is one of the easiest ways to start your career as a real estate investor. You can start with limited knowledge of real estate, and with advancements in technology, you can wholesale virtually anywhere.
What is wholesale and what do wholesalers actually do?
As a wholesaler, your goal is to find a motivated seller and to negotiate a favorable price for their accommodation. Once you have signed a purchase contract between you and the owner, you will attempt to sell that contract to an “end buyer”. The final buyer or the cash buyer is the investor who will ultimately close the property.
There are three basic steps for all wholesale transactions.
1. Find a motivated seller
In the first step, the wholesaler must find a motivated owner to sell his house. Motivation is a key part of the wholesale process because it allows the wholesaler to negotiate a favorable price for the home. This is imperative because the whole wholesale process relies on the wholesaler selling the house to a cash buyer for less than current market values. The wholesaler needs to negotiate a deal good enough that they can add their profit to the price and continue to sell it as a discounted property to an end buyer.
Finding a motivated salesperson can be a difficult task. Normally, this requires a calculated marketing campaign focused on a variety of issues that a quick sale would solve. For example, a wholesaler may target homes that are inherited and require major repairs. These private owners would not necessarily be able to sell this type of house on the open market. Most retail buyers aren’t looking for homes in need of repair, and most banks won’t lend for this type of home, making this a perfect home for a wholesaler.
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2. Negotiate the agreement
In the second step, the wholesaler will negotiate a purchase price with the owner. The supply can not only be low enough for the wholesaler to sell it to an end buyer, but they must also add extra money to make a profit. Here is an example of a wholesaler’s offer:
Let’s say the current market value of a “turnkey” (ready to move in, no update needed) the house is $ 200,000.
A wholesaler should calculate repair, renovation and rehabilitation costs as well as transaction costs (closing costs, etc.). They should also include their profits and the possible profits of the investor.
The process may look like this:
- Market value of $ 200,000
- $ 40,000 for rehabilitation, transaction, etc.
- $ 40,000 profit for the end buyer after rehabilitation
- $ 5,000 wholesaler profit
- $ 115,000 may be the wholesaler’s offer to the seller.
If the seller accepted an offer of $ 115,000, the wholesaler would attempt to sell the house to a buyer for cash for $ 120,000. If successful, the wholesaler would make a profit of $ 5,000.
This example is a very simplified version of the calculations required to make an offer. However, it should help to understand the process.
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3. Find a cash or end buyer
In the third step, the wholesaler must find a cash buyer – also called an “end buyer” – for their transaction. As a wholesaler, you don’t intend to close the deal. Your job is to put the property under contract and sell it to an end buyer. A final buyer or a cash buyer is the investor who will close and finance the transaction. The reason they are called cash buyers is that they must be able to buy the house for cash. This will avoid the involvement of a financial institution in the transaction.
When a financial institution is involved (i.e. a bank or a credit union), there are several requirements for the lending process. Appraisals and inspections are required to get a loan to buy a home. Most financial institutions will not provide loans for homes in need of major repairs. Therefore, in order to avoid problems, wholesalers only sell houses to cash buyers.
Many very successful real estate investors have started as wholesalers. As a wholesaler, you will be able to learn how to invest in real estate with very little transactional responsibility. This is important for newcomers, as simple mistakes can get very expensive. The wholesale process gives you the opportunity to learn while earning.
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