Anita is a real estate agent in Baltimore, MD that came to Akin Developers with a wholesale opportunity. She had located a house that the owners needed to sell quickly. The house needed a significant amount of work before it would be ready to sell to a family looking for a move-in-ready home. Anita was not prepared to invest the time or money in these major repairs herself, but remembered a conversation from two years ago and gave us a call.
At a real estate conference held two years ago in Washington, DC, Anita and Todd, one of our agents here at Akin, had the chance to discuss the wholesaling of real estate. Todd, who has been wholesaling for several years, explained the process to Anita and they exchanged business cards, adding each other to their professional networks. Todd assured Anita that he would be glad to work with her in the future on a wholesaling arrangement, so Anita knew just who to call to make this deal happen when it presented itself.
What Is Wholesaling Of Real Estate?
To put it simply, wholesaling real estate is buying a property at lower than market value and selling it to a buyer at a higher price. The wholesaler keeps the difference as profit. The buyer, usually a real estate investor, then takes care of maintenance and repair issues and sells – or rents – the property. Both the wholesaler and the buyer make a profit.
Why Would Someone Wholesale Their Property?
Wholesale properties are very often “distressed” properties – properties at risk of foreclosure because the owner cannot keep up with the mortgage payments. Other properties with motivated owners who are likely to wholesale include inherited property in disrepair or even a property that, while still in good standing with a lender, is just too much of a strain on a family’s budget but has issues that make it difficult to sell. Although the property owner would be paid less than market value for the property at wholesale, they would be out from under the financial strain and still walk away with cash rather than risking the chance of the property being foreclosed on and walking away with nothing.
When Anita contacted Akin Developers, she had located an inherited property. The property owner lived in Louisville, KY and, was an established business owner there, so he had no intention of moving into the inherited home in Washington, DC. He had been paying the mortgage payments on the inherited home and had paid for a few repairs to be made but had come to the realization that it was going to cost more than he could pay to fix everything that needed fixing.
In the meantime, making payments on that mortgage and the mortgage on the home he lived in, plus the expenses of his business was rapidly using up his emergency fund and other savings. So he decided, in his words, to “cut his losses” and sell the home. Unfortunately, with the major repairs needed on the home, very few potential buyers even considered the property and none of them decided to purchase.
The Wholesale Process: Step By Step
The real estate wholesale process involves more than just a property owner selling to a buyer. A wholesaler will arrange a deal with the property owner for less than market value. At the same time, the wholesaler will also work out a deal with an investor who is willing to improve the property then turn around and sell it at a profit. So the wholesaler makes a smaller profit but gets paid quickly, while the investor stands to make a larger profit but has to put more time and money into the process.
Step One: Finding Motivated Sellers
A successful real estate wholesaler will constantly be looking out for distressed properties and motivated sellers. This step usually requires, among other efforts, consistent research using various online resources. In Anita’s case, however, the owner of the property next door to the inherited property was a contractor who had previously worked with Anita and suggested the property owner contact her for help with his predicament. Although wholesale properties don’t often “fall into a wholesaler’s lap,” because of Anita’s networking within the industry, this particular property owner found Anita instead of the other way around.
Most wholesalers consistently search various sources including the MLS, Tax Assessor’s office, and multiple online real estate sites. These wholesalers will also be on the watch out for properties “for sale by owner” and will often use signs and direct mail to identify motivated sellers.
Step Two: Assessing The Property
After her initial conversation with the property owner, Anita arranged to visit the property and assess its value so she could make an offer. During her assessment, she inspected the home itself identifying necessary repairs and improvements. She also evaluated the neighborhood and recent selling prices of nearby property.
At this step in the process, a wholesaler will use certain formulas to determine what the property owner should be offered for the property. This will involve determining a starting value and figuring usually 75% of that amount. The wholesaler will also have to determine the cost for necessary repairs and subtract that amount from the 75%. The wholesaler’s fee will also be subtracted. The final sum after all of those subtractions will be the offer submitted to the property owner. This does put the offer below fair market value. But for a motivated seller, this is a quick way to get out from under a financial strain.
Step Three: Get The Property Under Contract
Once the wholesaler and the property owner agree upon a purchase price a contract will be drawn up that will also include an “assignment clause” allowing the wholesaler to transfer the contract to the investor. Once the contract is in place, a wholesaler will offer it to investors. In Anita’s case, she remembered the conversation with Todd from two years ago and knew she would offer it to Akin Developers first.
Step Four: Find A Buyer And Assign Contract Interest To Them
When Anita contacted Todd, he arranged an assessment on the property, too. Afterward, he and Anita agreed on the terms for the property and agreed on a fair wholesale fee to be paid to Anita. Since Akin Developers purchases homes in any condition and has funds available to make cash purchases, it was a quick and easy process, and a date was set for closing on the property.
Step Five: Close On Sale And Collect Your Fee
At the closing on a wholesale property, the investor pays the agreed-upon purchase price to the property owner and the wholesale fee to the wholesaler and takes ownership of the property.
In Anita’s case, a property owner who was overwhelmed and wanted out of a situation that was costing him too much time and money and frustration was able to do just that and walk away with money in his pocket. Anita made money in the form of a wholesale fee for finding the property and bringing it to an investor – in this case, Akin Developers. Akin was able to profit further down the road. Once repairs and improvements were completed, the property sold quickly.
While wholesaling is not the right choice for every frustrated or overwhelmed seller or every real estate agent or investor, it is an option that can benefit all of those individuals. But it requires a thorough knowledge of the process by both wholesaler and investor and honest communication between them and the seller. When handled correctly, all three can benefit.