A few years ago my husband walked into the kitchen hot and bothered about a way to invest in off-market real estate called Wholesaling. He had learned about this from John Lee Dumas’ Entrepreneurs On Fire podcast.
Before this we both thought that the only way to buy real estate was through a licensed Realtor. We had no idea that there was a system in place for discount off-market properties. That is what I have promised to share with you so share I will! Real estate is our main form of Nest Goose investing in our house so I want to share how we do it.
Wholesaling is when one investor finds properties that would not do well on the open market and sells it to another investor, most of the time for cash. The wholesaler is the middle person. This benefits the seller because they can find a quick cash sale for their properties, and the buyer because they find off-market deeply discounted properties. The wholesaler usually takes a flat fee.
I had a lot of questions about this and you probably do too. Let me take you through the ones I had:
Why would someone decide not to list their house with a Realtor?
Realtors are great most of the time. But buying a house takes forever, especially with traditional bank loans, and Realtors take an average 6% commission on the sale. In certain circumstances, that does not make sense.
For instance, what if a seller inherits a property and lives out of state? They cannot maintain it, show it, or pay taxes on it so they need to sell it quickly. What if someone has back taxes and liens on the property and wants to get out from under it as fast as possible? I’ve even heard a story about a guy who had some weird sex chamber in his house and that is why he didn’t want it shown by a Realtor. To each his own. An investor will not care. An investor will rip that stuff out, fix it up respectably, and sell it to an unsuspecting buyer on the open market.
Discounted properties are hard to come by but a wholesaler knows how to find people who may be in over their heads and match them up with the right investors.
What is the discount on these properties?
Usually the buyer gets the property at about 60 percent of open market value.
Isn’t the wholesaler illegally acting as a Realtor?
No. It is illegal to sell real estate that you don’t own without a real estate license. The wholesaler does own the properties that he/she sells, even if for a short amount of time. They can sell you the property that they have purchased outright or they can sell you their contract to purchase a home, which means they assign their purchase agreement to you.
If the wholesaler does not own the house and is trying to sell it to you on behalf of the seller, yes that is illegal. But that is not what this is.
What condition are these homes in?
It really depends. Sometimes they are total crap holes. I’ve seen some stuff. I don’t recommend doing major rehabilitations on properties unless you have an awesome contractor and lots of time to learn this skill.
Other times, wholesalers will have what is called Turnkey properties to sell to busy investors. That means your renter can live there right away because it is in good shape. This is probably what you want.
For novice investors, I recommend seeking out turnkey investments. A wholesaler may sell it to you at a discount with the caveat that it needs $10,000 worth of work. They will have a contractor ready to do that for you and since you’ve saved so much on a Realtor and the property itself, that work should not be a burden. Then they will point you to an awesome property manager and you will have been in good hands from start to finish.
How do I find a wholesaler?
A good wholesaler has a web presence. Some of them also have Facebook ads. If you Google the name of your city plus Wholesaler, you can start to find some. You can also join local Meetups for real estate investors. My husband and I own most of our turnkey properties out of state so this is exactly how he found the wholesalers that sold us our properties.
My husband does some wholesaling of his own in New Jersey and works with wholesalers around the country. If you want to learn to do this yourself, I can point you in that direction but that is not my expertise. I manage the investments once we’ve got them. I don’t find them.
How do I know if any given house is a good deal?
Do I have a spreadsheet for you? You know I do.
You want an investment with a cap rate of about 9-11%. Higher than that is even better! This is your return on a cash investment. If you are using a bank, your cap rate will be lower because you are also paying interest. Let’s talk about that another day.
Your cap rate is what you make on this property per year, with 40% deducted for taxes, repairs, and possible vacancy. This is a conservative estimate for these expenses. Now you divide that annual net operating income by your initial investment and see what your cash is doing.
What about property management?
Yes! You need that. You should NOT manage your property yourself! A property manager is the best investment we make each month! A good one will be strict about vetting renters, collecting rent, and keeping the house in tip-top shape. In my experience, they typically charge 10% of the rent or $100, whichever is highest. They are oh-so-worth-it! If you don’t know how to fix broken toilets or accept a credit check, hire a good property manager and then just collect rent checks. Trust me on this one.
Note: Property managers are required by law to be licensed real estate agents. Verify that before you hire one. Also, ask for referrals from other investors.
What if the house doesn’t appreciate?
Who cares!? Smart real estate investors do not invest for appreciation. Never! That’s how you get burned. You should invest for cash flow. Buy and hold people. Keyword: hold. As long as the house is renting consistently, who cares what it is worth on Zillow?
What kind of properties should I look for?
Depends on your comfort zone. We are comfortable with single family homes. My father likes condominiums and small apartment buildings. You’ll have to decide what you are comfortable with but single family homes are a good place to start.
How do I work with a Wholesaler?
A wholesaler will put you on their mailing list. If they get a good deal, they will mail it to the investors that they know are looking. If you see one you like, put the purchase price into my spreadsheet and estimate the monthly rent using Rentometer.com. If the numbers work for you, buy it!
Well yes, we have to talk about how to manage your cashflow but this post is already long in the tooth. We’ll do that another day. Meanwhile, do you have questions for me? Fire away!