Your exit strategy is an extremely important part of your real estate investing business. In fact, it is one of the most important parts. Sometimes investors get excited because they learn how to buy properties, they find them and they have the money lined up to purchase them, and they do, But when they get them, they have no idea what they plan to do with them.
You must know your exit strategy when you buy. What do you plan to do with the property? Knowing this allows you to make all types of decisions, from how much to offer, to what kind of financing to us, and more.
What is Wholesaling?
It is simply finding a bargain property and passing it on to a bargain hunter. That bargain hunter will be an investor who will either purchase the property to resell it or purchase it to hold it for rental income. Your profit as a wholesaler should be between $5000 and $15,000 on each house. In some cases it will be higher than $15,000 and on some deals your profit may be a little lower than $5,000. Why wholesale?
Real estate investors choose to wholesale properties for a few reasons. They could be:
Quick cash – it is possible to turn a property around anywhere from 7 to 45 days and get cash in your pocket. If you need to get your hands on some cash quickly, this would be a reason to wholesale. Or, you may not need the cash immediately. You might just want to build your cash reserves. Wholesaling is a good way to do this quickly.
Too many houses – maybe you’re good at finding houses, but you find more than you need or can use at any given time. If this is the case, wholesaling is a smart move for you. You can still profit from your locating skills, even if you aren’t going to keep the property for your personal portfolio. Flexibility – at any given time, you can determine whether you want to keep a property or sell it. This gives you flexibility as you locate and purchase properties.
An important fact to remember:
Probably the most important thing that you need to remember when you decide to wholesale is, your buyer should get the majority of the profit! This is important because your buyer will be the one to purchase and rehab the property. There has to be enough room in the deal for your buyer to do this and still retain a nice amount of money for cash out and/or equity.
This does not mean that you find properties and give them away for $1,000. If you did that, you would be a bird dog, not a wholesaler. Your profit will vary depending on the house, but the better you are at locating properties and putting together offers, the greater your profit will be – while still maintaining an excellent profit for your buyer.
Keys to Successful Wholesaling
There are several things that you can do to ensure a successful and profitable wholesaling business. We will discuss those now.
Consistent source of properties – Earlier in the program, we discussed several ways that you can locate properties. If you want to make wholesaling your main business, you will need to make sure you have a consistent source of properties. For instance, you may develop a relationship with a probate or divorce attorney, who knows a continuous stream of people with houses to get rid of. You may even develop a relationship with someone at a bank that works in the REO (real estate owned) department. These are the properties that the bank has had to take back due to foreclosure. However, you decide to find them, you need to make sure that you have a consistent source.
Your buyers list – If you decide to wholesale, you must develop a strong buyers list. This will allow you to locate properties with the assurance that you can move them. Even if you only wholesale properties occasionally, it is highly recommended that you have a buyers list built up. As we previously discussed, there are several ways that you can market to build up your buyers list. Two of the easiest ways to do this are to place ads in the paper and to advertise at REIA’s. You may even put out roadside signs to attract buyers. You should think of your buyers list as money in the bank. A good list will make it a lot easier for you to move properties. You will also feel more confident getting the properties, knowing that there are people ready to purchase them from you.
Good properties at good prices – Again, we are building on what we learned earlier in the program. You want to make wise choices when you look at investment properties, including when you wholesale.
Even though you are not going to keep the house, you still need to make sure that it is a good house in a good area at a good price. You can get 2BR 1BA houses at cheap prices all day long, but do you really want to? We would say no, unless the house is so cheap that your buyer could add an extra bedroom with little trouble. But even then, we wouldn’t recommend it. You always want to go the path of least resistance. Don’t get the houses with the weird floor plans.
They shouldn’t be too small or have any type of structural damage. Most investors do not want to take on rehab projects of more than $15,000 – $20,000, especially if they are just starting out. If you find a good deal that requires an intense rehab, you will probably want to save that one for yourself or pass on it altogether. And again, you need to make sure that the price is right. There should be enough room in the deal for your profit, your buyer’s profit and the rehab funds. Your profit will vary depending on the deal, however, to make it worth your time, you should shoot for a minimum of $5,000 per deal. Of course, this will vary by property. Review your buying formulas for wholesaling properties. Remember -wholesaling is not illegal flipping. You never want to artificially inflate the value of a property.
Relationship with your closing attorney – Typically, your lender will choose the closing attorney. However, this does not stop you from developing a relationship with them as well. In fact, if you work with the same lender a lot (for your purchases or your buyer’s), you will find yourself in that closing attorney’s office quite a bit of the time. Learn the culture of the office. How does it run? What are the personalities of the staff? What are their names? How do they like to do things? You will find that all closing attorneys are different. Some are more laid back while others are more uptight. Some will accept documents and requests faxed from you, while others want them directly from your buyer and/or your lender. The key is to find out how to best work with them so that your deals run smoothly. Find out what you can do to make things easier on the staff to bank some goodwill, you might need it on a bumpy deal!
Relationship with your contractors – Although they tend to get a bad rap, it is entirely possible to find a good contractor and to develop a relationship with him. You may have to go through several contractors to do this, but it is possible. Your relationship with your contractor is important, because you need to be able to count on the quality of the work and the prices at which it can be done. Even if your buyer uses their own contractor, you should have someone that you can bid the jobs and that you can recommend. Their prices should be in-line with those that you have found to be fair and reasonable in the market place and their quality should be the same. If you are recommending your contractor out, do your best to make sure that this person is reputable, fair and does quality work. There is no guarantee in this, we have come across some duds ourselves! But always do your due diligence. Check with references and view jobs that they have already completed. And always be on the look out for more contractors. You can never have too many good ones!
Relationship with your appraiser – Your appraiser will also be one that is approved by the lender. This is good for both you and your buyer. You always want to make sure that your values are as accurate as possible. The appraiser will make sure of that. Again, it is worth your time to develop a relationship with the appraiser. When you do this, you will be able to get them to verify values for you. This is important if you are unsure about an area and need to make a quick decision. A lot of the knowledgeable appraisers can tell you values off of the top of their heads. This is very valuable for you. You also want an appraiser that will get the appraisals completed quickly. There is really no reason to wait more than 3 or 4 days for an appraisal. If an appraiser has you waiting longer than a week, you need to look for someone else. Most lenders are amenable to trying out new appraisers, if there is justification. If you are having problems with them, they probably are too. The good thing is, there are a lot of appraisers out their with experience appraising investment properties.
Relationship with your private lender – this is of paramount importance, for both your purchases and those of your buyers. One of the most important things that we have learned with wholesaling is – You must approve your buyer’s lender. If possible, you should require that your buyer use only lenders that you approve. This is important because the lender can literally make or break your deal. You need to know what areas the lender likes, what types of houses, how much money they have and how quickly they can close. It is not heard of for a lender to approve a house sight unseen and then change their mind when they go to see it the morning of closing. Lenders can run out of money. They can have as many stipulations as a conventional bank. We have seen all of this happen before and it is not fun. You need to control this part of the process. Then, you can be assured that the deal will close when it is supposed to. You should work with a lender who appreciates your business and makes you a priority.
Know your closing requirements – These requirements typically depend on the lender, but you should know what you need ahead of time. This will allow you to close quickly and easily. You may begin securing some of the documents as soon as you lock down the house. Some typical requirements are: appraisal, title insurance, survey, and builder’s risk policy.
Marketing – The entire last lesson was devoted to marketing. That’s how important this is. Market, market, market!
Integrity – In business, as in life, it is so important to have integrity. Simply put, you need to do what you say you are going to do. Everyone that you work with should be able to count on the fact that you are good to your word. In wholesaling, there are a lot of things that are out of your control – which it why it is so important to be careful of who you decide to do business with. But, always do what you can and people will want to do business with you. Remember, good news travels fast, but bad news travels faster.
Whether you decide to make wholesaling your main business or a part of your business, it is a good option for you!