Why I Recommend Wholesaling For Beginners

New investors are drawn to wholesaling. Wholesaling is the one area of real estate where most new investors gravitate to. You can start wholesaling without having and cash or credit and it appeals to people who need to make more money and it also appeals to people who don't have money. 

So it appears to be very easy. The concept of wholesaling is very straightforward. You make an offer to buy a property, get an executed contract, and then assign the contract to another investor. That investor is the one who is going to close on the house, fix and flip it or turn it into a rental or Airbnb. 

But wholesaling is not for everyone and it's not the only place to start out as a new real estate investor. For example, when my student Andy came into my real estate training program, he was adamant that he wanted to learn how to wholesale. When I asked him why he wanted to learn how to wholesale his answer was so that he could "quit his job and flip houses for a living".

But he had a good corporate job with a Fortune 500 Company, he had a good salary, and he had health benefits, stock options and a 401k. He also had good credit. And he was young (only 27). I suggested that he consider buying and holding rental properties and learning how to implement the Buy, Repair, Rent, Refinance Method. It took around 6 months for me to persuade him that this is the strategy he should pursue (instead of wholesaling). And it has worked out very well for him. Now, 7 years later he has North of 2 million in equity and is making $80,000 a month in income from Airbnb (he has 10 Airbnb's). 

He was able to quit his corporate job, and he makes his income full time from real estate. But he doesn't make his income from wholesaling. So there are multiple ways to make income from real estate, and they are not all from wholesaling which is a perception that I see a lot of beginners gravitating towards.

Another thing I often see is when I give new students a choice of which area of real estate they want to focus on. I give them a choice and ask them to pick one of these: 

1. Wholesaling
2. Buying rentals
3. Fixing and flipping
4. Buying Airbnb's

Everyone answers that question the same way. They say "I want to learn all of them". And when pressed further they say that they want to learn how to wholesale to make money, and then after they are making money, they want to learn how to fix and flip houses and then ultimately buy rentals. But if your ultimate goal is to own rental properties, why not focus on that goal and buy rentals? 

Wholesaling and learning how to be a deal finder is a great way to start for new real estate investors. But in order to wholesale and get a house under contract, you have to understand the product (houses). You need to now how much you would be willing to pay to buy a specific house. And the way you do that is by knowing what the house is worth fixed up (we call that ARV). You also need to know how much it will cost to repair the house, and the maximum amount you would be willing to pay. We call that "Maximum Offer Price". 

If you knew for a fact that I would buy a house for $100,000, and you offered a seller $90,000, then you would know that you could make $10,000 flipping that house to me. So the key variable is what would an investor like me pay to buy that house? The beauty of wholesaling is that if you can learn how to get houses under contract at a discount, you can flip those houses to other investors without risking any of your own cash or credit. That is very appealing. There is no risk for you. There are other benefits to wholesaling too. For example, as a wholesaler, your lifestyle is very flexible. You don't have to work if you don't want to. Andd you can take a vacation whenever you want to.

As a wholesaler all you have to do is make offers on properties, get them under contract, and then flip those contracts (assign them) to other investors. The issue is that many late night TV infomercials, online Webinars, YouTube Videos etc. make it seem so easy like there is nothing too it. And that is not true. 

In a way wholesaling is very easy. For example if I search the site www.hubzu.com and I find a property, and I bid on it and win the auction I will get an email from them with a contract to sign. If I sign that contract then I know have a house "under contract". I can then put that house out on my daily email list to my cash investors. If I paid $150,000 for the house I can easily put it out on my email list for $179,900. And if someone offers me $170,000 then I just made that spread. I just made that profit. 

If you reviewed how long that took, me, logging into Hubzu, finding the property, bidding on it, and signing the contract, it could be less than an hour of my time. But yet the profit could be $20,000. So from that perspective it is easy and it is very profitable. In fact, wholesaling is the highest profit potential per hour that I know of. Even brain surgeons don't make $20,000 for an hour of work. 

But the key thing to understand is that in order to bid on properties, you need to KNOW HOW MUCH TO BID. And to know how much to bid, you would need to know what the house would be worth fixed up, what it would cost to repair it, and the maximum amount that you would be willing to pay. 

As an example, today we had a seller call in with a flood damaged house that he was looking to sell. His asking price was $330,000. His goal is to sell the house for cash and to walk away and keep the insurance money. The ARV on this house (what it is worth fixed up) is $450,000.

as an investor (or a wholesaler) you need to instantly know what an investor like me would be willing to pay to buy this house. 

As a wholesaler, theoretically you could make offers on properties by offering really low like say 50% of the Zillow Estimate. Eventually you would find a seller who is so desperate and motivated to sell that they would sell their house to you. And you could flip that house to an investor like me and make a profit. But you would NOT be a real estate investor because you would not understand your product (the house). 

I teach my real estate students to become "Complete Real Estate Investors". I teach them to understand what the house is worth, what they could sell it for, what it would cost to repair, and the maximum amount that they should be willing to pay to buy it. The reason I teach it this way is because many of my students may start out as wholesalers, but ultimately they want to buy and own rental properties. 

When you understand the numbers, and you know what a house is worth fixed up, and you know what it would cost to repair the house, then you can very easily assess how much you would be willing to pay for it. For example with the flood damaged house that I mentioned above, with an ARV of $450,000, I can do some basic math and see that $330,000 would never make sense. As a beginner you might think there is a $120,000 profit potential and why would that not make sense? 

I will break it down for you The house is 1,600 square feet under air. If it cost me $30 per square foot to renovate the interior of the house that is $48,000. If the house needed a new roof that is another $20,000. That is already $68,000 in repairs, and we have not yet factored in the exterior of the house, Air Conditioning, Fences, Landscaping or anything else. We also have not factored in holding costs like monthly interest payments, the cost of the monthly water and electric bills, mowing the lawn, insurance, property taxes and any other expenses.

So basic math purchasing at $330,000 and spending $70,000 in repairs would put my cost at $400,000. To sell that house at $450,000, if you did not have a real estate license could be 6% in commission and 3% or 4% in closing costs. Let's round that up to 10%. That works out to be $45,000 off of the $450,000 sales price (assuming we could sell it at $450,000).

That would net us $405,000 on a $400,000 investment. And this does not even factor in interest payments, holding costs, insurance, property taxes, mowing the lawn and paying the water and electric bills. So clearly there is no profit potential for an investor to buy this property for $330,000.  

If your goal was to make $50,000, fixing and flipping this house then your offer would probably need to be around $260,000 for the numbers to make sense.   

I see many wholesalers that just throw a number out there when they talk to seller. They often offer too much because they don't understand all of the costs involved in rehabbing a property. And these same wholesalers always end up cancelling the contract when they cannot flip it to another investor. 

When that same seller talks to me, and I offer way lower (say $260,000) initially the seller will usually reject my offer. But what will happen is that he will sign a contract to sell his house to a wholesaler, and then that wholesaler will ultimately cancel the contract when they realize they offered too much.

That seller will then reach out to other wholesalers and people who mail him postcards and the process will repeat itself. Those wholesalers will cancel on him as well. At this point the seller will be really frustrated (and sick of wholesalers). If a significant period of time passes, like 3 or 6 months, the seller might get very discouraged. At this point he will be much more agreeable to selling at a lower price and he may agree to sell it to me for my offer price of $260,000.

The ability to close is very powerful. 

If the seller comes to me and says I will sell it at $260,000 and I agree then I will close. I won't haggle. I won't reduce him. I will just close like I said I would. And when I close I have more options. I can close on it, put a lockbox on it and list it on the MLS. I can also do basic repairs like fix up the drywall, do the flooring and paint, and then list on the MLS. The third option is I could do a full remodel, and then list the house on the MLS.

A lot of wholesalers, are making offers on the same properties that we are bidding on. This makes sense because if we are mailing postcards and the wholesalers are mailing postcards, then the seller may call both of us. Or the seller may come to one of my websites from a pay per click campaign and fill out a form (like this flood damaged seller did). 

And when the seller speaks to these other wholesalers, I know they will offer more than me. I also know that they will probably cancel.  

But when that same seller speaks to me he knows I will close. This is very powerful.

As an investor you have to be willing to stand your ground. You have to know what your maximum offer price is and if you get it then you need to close. 

One tactic that works well to beat out wholesalers is I tell the seller that I will buy the house with $10,000 deposit and zero inspection period. I tell the seller that other wholesalers will only want to put $1,000 down and will want to have at least a 7 day inspection period. 

I tell the seller to make sure if he signs a contract with someone, that they put down at least $10,000 and that there is no inspection period. That beats out the other wholesalers. 

Learning how to wholesale is a great skill set to learn. If you are starting out as a brand new investor I recommend that you start out as a deal finder. Why? because if you get a house under contract, and you try and flip it to an investor like me, and I don't want to buy it then you learn something. You learn that your offer price was too high. There are way too many amateur wholesalers out there who don't really understand the costs of rehabbing because they have never rehabbed a house before. 

This is why I teach my students to be complete Real Estate Investors. Learning how to wholesale is a great way to start out. I teach wholesaling at my Wholesaling Real Estate Boot Camp. Our training also includes a "Partnership Program" which shows you how to flip a house to one of our investors if you don't have any cash buyers and how to get it funded. Wholesaling is a great place to start. But learning how to wholesale is just the beginning. If you take the time to learn ARV, Comparable Sales and Repair Estimates, then you know where you would be comfortable buying and closing on a property. When you understand that you become what I call a "Complete Real Estate Investor"   

To learn more about the Wholesaling Real Estate Boot Camp visit: https://www.lexlevinrad.com/distressed-real-estate-boot-camp/

To learn more about my real estate training programs please visit my website at https://www.lexlevinrad.com or call my office at [phone]. 

Enjoy the podcast!