Wholesaling Real Estate Basics: 9 Steps to Quick Cash

I made $53,849 on one house in July 2005 for 3 hours of my time. It's a real estate investment property that I found through an advertisement, then called the seller, signed the contract, and sold within 20 minutes of taking possession. I did absolutely nothing to this home and only visited it twice (when I bought it and when I sold it).

If you've never heard of the term "wholesaling," let me explain. It's when you buy a home well below market value and quickly resell it, still below market value.

The advantages of this over other types of real estate investing are that it:

• Generates quick cash

• Requires little to none of your own money

• Has little to no risk

• Does not require any experience

How does it work? Here are the nine basic steps for doing your own wholesale deal...

Step 1: Make your offer

Whether you pursue FSBOs (for sale by owner) or properties listed on the MLS (Multiple Listing Service), you're never going to be able to flip a property unless you first make an offer.

In making your offer, you need to keep your customer, the rehabber, in mind. Your offer should be based upon a conservative estimate of the market value of the property after repairs minus:

• A profit margin for the rehabber

• Money for closing costs (for both buying and reselling)

• Money for holding costs

• Money for repairs

• Last, but not least, a profit margin for you, the wholesaler

Typically, I deduct the greater of 30% or $25,000 for profit, then closing and holding costs, then money for repairs, and then about $5,000 for my wholesale profit. So my formula would look something like this:

Max Offer = ARV - 30% (or $25,000) - repairs - $5,000

Step 2: Offer is accepted, sign the contract to buy

Once your offer is accepted, you will meet with the seller (if it's a FSBO) or your real estate agent to sign the contract and give them an earnest money deposit.

Step 3: Start the title work

After signing the contract, contact your settlement attorney (title company, escrow company, etc.) to start the title work on the property. They will order a title search and schedule a settlement date.

There are two reasons to start the title work ASAP.

1. First, you want to be ready to settle when you are supposed to settle.

2. Second, in the event that you find a buyer who claims to be ready to buy, you want them to be able to settle right away.

Step 4: Begin marketing to find a buyer

There are two main avenues that I use to market my properties.

1. First, I'll call the people on my buyers list to see who might be interested.

2. As I'm doing this, I will place an ad in the "Investment Properties" section of the Sunday paper.

Here's an example of an ad that I've used in the past:

Step 5: Come to agreement with prospective buyer

At some point, someone will show interest in your property. Whether you have one potential buyer or multiple potential buyers will depend upon the deal. Each one is different. The more buyers you have, the less flexible you need to be in reaching a final sales price.

Step 6: Qualify the prospective buyer

Make sure the prospective buyer either has the cash or a line of credit (ask for proof of funds if they say they do) or will be able to borrow the money from a private (hard money) lender to purchase your property.

Step 7: Sign contract with buyer & collect a deposit

After verifying your buyer's source of funds, meet with him, execute a sales contract or an assignment agreement, and collect a deposit. The sales contract serves as the receipt for his deposit.

Be sure you either handwrite or include typewritten verbiage somewhere on your contract a statement such as the following:

...and initial it once you receive their deposit. You might also include their check number or write "CASH" if they give you cash.

Step 8: Submit documents to the title company

Submit both items: the executed contract with the original seller and the executed sales contract/assignment agreement with your buyer to your attorney (title company, escrow company, closing agent, etc.) and schedule a settlement date.

Step 9: Go to settlement

Go to settlement, pick up your check, and celebrate!

An additional tip based on real life experience

When I first started, I believed everyone who signed a contract to buy a home from me. I believed everything they told me and took their word. Often, I got burned. It didn't take too many slaps in the face before I realized that I needed to take control of the entire process.

At that point, I decided to control every deal by lining up contractors, lining up the lenders, starting the title work myself through my attorney, and mandating that my buyers use my attorney.

Before taking control, I estimate that about 25% of my deals didn't settle with my first buyer. Since taking control, that percentage has been reduced to about 5%.

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