“I never lost money by turning a profit.” – Bernard Baruch
The $53,849 is what I made on one house in July for three hours’ worth of my time. I found it through an advertisement, called the seller, signed the contract, and sold it 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” in terms of real estate, let me explain. It’s when you buy a home well below market value, and quickly resell it – still below market value – to someone who plans to rehab it and then resell it himself. The advantages of this over other types of real estate investing are that it generates quick cash, it takes little to none of your own money, there is little to no risk, and no experience is required. And how does it work? Here are the nine basic steps that are involved:
Step 1. Make your offer.
Whether you pursue FSBOs (For Sale By Owner properties) or properties listed on the MLS (Multiple Listing Service), your offer needs to be made with your customer, the rehabber, in mind. It should be based upon a conservative estimate of the market value of the property after deducting closing costs, holding costs, and money for repairs. It should also include a profit margin for the rehabber and a profit margin for you, the wholesaler.
Step 2. Sign the contract to purchase the property.
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, closing agent, 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. First, you want to be ready to settle when you are supposed to settle. Second, in the event that you find a buyer who claims to be ready to buy, you want 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. First, I call the people on my buyers’ list to see who might be interested. As I’m doing this, I place an ad in the Investment Properties section of the Sunday paper for the upcoming weekend. Here’s an example of an ad that I’ve used in the past:
*Fixer Upper* 123 Main St., $80k comps, only $40k (xxx) xxx-xxxx
Step 5. Come to an agreement with a 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. They’re all different. The more buyers you have, the less flexible you need to be in negotiating 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 a contract with your buyer and collect a deposit.
After verifying your buyer’s source of funds, meet with him, execute a sales contract or an assignment agreement with him, and collect a deposit. The sales contract serves as the receipt for his deposit. Somewhere on the contract, either handwrite or include typewritten verbiage that states: “Received $[insert dollar amount] as an earnest money deposit on [insert date].” Initial this statement once you receive the deposit. You might also include the buyer’s check number or write “CASH” if he gives you cash.
Step 8. Submit the executed documents to the title company.
Submit both documents – 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! One more thing you need to know … When I first started in this business, 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. However, it didn’t take too many slaps in the face to realize 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% of my deals.[Ed. Note: Stephen Cook is an author and active real estate investor. He specializes in the wholesaling and rehabbing of properties for profit.]