What is wholesaling and why are so many real estate investors talking about it?
More importantly, how can you start a wholesaling business of your own?
That’s what we’re going to cover in this guide.
We’ll explain what wholesaling is, why it’s a viable business model (lots of investors have built 7-figure businesses through wholesaling!), the pros and cons of it, and even 5 steps to building your own wholesaling business.
Let’s dive in!
What is real estate wholesaling?
Wholesaling in real estate when a real estate investor contracts a home with a seller and then flips that contract to an interested buyer. Most often, wholesalers play the middle-man between people who want to sell their homes quickly for cash and other real estate investors who are looking for good investment properties.
Still a little confused?
Let’s walk through a common example of what this process looks like.
As a wholesaler, imagine that you find people who want to sell their home quickly for cash because their property is in disrepair and they don’t have the money to fix it up and sell on the MLS through a real estate agent.
After examining the home and estimating the cost of repairs as well as its ARV (after repair value), you make the following calculations.
- The home’s ARV is $200,000
- The cost of repairs is about $30,000
Knowing that you’re going to flip this property to a real estate investor who will also want to make a profit, you use the 70% rule (which states that a house flipper should only pay 70% of a homes ARV minus the cost of repairs) and determine that your buyer will likely only want to pay $110,000 for the property.
Wanting to make $10,000 as a wholesaler (the middle-man), you offer the sellers $100,000 cash. They accept, you put it under contract, and then you flip the deal to an investor who buys it for $110,000.
$10,000 goes to you and $100,000 goes the homeseller.
To be clear, you never actually own the home as a wholesaler — you simply put it under a legally binding contract that requires the seller to sell to you for a certain time period and then you flip the property to a cash buyer.
You might be wondering why a homeseller would sell their property to you instead of selling it for more money on the MLS. Some of the top reasons are…
- The property is distressed and the sellers can’t afford to fix it up.
- The sellers are going through a difficult situation (divorce, bankruptcy, poor health, etc) and just want to sell quickly.
- The sellers have a lot of equity and just want cash fast.
- The property was inherited and the new owners don’t have time to sell it the traditional route.
Those are just a few reasons.
You might also be wondering why cash buyers would work with a wholesaler rather than just finding their own deals.
The answer is that finding deals is difficult. It requires time, good marketing, sales skills, and data management.
Many real estate investors don’t have the time to find their own deals and have no problem with getting them through wholesalers, even if it means $10,000 less in profit.
Is real estate wholesaling a viable business model?
Yes. It definitely is.
The business model can be very profitable and scalable if you do it right, which we’ll talk more about here shortly.
The Pros and Cons of Wholesaling Real Estate
What are the pros and cons of wholesaling real estate? Let’s walk through the main ones.
Pros of Wholesaling Real Estate
- Low cost to get started. You can start by spending just a couple thousand dollars on mailers to find your first deal.
- Learn about real estate investing. As a wholesaler, you’ll get to learn the ins and outs of real estate investing without investing hundreds of thousands of dollars.
- Great ROI. Wholesaling offers an awesome return on investment. If you market well and have good data management, then you can make $5,000 to $50,000 per deal. And most deals only take a few weeks to close on and a couple thousand dollars in marketing costs.
Cons of Wholesaling Real Estate
- Unpredictable income. This is true of any type of business. When you start, as you’re learning to ropes, you’re probably going to have less predictable income than you did at your W2 job. But that’ll even out as you create good processes for managing your data, generating leads, and closing deals.
- Doesn’t build net worth. Wholesaling is a great business model for generating revenue quickly, and you can turn that revenue into longer term investments down the road, but wholesaling itself isn’t going to increase your net worth.
- Requires good processes. Since wholesaling requires you to consistently generate leads, find motivated sellers, negotiate terms, and close deals, growing a wholesaling business depends on having good internal processes. The more automated and systemized your business is, the easier it’s going to be to grow.
How To Build a Real Estate Wholesaling Business From Scratch (5 Steps)
Now let’s talk about how you can build a wholesaling business from scratch.
Step 1. Identify a Profitable Wholesaling Market
The first step is to decide where you want to build your wholesaling business.
Ideally, you’ll want to operate where there’s a good amount of people who are buying and selling real estate. The good news is that almost any city will work… because where there’s a city, there are people who want or need to sell their home quickly for cash.
If you’re in a very rural community, then you might consider moving to a city or pursuing virtual wholesaling (here’s a guide from Mashvisor about how that works).
Just remember: the bigger the city, the more opportunity there is for wholesalers.
However, state laws matter as well. Some states make it easy to wholesale while others place stringent restrictions.
So you'll want to consider your local regulations. If there's not much opportunity for wholesaling in your local market, you could always build a virtual wholesaling business!
Step 2. Create a Lead-Gen Marketing System
Wholesaling requires a consistent flow of leads.
When you’re not generating leads, you’re not closing deals. And when you’re not closing deals, you’re not making money.
For your first deal, you can just send a few thousand mailers, find a buyer, and close the deal to get familiar with the process.
But if you’re going to wholesale real estate over the long-term, then you need to have a process for generating leads. The less work it requires and the more systematic this process is, the easier it’ll be to scale.
Here’s what this means practically…
- Send Mailers Every Month — Direct mail is by far the most common way that wholesalers generate leads. You can send mailers to eviction, probate, divorce, pre-foreclosure, absentee owner, and other relevant lists. But you’ll want to do this consistently (every month or every week) to keep the flow of leads coming.
- Build Your Online Presence — Your job is to attract a many motivated sellers as possible. In 2021, having an online presence is an important part of that. Create social media profiles for your business, build a website, and even consider running Facebook Ads and Google Ads.
- Skip Trace High-Value Records — Finding contact information for your prospects can be challenging. But skip tracing (a process that was previously used by the government and bounty hunters to find criminals) is a great way to find phone numbers for your prospects. Here’s our full guide to skip tracing (it’s easier than you think).
- Use Other Marketing Tactics — There are a lot of other marketing tactics you might consider trying, such as cold calling, driving for dollars, and even getting your website to rank in Google for high-value phrases. Whatever you decide to do, put your time and money toward whatever is generating the most deals and remember to be consistent.
- Answer The Phone — This might sound obvious, but answering the phone when it rings is super important for making the most of the leads that you’re generating. When someone calls, you need to be available, even if that means hiring someone to take calls during your off-hours.
Step 3. Create a Ninja-Focused Follow-Up Process
Here’s something that most people won’t tell you.
80% of your deals will happen during the follow-up process.
Since you’re offering less than market value for people’s homes, many people need time to think about and consider your offer. They need to talk about it with family members and they need to remember the problems they’re experiencing by not selling.
That takes time.
This means you need to have an effective and efficient process for managing your data, gauging your lead’s level of interest, and following up with promising prospects.
Here are some practical tips…
- Identify Your Most Promising Leads — Not all leads are created equal. Some people aren’t interested now and they’ll never be interested. Other people want to sell within the next couple of weeks. And still others will take a little bit of convincing. In REISift, you set the status of records and tag your leads to fit your system. You can also organize and filter leads based on a smorgasbord of factors, including custom tags, phone tags, county, zip code, list stacking, and property parameters (such as absentee, vacant, DNC, and previously skipped).
*A small sample of REISift’s versatile data filtering system.*
- Follow Up For 12 Months — It can take a long time for people to make a decision about selling their home to you. That’s why we recommend following up for at least 12 months. Near the end, you might only be making contact once every 3-6 months, but it’s still an important part of the process. You can use a tool like InvestorFuse to track your follow-up with individual prospects.
- Use Multiple Mediums — You don’t need to just follow up by calling prospects on the phone. You can also text, email, and send direct mail. To make your follow-up system a little less abrasive, we recommend alternating between all of these different mediums.
- Re-Skip Updated Data — You might skip trace a record now and come up short. But online databases are constantly being updated with new information, so make sure that you re-skip promising records every year or so (REISift will record every time you skip a record, so this is super easy to do).
Step 4. Close Deals
As often as possible, you want to turn your leads into deals.
A deal is where you make the real money. This is where you sign a contract with a seller, flip the house to a cash buyer, and make what’s called an “assignment fee” in the middle (which is usually a 5-figure number).
Here are a few things you need to have in place in order to consistently be turning leads into deals.
- Buyers List — Finding motivated sellers is what wholesalers put the bulk of their time into doing, which is good, because that’s the most difficult part of the process. But you also need to have a list of loyal buyers to flip those deals to. So don’t neglect this part of the process. You can check Craigslist, go to auctions, and network in your area to find cash buyers.
- Sales Savvy — Wholesalers spend a lot of time on the phone talking to buyers and sellers. You’ll need to become familiar with this part of the process and comfortable will selling and negotiating. Secrets of Closing The Sale is a great book by Zig Ziglar.
- Mathematical Expectations — As a wholesaler, it’s extremely important to have realistic and mathematical expectations as to how much your cash payer will want to pay for a property. It’s always better to err on the side of expecting high repair costs than low costs. That way, you don’t get stuck with a property. Here’s a helpful guide to calculating repair costs on a flip (you’ll need to adjust that number slightly to make sure you get your assignment fee!).
Step 5: Rinse & Repeat With Good Data Management
The more deals you close every month, the more money you make. And the more money you make, the more you can reinvest into direct mail and advertisements, which generates leads and feeds your wholesaling machine even more!
Wholesaling is all about doing as many deals as possible per month.
The key, then, is to automate and systemize your lead-gen, follow-up, and deal-closing processes as much as possible.
Well, as your business grows, you might need to hire people who can help you answer the phone, cold call, and tackle other important tasks.
You will definitely need to set expectations and an ongoing budget for sending direct mail, running advertisements, and marketing your business.
You’ll need to have a clear-cut and easy follow-up process.
And you’ll need to have good data management.
We put emphasis on that last one because many real estate wholesalers struggle to make the most of the leads that they’re generating. After all, with hundreds of leads coming in every month, all of that data quickly gets cluttered. It’s hard to remember who you followed up with and when, which records you’ve already skipped, and the lists where you last sent mailers.
But here’s the thing: having that information is a part of winning.
To grow your wholesaling business — and definitely to beat the competition — you’ll need to have easy access to all that important info.
That’s why we built REISift.
It started as software that Tyler would use for his own investing business, and then he started offering it to other investors.
Here’s what just a few of our members have said…
“If you want to have a fully automated real estate business and find the best off market deals before anyone else, then REISift is hands down the best decision you can ever make for your business. I was able to go from 1 deal a month to six figure months overnight just by following the REISift systems and processes. You will never find a more dedicated servant to the greater good than Tyler and he will give you everything you need to succeed from day one. Couldn’t recommend REISift any stronger. Get it now!” -- Josh Newman
"REISift keeps all my hard work organized in an easy to use, convenient, & real working platform. You never have to worry about tracking down that phone number or seeing if you 'think' they might be the same person as someone you just spoke with. It really helps prioritize so you execute & find the deals sooner!" -- Dylan Schapansky
With REISift, you can manage your data as efficiently as a ninja swings a sword. Our software allows you to easily clean, skip trace, and filter your data for more targeted marketing campaigns.
And the best part is, you can try us for free for 14 days!
Is wholesaling real estate right for you?
You should now have a pretty clear understanding of how the wholesaling business model functions.
We’ve discussed what wholesaling is, the pros and cons of it, and even 5 steps to building your own wholesaling business.
Is this the right business for you to build?
Only you can answer that question — but it’s certainly a profitable business model that has made a lot of people a lot of money!