Wholesaling 101, Option Periods, and Easy Money

I’ve been getting a lot of feedback on the subject of wholesaling. Right now it seems like each day more people are interested in investing their time and money into real estate, but the problem most people face is that they have time, but not the money.

Wholesaling is an alternative form of real estate investing, that requires little to no money to begin working and making some extra money. I’ve heard many gurus charge for this type of information, and like I’ve said before… don’t pay when you can get it free.

I must disclose that I am a licensed real estate agent, and I have never wholesaled a property before. I have bought a property from a wholesaler, but have never done this on my own. There really is no point for me since I am licensed, I can sell retail real estate and make more money. If the right situation came along, I might consider wholesaling a house, but I do not actively go out to find motivated sellers for wholesale purposes.

In earlier posts, I said that you’ve either got time or money. The money guys don’t have time, and the guys with time don’t have money. Step back and find out where you’re at in that equation, and if you’ve got money, wholesaling might not be for you. If you’ve got time, then this is right up your alley.

Wholesaling essentially is finding a good deal, doing the legwork, running the numbers, finding a buyer, presenting the numbers, and getting paid for your work. You are connecting both a motivated buyer and seller to benefit from a real estate transaction. Some states have laws against this, such as “brokering without a license”, which is why you actually have to “own” the house to do this. We’ll go over how this takes place…

First and foremost, you must understand what an option period is. If you’ve been reading up on the subject, you’ll notice everyone is talking about “option deals”, etc. The option period reads like this in a real estate contract:

If you read carefully, this is the part of the 1-4 residential contract that grants the buyer the option to back out of the real estate deal for X number of days, for X number of dollars. Real estate law says (I am not a lawyer) that you must have consideration to have an option period, which means that you must put more than $1 down for the option period. Most common is $100 for 10 days, in retail transactions.

How does this apply to wholesaling?

Sample wholesale break down:

Lets say I am wanting to wholesale a house I found in my neighborhood, and have spoken with the home owner. They can’t sell the home because of the repairs needed, banks won’t lend on a conventional sale. They don’t have the money to fix the house themselves, so they are in a lose-lose position – can’t sell and can’t fix. That’s where Mr. Wholesaler steps in.

You run the numbers, and find that the After Repair Value (ARV) of the house is $155,000. You walk through the house, and ask questions, and estimate repairs – you’ve estimated the repairs are $35,000. The seller owes $40,000 on their note. You make them an offer of $45,000 and include to pay for all their closing cost. They get to walk away from their note, make $5,000, and close fast – 7 days fast. The seller thinks about it for a while, and takes you up on your offer. You write a contract to purchase the home (either under your name or an LLC, S Corp, DBA, etc) and put an option date of 30 days with an option fee of $100. This gives you the option to back out of the purchase for 30 days and risk $100 for doing so.

In your contract, you include verbiage that will allow you to assign your contract to a 3rd party, for no fee.

After you sign the contract, you call your buyer and tell them you’ve got a great deal for them. The After Repair Value of the house you’re selling is $155,000, the repairs are $35,000, and you’ll sell it to them for $55,000. The investor crunches the numbers, and realizes $55k (purchase price) + $35k (repairs) = $90,000, or 58% of the After Repair Value. They are paying 58 cents on the dollar! Your offer is accepted by your buyer.

Note: typical investors use this formula to determine if the deal is feasible for them. Purchase Price + Repairs = 70% or less ARV. Depending on what you will charge for your wholesale fees, you could make or break the deal.

Did you catch what happened? You “bought” the house for $45,000, and “sold” it for $55,000. Where did the $10,000 go? Your efforts! You’ve got to pay yourself…

You contact the original seller, and let them know you are going to assign the contract to a 3rd party buyer. You assign your contract to the other buyer, and they close the deal. Upon funding, you get a check for $10,000 for finding the deal.

Everyone wins. This is your ideal situation in a wholesale deal. The transaction goes from A-B and B-C, with A being the original home owner, B being you, and C being the end investor who purchases the home. There needs to be enough room for A to want to sell, and C to make enough money – this means you can’t be greedy, and mark up the deal $20-30k.

Easy money is what most people think about wholesaling. I’ve got news for you – it isnt. Most of the time you’re going to be dealing with people who have other issues in their life making them have to sell, or commonly refered to the 4 d’s of real estate: death, divorce, drugs, or drinking. When dealing with these type of situations, you must remember that selling a house comes with emotional attachment, and some of these people might not be in the most stable period of their lives. Assure them that you want to help them (which you should), and stay away from predatory marketing practices. 

So that’s the easy part, understanding the process. The hard part is finding motivated sellers and qualified buyers. I would recommend building a buyers list before you start to market to find houses. Start with craigslist classifieds in the real estate section, and post an ad saying you’re looking for investors to buy discounted properties… they will call / email you.

There are other methods to wholesaling that I did not go over, such as “Subject to” deals. You can find more information on these type of deals from the links I have provided below.

If you’re not involved in the real estate industry, you’re going to need to make friends. Title companies, and REALTORS will be very helpful to your business. REALTORS will be able to pull comps straight off the MLS, so you will have an accurate value for your deals. Reward them kindly, because REALTORS typically make little to anything off wholesale clients. Find a title company who is experienced in working with wholesalers, and ask if you could come in to meet with them. They should be more than helpful to want to help you out.

Build your business from the ground up. People on BiggerPockets have operations as large as call centers answering their phones, offering to buy houses within 24 hours. They have systematically made the wholesale process so simple and easy for the seller to understand, they are profiting big from this business.

Now you know how the “WE BUY HOUSES” people make money.. essentially this is “house flipping” on paper. Some people are good at this – REALLY good. Steph Davis is a wholesaler out of Florida, check her blog out at http://www.flipthiswholesaler.net/ for more wholesaling tips & tricks. StrugglingInvestor (http://www.strugglinginvestor.com/) also has some great articles about probate wholesaling.

This was a simple break down on how the transaction happens, and how you would make your money. For more information on the subject of wholesaling, visit the BiggerPockets wholesaling forum at http://www.biggerpockets.com/forums/93-wholesaling.

Until next time,

Danny Day
Coldwell Banker United, REALTORS
Houston, TX