As an asset class, it’s difficult to beat real estate. While the real estate market can experience dips and recessions, it’s common for the value of real estate to increase steadily over time. Since the year 2000, the average home value in the United States has increased an average of 4.7% per year according to the Federal Housing Finance Agency. Since 2012, the average has been even higher, at 7.7%.
The reason why home prices continue to increase is because of unmet demand. While the population has risen steadily, the amount of new homes hasn’t kept pace. According to Freddie Mac, the country is short 3.8 million housing units for sale and for rent.
These increasing prices, combined with a massive gap in supply, point to real estate being a sound investment for years to come. With real estate being such a strong investment, it seems like everyone should invest in real estate. While there are many different ways to invest in real estate, they all require the investor to put down at least some money at the outset with one exception.
Understanding Real Estate Wholesaling
“No money, no problem” may sound like an improbable prospect for real estate investing. But if you’ve ever wondered how to make money in real estate with no money, the answer is simple: wholesaling real estate.
Wholesale real estate is a business strategy in which a wholesaler seeks out a property, typically one with distress factors, and enters into a contract with the owner of the property. In the contract, the wholesaler agrees that he or she has an option to buy the property. The wholesaler then finds a cash buyer for the property. The wholesaler then assigns the right to purchase the property to the cash buyer for an amount higher than what the wholesaler and the seller agreed to.
Any type of real estate can be sold wholesale, including raw land, houses, mobile homes, condominiums, apartment complexes, and even commercial properties. Wholesale real estate is a popular strategy for newer investors, as it doesn’t require a real estate license, just the ability to find a homeowner willing to sell their property and a buyer for that property.
How to Wholesale Real Estate
The first step in real estate wholesaling is to identify a distressed property. The most common property distress factors are either physical or financial. In some cases, a property will have both types of distress factors. Physical distress just refers to a property in disrepair. There are a variety of financial distress factors, including pre-foreclosure, vacancy or abandonment by the owner, properties in probate, or the owners may be divorcing. These types of financial distress factors can be uncovered by investing in real estate software that sources public records.
Driving for dollars is a low-cost and effective way to find homes with physical distress factors.
Once the wholesaler has identified a property in distress, it’s time to approach the owner to express interest in buying the property and gauge the homeowner’s interest in selling. If the homeowner is interested, the wholesaler and homeowner will negotiate and agree upon a price for the property and a timeline for how long the option to buy will last.
The wholesaler will then find a cash buyer and reassign the contract to the buyer for an amount that’s higher than the price that the wholesaler and the homeowner have agreed upon. The difference between these two prices, commonly referred to as the spread, is the sum that the wholesaler earns for their work on the deal. The wholesaler never has to personally purchase or spend any money on the property, so this strategy gets to the heart of how to make money in real estate with no money.
The wholesaler plays an important role in this transaction. First, being able to locate a distressed property, find the owner, and then persuade them to sell their home is no easy task. It requires tact, empathy, and an ability to clearly communicate to a potentially emotional homeowner why selling their home is in their best interest. On top of that, the wholesaler has to convince them that a below market value offer for the property is fair.
There’s an art and a science to offering an amount that the homeowner will be amenable to but will still be significantly less than what the buyer will pay for it. A good strategy for making your offer will include reviewing what comparable properties are selling for. That will help you determine the property’s after repair value (ARV).
Many investors follow the 70 Percent Rule, which states that you shouldn’t pay more than 70 percent of the property’s after repair value. As the wholesaler, you should calculate your offer to the homeowner by taking 70 percent of the property’s ARV, then subtracting the cost of repairs as well as your fee for putting this deal together. Keep in mind that the 70 Percent Rule isn’t an ironclad formula. Different factors can affect the value of the property, and the 70 Percent Rule applies best to low and medium-priced properties.
Once the homeowner has agreed to the wholesaler’s offer, the next step is to find a cash buyer for the property. Cash buyers are critical to real estate wholesaling. The last thing you want as a wholesaler is to lose your option on a property while you wait for an investor to secure funding. That’s why wholesalers need to develop a contact list of potential cash buyers for their properties. It’s in the wholesaler’s best interest to network as much as possible. That way, when it’s time to assign the deal to a buyer, the wholesaler won’t be at risk of the deal going away because they can’t find a buyer for the property.
Understanding the Contract Assignment Process
The wholesale process is actually comprised of two separate agreements – one between the wholesaler and the homeowner, and one between the wholesaler and the buyer.
The first agreement between the wholesaler and homeowner is called an option contract. As its name suggests, the option contract gives the wholesaler the option to buy the property. This contract includes the agreed upon price, the end date of the option, and language that allows the wholesaler to pass this option to buy the property to another buyer.
The wholesaler then strikes a deal with a cash buyer, assigning them the option to buy the property at a higher price than the one the wholesaler and the homeowner agreed upon. This agreement is formalized in an assignment contract. This contract typically includes a copy of the agreement between the wholesaler and the seller, the price of the property that the buyer and the wholesaler have agreed to, and language that prevents the buyer from reassigning the option to buy to someone else. As the wholesaler, this is important because you want to ensure that the property will be sold within the timeframe you’ve agreed upon with the homeowner.
How to Make Money in Real Estate With No Money
To know how to wholesale real estate is to know how to make money in real estate with no money. Wholesalers can make thousands of dollars per deal without ever spending a cent on the property.
Of course, with any entrepreneurial venture, there can be business expenses, but it’s up to the individual wholesaler to decide what expenses they can afford and are important to them.
There are a few expenses that could help you as a wholesaler in the long run. First, wholesalers should consider forming a limited liability company (LLC) for their wholesaling business. This can be done online for a nominal fee of a couple hundred dollars, but that can save you a lot of money in the long run. The main benefit to establishing an LLC is that you can protect your personal assets in the event of a lawsuit or bankruptcy.
Because wholesaling involves the execution of two separate contracts, it’s worth it to consider hiring an attorney to create templates for both contracts that you could reuse. While some investors choose to use contracts they find online, buyer beware: these contracts can vary in quality and may have been written for another state or municipality.
An additional expense wholesalers should consider is an earnest money deposit on the property. The amount can vary, but is typically between $500 and $2000. This gives the homeowner peace of mind by demonstrating that the wholesaler is serious about finding a buyer.
Apart from these three expenses, all wholesalers need to prosper is a willingness to find distressed properties with motivated sellers and cash buyers.
Key Takeaways
Real estate wholesalers know how to make money in real estate with no money. That said, wholesaling is not easy money. Successful wholesalers need to be able to find distressed properties and persuade their owners to put them up for sale. That can be a challenging conversation and it won’t always go in the wholesaler’s favor. Additionally, the wholesaler needs to consistently network to create a list of potential cash buyers.
Even with these challenges, wholesaling real estate can be a lucrative entry point to real estate investing.
