Wholesaling is usually the first strategy many new investors use to get started without that much risk
Basically, you look for properties that are in distress, this means the property needs to be fixed, renovated and updated to current market standards. Or the owner is in financial distress, and cannot afford making mortgage payments or making repairs on the property.
When Wholesaling, You find these type of properties by driving neighborhoods, placing signs on the side of the road (bandit signs), or market directly to owner occupied properties, absentee owners, probate, inherited, city code violation, foreclosure, fire damaged homes, etc.
Once you talked to the sellers of the homes, you need to set up an appointment, negotiate with the seller and then put the property under contract at a discounted priced based on the “As-is” value of the house. When the Property is under contract, you have an equitable interest on the property.
Lets say the property is worth $100,000 already renovated, and you have it under contract for $50,000, you can turn around and sell the house to a Cash buyer for $60,000 and your make $10,000. This is the beauty of Wholesaling.
When Wholesaling, There are 3 ways you can use to close the transaction
1. Double Escrow
In this case there are two escrows involved, meaning there are two different files open with the title company
The escrow number one or the A-B transaction, which is between you and the seller.
Then there’s escrow number two or the B-C Transaction, which is the deal between you and the buyer.
An now the goal is to close both transactions in the same day.
The closing agent or escrow officer will have the B-C transaction closed first. The buyer will come in, sign all of their documents and wires the funds for $60,000 and pay all closing costs. You’re going to come in and sign all of your documents.
The seller will come later on that day to close the A-B transaction. The funds are already at the closing agent’s office and the deal is closed. The seller gets their $50,000.
The closing agent will write a check for you or can wire the funds for a total of $10,0000, and you walk away happy.
2. Contract Assignment
Contract Assignment is the strategy we use the most to run our real estate business . Assigning a contract is one of the easiest real estate exit strategies when wholesaling a property. Assigning a contract, requires you the wholesaler to sell a contract to a cash buyer for a fee. In other words, what you are doing is transferring the equitable interest on the property from you to the cash buyer.
You need to sign a contract with the Cash buyer, stipulating you are assigning the original contract you had with the seller. Just keep in mind that all contracts, by default, can be sold to another party unless specifically stated otherwise within the contract.
It is important to understand that the assignment of a contract does not mean you are actually selling the property, nor will your name go on the title. You are simply assigning your rights within the contract. Essentially, you are assigning your right to purchase the property at the agreed-upon terms for a profit, in this case it was $10,000.
So the buyer goes to closing agent and sign all the documents, and wire the funds for $60,000. The seller goes and signed their documents and receives a $50,000 check. You get a $10,000 check for your services and you don’t need to go to closing to sign any documents.
3. Transactional Funding
This is the last Exit strategy when wholesaling a property.
in this case, you need to have a purchase contract with the cash buyer for $60,000.
You will need to have a hard money lender or a private lender to lend you the funds, they typically will charge a fee for a few days.
You will need to close on the property with the seller first for $50,0000. You will be required to pay closing costs on this transaction. These costs can be roll over loan from the lender. Then a few days later, you close the transaction with the buyer and the closing agent will pay back the loan.
Your total fee will depend on what you negotiated with Cash Buyer. In your contract can be stated they are responsible of paying all closing costs that you incurred or if not stated you will be responsible for paying those costs out of your fee. In the best case scenario you will get the $10,000, but you could walk away with less as an example you ended up with a fee of $7,000 after all closing and loan fees are paid for, but in each case you win. You close your first deal, you learn along the way and make some money.
Those are the 3 exit strategies you need to know when wholesaling a property
After all is done, Keep 30% -35% aside for taxes to be paid at the end of the year, just in case you need to. Then reinvest the rest into the business or just 20%, this will depend on what your goals are. Are you planning to do this on a regular basis to find financial freedom or just need extra money to pay some bills or just go on vacation, this is up to you.