While not every market or property is ideal for wholesaling, it is important to know the ins-and-outs of the process, so that you can identify an opportunity when you see it.
Wholesaling real estate is generally low risk, but in turn, the cash out potential is lower than other exit strategies, like lease options and selling outright. It is essential to learn how to determine what deals are appropriate for wholesaling, as well as which are not. So, what does wholesale real estate mean?
What is Wholesaling?
Wholesaling is when you have a motivated seller, usually someone in foreclosure, and you essentially take control of the sale with a purchase & sale agreement (PSA) or option agreement (OA). These agreements are with the seller and usually have a deadline subject to the foreclosure schedule, if applicable.
Once you sign an agreement with the seller, you can then find a buyer for the home that can close quickly. When negotiating the agreement, it is in your best interest to make the contract term as long as possible, so that you have time to find a buyer. Investors who flip properties are generally a good buyer for this type of property or someone who can close quickly to meet the deadline.
The closing is done directly between the buyer that you find and the seller. Because of this, there is limited profit potential. In the PSA or OA you define an assignment fee, which you are paid when the deal closes. It is generally 3 to 5 percent of the purchase price.
When Does a Wholesale Deal Work?
Wholesaling should only be considered when the purchase price of the property is calculated to be equal to or less than 70 percent of the Fair Market Value (FMV.) To determine the FMV you can either calculate it yourself, or you can use a service like my ProfitGrabber Pro, that will calculate the FMV in seconds. Always remember to take into account the cost of any repairs that need to be done. Also, the total amount owed on the property should be lower than the maximum purchase price.
To recap, the steps to wholesaling are:
- Find a motivated seller in foreclosure
- Analyze the deal to make sure wholesaling is the best method
- Figure the market value
- Sign an agreement with the seller
- Find a buyer (preferably all cash)
- Close, and collect your assignment fee
There are so many details that go into choosing an exit strategy for the property you are considering investing in, learning how to do it right Is the best way to make a substantial profit and start a successful real estate investing business.
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