A Step By Step Guide To Wholesaling
After closing hundreds of wholesale deals, I have realized there is a shitload of misinformation that exists when it comes to real estate investment education.
My goal with this lengthy blog is to give you a strategic, business-minded overview of exactly what it takes to build a high six-figure wholesaling business. I am going to distill my 8 years’ worth of wholesaling successes and failures into a guide you can follow in order to either get your business off the ground or take it to the next level.
Notice that I used the word business. There will be no mention of get-rich-quick activities, push- button solutions, or magical software; so if that is what you are looking for, you’d best leave now.
What is Wholesaling?
Wholesaling is the art of putting a property under contract at a fraction of its true value. An example of this would be putting a property that is worth $100,000 under contract for $25,000. The contract is then assigned to another investor for a fee. In this case, I would find a buyer that is willing to pay $30,000 for the house. The contract is assigned to the buyer for $5,000. This means the seller gets the agreed upon $25,000. You get the $5,000 – the difference between $30,000 and $25,000.
Simply put, if done properly, wholesaling can change your entire life.
What Wholesaling is Not
It is NOT a get-rich-quick hustle.
It is NOT easy.
It is NOT going to make you a millionaire driving a Lamborghini by next week.
The Business Model
I am an avid student of business and business models. That is why I find it very frustrating when I see wholesaling presented as some get-rich-quick hustle. The business model behind wholesaling is the same business model used by Fortune 100-500 companies such as Walmart, Google, and American Express.
This business model is a two-sided platform business and is predicated by the fact that, as a business, you have two distinct customers. Two very separate customers whom your business depends on for success. They are 1) the homeowners who agree to sell you their property and 2) the investors that are actively buying property.
For example, let’s look at Google. Google operates by being the intermediary between two very separate but equal customers: 1) the customers that are using the platform as a search engine and 2) the advertisers.
From now on, I forbid you to think about wholesaling as some get-rich-quick tactic. Instead, start to think of it as a business.
So, What is a Business?
A business is simply an organization that exists to bring value to them marketplace by creating solutions for its customers.
Before you move on, read that last sentence again.
The two questions I am most often asked are:
- Why in the world would someone sell you his or her house for such a cheap price?
- Why would a buyer allow you to make $5,000-$15,000 flipping a house to them? Why wouldn’t they just bypass you?
Let’s look at Question 1. The reason people sell me their houses for a fraction of what they are truly worth is that, in most cases, they are experiencing some type of distress. I will dive into this later in this post.
In regard to Question 2, think back to the definition of business. The key word there is VALUE.
You are bringing tremendous value to other investors who are actively purchasing properties by, essentially, gift-wrapping a deal and dropping it directly in their lap.
Keep in mind, this is a deal they did not have to find or negotiate for themselves. As long as the number makes sense for them, most legit investors could not care less that you are making money on the deal.
By the way, if they do care, then that is someone you should NOT be doing business with.
Why most people fail + the ridiculously high failure rate of aspiring REI’s
I wholesaled my first house in 2008. Since that time, I have seen dozens upon dozens of aspiring investors exit this business. This has led me to become very fascinated with WHY people fail.
The failure rate for aspiring real estate investors is extremely high – well over 90%. This failure rate can be attributed to several factors. The most common reasons that I see are:
- Mindset – “We are the things we think about.” Not only can a lack of vision can keep a business from growing, it typically prevents it from ever getting a good start to begin with.
- Lack of strategy – Many investors exist in a world of darkness aka not knowing what to do. As a result, it becomes a continuous game of wheel spinning.
The Rules of Engagement: The Blueprint For Being a very successful wholesaler.
Thus far, I have defined wholesaling and business as well as identified the reasons people fail. Now let’s dig into what it takes to build a highly profitable wholesaling business. I have boiled this down into 4 crucial steps.
It is vital to have an understanding of what is going on in your local marketplace.
After closing hundreds of deals, I can directly correlate my success to having an intimate knowledge of my local marketplace here in Philadelphia. The beauty of this is that I am able to make super-fast decisions when we have potential deals on the table.
4 Ways to Increase Your Market Knowledge:
- Talk to local realtors
- Talk to other investors
- Know the top five areas/zip codes where investors are buying
- Remember the concept of supply and demand
Paralysis Analysis: Do not do this… As you are reading this, you might say, ‘OMG, I need to become a complete master of my marketplace before doing anything else!’ The problem with this is there is NO WAY to fully master the market place without going out and “getting your hands dirty”.
How do you know if you are successfully moving in the right direction? If sellers are not calling you on a weekly basis, then you do not have a business. you have a hobby at best.
Marketing AKA: Strategically placing yourself in front of homeowners is the lifeblood of this business. Implementing a Direct Response Marketing plan on a consistent basis is vital to success. It is a marketing myth that you can do one mailing and be guaranteed to make tons of money. Steady and repeated contact with homeowners and is the only way to grow your wholesaling business.
How many times have you seen advertising for Walmart, Target, Apple, etc? If you only ever heard of Apple one time, then they would not be the billion-dollar business that they are today.
Your success in this business will be tied directly to your ability to market and generate seller leads.
Think about this scenario: John is able to get 26 sellers to call him every week, while Susan is only talking to one seller per week. Who has the better chance of building a successful business?
There are several different channels you can use for marketing: online, direct mail, television, print, phone, etc. My favorite is direct mail.
Direct mail consists of two main components that I refer to as a List and the Mail Piece.
A List, for real estate investment purposes, is a compilation of homeowners that might be experiencing some type of underlying distress. These could be people that are:
-need to relocate
-own a vacant property
-evicting a tenant
One of my favorite lists to market is Probate. This list is comprised of property owners that have passed away, leaving their family members in charge of taking care estate. Often they are not in a position to have the time or resources for this additional responsibility. Maybe they need to split the estate, which means selling is a better option. This is a niche that has made me $500,000 in the past couple years.
If you are trying to decide which type of Mail Piece to send – postcard or letter – my choice is to SEND BOTH. Choosing one implies that you are only going to reach ONE person ONE time. In order for direct mail to truly work, you should be mailing your prospects multiple times and sending multiples types of mail pieces.
With my probate campaigns, we are contacting those people EVERY 30 days with a marketing mix of postcards, letters, and phone calls. Think about that compared to the guy/gal that only sends one piece.
3. Ability to Convert
Myth: All you have to do is send out a batch of letters, put up some signs, etc., and money will magically appear.
The hardcore reality is that in 2016 everybody and their momma can send a letter or put up some signs. What very few people know how to do is convert.
Can i share a secret with you? The front end of your wholesaling business is a marketing business designed to generate seller leads. The back end is a sales business designed to convert those leads into contracts.
Conversion has four very crucial steps:
- Talking To Sellers
It all starts here. People do business with people that they like! I cannot begin to tell you how many people have made deals with me simply because they like me. I do this by simply connecting with people and building rapport.
I have a theory. If I am able to connect with people and make them laugh, I have just dramatically increased the chance of them selling their house to me.
To build rapport, find things that the other person enjoys talking about such as sports, family, or specific hobbies. Show a genuine interest in whatever is interesting to them.
- Analyzing Deals
This step will single-handedly determine whether you will make any money or not. Let me walk you through this scenario.
You spend a lot of time and energy on your marketing. Finally, a seller calls you. You talk to them and build a good bit of rapport. You run the numbers, make an offer, then BOOM!, the seller agrees and you put the property under contract.
You are super excited. All of your hard work has paid off. Now all you have to do is sell the deal to a cash buyer. So, you market the deal and find out that NOBODY wants to buy it because you have it under contract at the wrong number.
All your work down the drain. You have a useless contract that nobody wants to buy.
This my friend is a dilemma that the causes many aspiring wholesalers to quit. You MUST know how to properly analyze deals or you too will face this dilemma.
Myth: There is a magical numerical formula that can be used to analyze all deals.
This is one of the silliest myths that exists in real estate investing. Analyzing deals simply comes down to understanding what another investor will pay for a property in a particular area.
So, let’s say you’ve got a house at 2022 Fisher Street. It is a 1023 sq ft, 3 bedroom, 1 bathroom ranch in fair condition.
The way to properly analyze this deal is to do a radius search and see what other 3 bedroom ranchers have sold for within a half a mile radius of your subject property. If you dig deeper you will see 2 kinds of comparables. Those that were purchased by homeowners and those that were purchased by investors.
The key here is to sort through the similar properties that were purchased by other investors. What better way to determine your offer than to see what your ideal customer has already been paying for similar houses?
A big mistake investors make is comparing apples to oranges when trying to determine property values. If the subject property is a 3/1 rancher, do not compare that to a property next door that is a 3500 sq ft duplex.
When determining value, focus on these things:
- Apples To Apples
- Ability to sell the deal
The Live Appointment
Going to see the property is the final step of conversion. Let’s say up to this point you have had a successful intake and processed this new seller lead. You have crunched the numbers to determine what you are able to offer the seller.
This final step can make or break the deal. You must go see the property and make an offer. This is one of my favorite things to do. I have been able to rack up huge, huge discounts by meeting face-to-face and logically presenting my offer to the seller.
Example: We just had a seller accept our $200,000 offer, when her initial asking price was $250,000.
So how do we negotiate killer deals like this?
First, go see the house! Not everything can be figured out over the phone. I can honestly say out of all the homerun($40,000+) deals that I’ve completed , none of them would have happened if I had not actually set an appointment to go see the house.
Second, build even more rapport! Some amount of rapport should have been established prior to the personal meeting, but now you are live and direct. Find more ways to connect.
Tip: Create an atmosphere in which they are comfortable talking about something other than the property.
Third, logically explain why! There are those who go to a seller’s house and negotiate by rudely telling them how horrible their house is and then presenting their offer. My approach is to logically explain to the seller WHY we can’t buy their house at the often “overpriced” number.
For example, if the property is in bad shape and needs a new kitchen, bathroom, roof etc. Be aware that many sellers will go online and look at what other properties have sold for in the area. The issue with that is they are often comparing their house to a house that sold in tip-top condition. Don’t run from this!
It’s your job to explain that you need a discount due to all the things that need to be done in order to get their property (in its current state) to be comparable to that newly renovated house that sold down the street.
This is your time to shine and really convey WHY your offer is your offer.
At times, I have spent over an hour with a seller going over the same information repeatedly in order to clearly explain that my offer is based on the condition or the location of the property.
The Ability to Sell the Deal
A question that plagues most investors: Do I go after sellers first or buyers first?
Let’s really break this down. In any given marketplace there are anywhere from hundreds to thousands of possible buyers in your hyperactive marketplaces like Philadelphia, Houston, Atlanta, Miami, etc. This means there is no shortage of investors that are actively looking for deals at any given time.
Many gurus preach that you should spend your time looking for buyers prior to looking for any deals. This is a terrible piece of advice!
Recall my explanation that business is an entity that delivers value to its customers. But, how do you deliver value to cash buyers? It’s simple. By bringing them juicy deals that they can make money on.
Finding value for your buying customers is created by marketing for deals in areas where people are actively buying. There is no need to individually interview buyers and become a personal shopper for each specific buyer.
If you have followed each recommendation that I have shared so far in this article, then finding a buyer becomes a formality due to the fact that you have an actual deal.
Myth: In the real estate investing business, you need a gigantic buyers list with thousands of people on it.
How many buyers are on my list? Amazingly, only about 20 people. Your list does not have to be long; it just has to be made up of buyers who are actively purchasing dozens of properties per year.
Get Ready to Implement
Now it is time to implement. Read that sentence again! I put together this long post, not so you could just read it and then go look at funny cat videos, but to guide you through the necessary steps to fulfilling your dream of being a successful wholesale real estate investor.
This is when you buckle down, take what you learned, go out and put it into action!!
Here are the next steps:
- Get step-by-step directions for building a wholesale business by signing up for our free web class!
- Join me on Periscope where I will be giving you real-time content on a wide range of topics including successful wholesaling or even what it takes to win in life.