What is Co-Wholesaling in Real estate and How to Do it
This is the first in a 3-part series of articles going through my journey of finding syndications to be the best form of passive income. Passive income…that crown jewel of early retirement. Anyone looking for additional income streams or “side hustles” will quickly learn that countless YouTube and Instagram heroes and influencers are begging for your money and promising that if you click “HERE,” you can make $10,000 monthly!!!
As I grew my rental portfolio, wholesaling sparked my interest in getting properties at an actual discount and rapidly increasing my portfolio. This is what wholesaling is promoted as, after all.
The question “Can you make a living off wholesaling?” often looms large in the minds of new investors entering the real estate industry. The simple answer is yes, you can make a living through real estate wholesaling, but the journey is far from straightforward.
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Real Estate Investors and Wholesaling
Wholesaling is an excellent way for real estate investors to start a business. Unlike traditional real estate investing, where you might need substantial capital for down payments and significant repairs, wholesaling requires less upfront investment.
The basic premise involves securing a contract with a motivated seller and then assigning that contract to an end buyer, usually a cash buyer, for an assignment fee. Unless you like the property, in which case you keep the property in your portfolio as a long-term rental at a significantly discounted price. This is a fantastic business model. Getting there is tough.
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Potential for Good Deals
A wholesale deal can be a win-win for everyone involved. Sellers can quickly offload properties that may need work or are in distress. Distressed buyers can range from any number of situations:
Foreclosure/Bankruptcy
Divorce
Death
Sickness
Potential buyers get access to good deals below market value, and you, the wholesaler, earn an assignment fee ranging from a few thousand dollars to tens of thousands, depending on the property and local market conditions.
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Cash Buyer Relationships
The most important thing for a wholesaler is an active buyer’s list. These cash buyers are usually real estate investors looking for great deals they can flip or rent for a higher price later on. Establishing an ongoing relationship with these buyers can lead to consistent income. Many successful real estate wholesalers have built a solid foundation by nurturing these relationships.
The Importance of Due Diligence
The wholesale fee is more than just easy money. To ensure a successful transaction, it’s essential to have a successful transaction. This includes understanding the real estate laws in your jurisdiction, having a real estate attorney review contracts, and ensuring earnest money is handled correctly. Knowing the property’s after-repair value is also crucial, as this will be a significant selling point for your potential buyers.
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Co-Wholesaling Ventures
A co-wholesaling venture can amplify the opportunities to close deals and make a living. In a co-wholesaling agreement, two wholesalers join forces to find, negotiate, and sell properties. This joint venture agreement allows both parties to divide the responsibilities and share profits. It provides an excellent opportunity for new investors needing an extensive buyer list to partner with more experienced wholesalers.
In summary, making a living through real estate wholesaling can be lucrative if executed correctly. The keys are building solid relationships with cash buyers, conducting thorough due diligence, and considering co-wholesaling ventures to expand your opportunities. While wholesaling in a competitive market may present challenges, the potential for good deals and substantial assignment fees makes it an avenue worth exploring for individual investors.
What is the Hardest Part of Wholesaling Real Estate?
Wholesaling may appear straightforward on paper, but the journey is filled with challenges. Many new real estate wholesalers need to pay more attention to the complexities and hurdles, leading to disillusionment. Understanding these obstacles can better prepare you for a successful career in wholesaling.
Building a Buyer’s List
One of the most complex parts is building a reliable buyer’s list. It’s about having potential buyers who are serious and have the financial capability to close deals. Real estate agents can be valuable allies in this endeavor, but attracting the right people takes time. Your buyer’s list is your bread and butter in the wholesaling business. Having a solid list can make or break your venture.
Finding Great Deals
Good deals are the lifeblood of wholesaling. But in a competitive market, finding these deals is easier said than done. Bandit signs, direct mail campaigns, and phone calls are standard methods to source deals. These require time and money. And even with all these efforts, there’s no guarantee that a good deal will come your way.
In my personal experience, this became the real challenge. The value wholesalers brought was cash to desperate sellers during the 2008-2009 financial crisis. I was trying to find deals in a market that was not ripe with foreclosures.
Another thing was happening at this time: the Internet.
By 2016, internet marketing for real estate companies such as Zillow and other firms took off. What this meant for the distressed property buyer was an informed seller. Sellers may have been distressed, but they were armed with information at their fingertips about the home prices of their neighbors. While their homes may have required more work to get to those values, it added offers, time, and price.
There were fewer distressed deals and more cash buyers, which does one thing to real estate prices: drives prices up.
This was not an area I found very interesting or lucrative. It was a lot of haggling and marketing and wheeling and dealing. Instead of one job, It was more like 5. However, if you can get the seller to commit to the deal, there is a lucrative payout.
Navigating Legal Issues
While you don’t necessarily need a real estate license to wholesale properties, having a good grasp of real estate laws in your jurisdiction is crucial. Engaging a real estate attorney is an effective way to navigate legal complexities. Legal issues can include contract violations, illegal ways of advertising, and even disputes over assignment fees. Being unaware of legal requirements can cost you a deal and result in legal repercussions.
Luckily, here in Texas, it is still a free market where people can buy and sell properties freely. If you will do a deal, make sure it is in writing and on paper on a TX purchase and sale agreement.
Mastering the Art of Negotiation
Once you’ve found a motivated seller and a potential buyer, you must bring both parties to an agreement. This involves negotiating the seller’s purchase price and the buyer’s assignment fee. Successful investors have the knack for negotiating deals that offer value to all parties involved. But, the negotiation process can be daunting if you’re new to the industry.
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Co-Wholesaling: A Possible Solution
Co-wholesaling can help overcome some of these challenges. In a co-wholesaling partnership, you share responsibilities, from finding deals to closing them. This business relationship offers new investors the advantage of learning from more experienced co-wholesaling partners. For instance, one wholesaler may be good at sourcing deals, while the other excels at buyer relations. By combining your skills, you both stand to gain.
In conclusion, the most challenging parts of wholesaling are multifaceted, ranging from building a strong buyer’s list and sourcing good deals to navigating legal issues and mastering negotiations. These challenges are amplified if you’re new to the real estate industry. Co-wholesaling presents an excellent opportunity to mitigate difficulties by joining forces with a fellow investor, dividing the responsibilities, and sharing the profits.
So, while wholesaling real estate has its challenges, recognizing these hurdles and developing strategies to overcome them can pave the way for a successful and lucrative career.
What is an Example of Wholesaling?
Understanding the intricacies of real estate wholesaling is easier when we delve into an example. A real-world scenario helps to illuminate the steps involved, the challenges you might face, and the solutions to those challenges. Whether you are an individual investor or part of a co-wholesaling venture, a concrete example provides valuable insights.
The Starting Point: Identifying a Motivated Seller
Suppose you come across a motivated seller who needs to sell a property quickly due to financial distress. After some back-and-forth discussions, you and the seller agree on a purchase price of $100,000. You then draw up a bilateral purchase agreement, specifying the terms and conditions. An earnest money deposit is made to show your serious intent.
Due Diligence and Property Evaluation
The next step is to conduct due diligence. You assess the market value, estimate the after-repair value, and identify any major repairs the property might need. Your evaluation suggests the property could quickly sell for $150,000 after minimal repairs.
Locking in the Buyer
First, find a cash buyer from your buyer’s list interested in this deal. Then, negotiate an assignment fee of $10,000. You formalize this through an assignment contract, which legally transfers your rights as the buyer to the new end buyer.
Double Closing: An Option to Consider
Sometimes, wholesalers opt for a double closing, especially when the assignment fee is significantly high. Double closings involve two back-to-back closings: one where you buy the property from the original seller and another where you sell it to the end buyer. This ensures that the original seller is unaware of your assignment fee, which can be a good idea when the fee is hefty.
Closing the Deal
After your real estate attorney reviews all the paperwork, you head to a title company for closing. You walk away with your $10,000 assignment fee, and the end buyer secures the property at a good deal below market value. The original seller, meanwhile, has successfully offloaded a distressed property.
The Role of Co-Wholesaling
This whole process can be divided between two wholesalers in a co-wholesaling scenario. One could handle the search and negotiation with the motivated seller, while the other could focus on finding an end buyer. Both parties would share the assignment fee, reducing individual workload and risk.
Key Takeaways
This example underscores how you can navigate a wholesale real estate transaction. It involves various steps, from securing a purchase contract to identifying potential buyers and closing the deal. While challenges like negotiations, legal issues, and finding a good fit from your buyer list can arise, the rewards can be lucrative if handled correctly.
Thus, wholesaling is more than just connecting a seller to a buyer; it involves strategic decisions, legal considerations, and, sometimes, the collaborative efforts of co-wholesaling partners.
What Are the Cons of Real Estate Wholesaling?
While real estate wholesaling offers many opportunities, addressing its downsides is crucial. Understanding the challenges and potential pitfalls can help new and experienced investors navigate the real estate industry more effectively.
Financial Uncertainty
One of the most glaring cons is the financial instability associated with wholesaling. Unlike a regular 9-to-5 job, your income depends on the number of deals you close, which can vary monthly. This requires a high level of financial planning and a substantial reserve of funds for times when deals are scarce. Unlike a landlord who owns properties, the wholesaler’s primary expense is marketing.
Legal Concerns
As highlighted earlier, many legal aspects exist, from assignment contracts to real estate laws. A simple oversight can land you in hot water. Therefore, retaining a real estate attorney is often necessary, which can add to your operational costs. Any illegal way of conducting business can jeopardize a single deal and tarnish your reputation in the market.
Market Fluctuations
The real estate market is subject to economic cycles. Motivated sellers and cash buyers may become rare commodities during a downturn. Even if you find a motivated seller, securing a cash buyer willing to pay a higher price can become an uphill battle.
Complexity and Time-Consumption
Wholesaling involves various steps: marketing to find sellers, conducting due diligence, negotiating purchase agreements, finding buyers, and closing deals. Each step requires time and effort, and shortcuts often lead to problems. It’s more complex than some online courses and real estate gurus may make it seem. Understand now that this is not passive income. This is another job. If you want to start a business, this is a 2-5-year journey, but it can be lucrative. For me, I wanted to pursue passive income opportunities.
Co-Wholesaling Challenges
Even in a co-wholesaling venture, there are challenges like aligning business goals, dividing tasks equitably, and ensuring transparent communication. Finding a good person as a co-wholesaling partner is crucial to avoiding potential conflicts. A failed partnership can result in financial losses and legal issues, not to mention the toll it can take on your professional relationships.
Competition
The market is often saturated with new real estate wholesalers, all vying for the best deals. So, experienced wholesalers have the challenge of someone new to the business offering prices to distressed sellers that could be more realistic. This is frustrating because the seller will accept that offer, and weeks to months will be wasted only for the deal to fall through.
Finding great questions to ask sellers, effective social media marketing strategies, and unique selling propositions are vital to standing out in a competitive market. You’re not just competing with individual wholesalers but sometimes with real estate brokerage firms with more resources.
Skill and Knowledge Requirements
Successful investors often spend years acquiring the skills and knowledge necessary to thrive in the real estate market. There is a steep learning curve, and mistakes can be costly. If you’re new to the industry, be prepared for a rigorous educational journey.
In summary, while wholesaling can be lucrative, it has its downsides. The challenges range from financial and legal risks to the complexities of each transaction.
Co-wholesaling offers a way to share these burdens but has potential issues. However, with due diligence, ongoing education, and a strategic approach, many of these cons can be mitigated, making wholesaling a viable and often rewarding avenue for those willing to take risks.
However, for working professionals, this is either a path to a new career or a very active side hustle. It is not passive income.
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If you would like more information about passive income ideas please contact me at jeff.davis@bridgestoneinvest.com. We have syndications going on throughout the year.
Always consult with a financial advisor, CPA, or CFP to make sure your financial plans align with your goals, risk tolerance and financial situation.
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