Wholesaling properties for quick cash is something that anyone can do, even the beginning investor. In this article, I would like to give a brief introduction to the world of wholesaling, going over the nine basic steps that are involved in flipping a property.
Step 1) Make your offer.
Whether you pursue FSBO's (For Sale By Owner's) or properties listed on the MLS (Multiple Listing Service), you're never going to be able to flip a property unless you first make an offer. In making your offer, you need to keep your customer, the rehabber, in mind. It should be based upon a conservative estimate of the market value of the property after repairs less a profit margin for the rehabber, money for closing costs (both for buying the property and for reselling it to the retail buyer), money for holding costs, money for repairs and last but not least, a profit margin for you, the wholesaler. Typically, I deduct the greater of 30% or $25,000 for profit, closing and holding costs, money for repairs and about $5,000 for my wholesale profit.
Step 2) Once offer is accepted, sign contract to purchase property.
Once your offer is accepted, you will meet with the seller (if it's a FSBO) or your real estate agent to sign the contract and give them an earnest money deposit.
Step 3) Start title work.
After signing the contract, contact your settlement attorney (title company, escrow company, etc.) to start the title work on the property. They will order a title search and schedule a settlement date. There are two reasons to start the title work ASAP. First, you want to be ready to settle when you are supposed to settle. Second, in the event that you find a buyer who claims to be ready to buy, you want them to be able to settle right away.
Step 4) Begin marketing to find a buyer.
There are two main avenues that I use to market my properties. First, I'll call the people on my buyer's list to see who might be interested. As I'm doing this, I will place an ad in the Investment Properties section of the Sunday paper for the upcoming weekend. Here's an example of an ad that I've used in the past: Fixer Upper*123 Main St., $80k comps, only $40k (xxx)xxx-xxxx
Step 5) Come to an agreement with a prospective buyer.
At some point, someone will show interest in your property. Whether you have one potential buyer or multiple potential buyers will depend upon the deal. Each one is different. The more buyers you have, the less flexible you need to be in reaching a final sales price.
Step 6) Qualify the prospective buyer.
Make sure the prospective buyer either has the cash or a line of credit (ask for proof of funds if they say they do) or will be able to borrow the money from a private (hard money) lender to purchase your property.
Step 7) Sign a contract with your buyer and collect a deposit.
After verifying your buyer's source of funds, meet with them, execute a sales contract or an assignment agreement with them, and collect a deposit. The sales contract serves as the receipt for their deposit. Either handwrite or include typewritten verbiage somewhere on your contract a statement such as the following, “Received $(insert dollar amount) as an earnest money deposit on (insert date)” and initial it once you receive their deposit. You might also include their check number or write “CASH” if they give you cash.
Step 8) Submit executed documents to the title company.
Submit both items-the executed contract with the original seller and the executed sales contract/assignment agreement with your buyer-to your attorney (title company, escrow company, closing agent, etc.) and schedule a settlement date.
Step 9) Go to settlement.
Go to settlement, pick up your check, and celebrate!
Real Life Experience
When I first started in the business, I believed everyone who signed a contract to buy a home from me. I believed everything they told me and took their word. Often, I got burned; however, it didn't take too many slaps in the face before I realized that I needed to take control of the entire process. At that point, I decided to control every deal by lining up contractors, lining up the lenders, starting the title work myself through my attorney, and mandating that my buyers use my attorney. Before taking control, I estimate that about 25% of my deals didn't settle with my first buyer. Since taking control, that percentage has been reduced to about 5% of my deals.