Rich Dad Education – Real Estate Blog

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Wholesaling Real Estate – Creating Wealth out of Thin Air

One of the most appealing things about investing in real estate is that it can be done with very little capital. In other words, you do not have to have a $150,000 in your bank account to purchase a $150,000 house. This concept is called using leverage. Leverage simply means that you can control a lot (the whole house) with very little investment.

This article will focus on how you can leverage yourself into some great deals and make some money along the way. We will focus on an investing technique called wholesaling (also referred to as contract assignments).

How It Works

Wholesaling involves finding a great deal and then selling it to another party interested in the deal. You sign a contract with the seller agreeing to the terms of the purchase. Then, you find someone else that would like to have those terms with the seller and you sell them the contract. You are not selling the property; you are selling them your position in the contract.

The seller still gets every penny that was agreed upon in writing, the new buyer gets a great deal, and you make a fee for assigning your position in the deal to the new buyer. It is a true win-win-win situation.

What is the benefit to you as the person in the middle of this transaction? Think about it like this:

If you are the one in the middle, how much money did you have to invest to make this deal work? The answer: very little. The only money that you invested into this deal was the earnest money deposit that you paid with the purchase contract once the offer was accepted. Since this amount is negotiable, it could be as little as a couple hundred dollars or less if you are good at negotiating.

How much financing did you need to get? The answer: none! Since you are selling your position in the deal, you never needed financing to make this work. The new buyer pays cash or lines up their own financing to complete the purchase.

If the property needed repairs, did you have to do the repairs? No! The new buyer is taking on the contract as is and the property as is. Any repairs that are needed will be completed by the new buyer.

As you can see, there is a tremendous benefit to be able to do deals where you invest very little money, financing is not necessary, and you do not have to do repairs. If you are doing transactions that require very little money, your credit is not needed and you do not have to be a handyman to do it, you can see that you have really removed the major barriers that keep people from investing in real estate. You have harnessed the power of leverage all because of the simple technique that you are using.

Finding Investors

Although you could sell your contract to a buyer that wants to purchase their own home, you typically will sell it to another investor. The major reason for this is that they are always in the market for a great deal. If you negotiated a great deal, they will likely have an interest.

When most people are introduced to wholesaling, they typically comment that finding the investor to sell the contract to must be difficult. Actually, it is quite the opposite. If the contract that you negotiated with the seller is a great deal, then that represents an opportunity for the other investor to make money. That is what is going to keep them interested. You will find that the better deal you negotiate, the easier it will be to find another investor. If the deal is not that great, you will have a hard time finding investors.

If you are using this technique and you find that you are having a hard time finding investors that are interested in your contract, that tells you that you probably have not negotiated a good enough deal.

One of the easiest ways to find investors for your contracts is to use the “We Buy Houses” signs and ads that you see all over the place. If you are wholesaling, the investors that are advertising are not your competition. They are your buyers.

As you find these signs and ads, you should be taking down their names and phone numbers. Start building a list of potential buyers. You will have a lot more confidence going into a deal knowing that you already have potential buyers lined up.

When you find these investors, give them a call. Your whole objective during this call is to introduce yourself and find out what they are looking for in a deal. Every investor is different. Some of them have certain areas that they like to invest in. Some of them have specific types of properties that they look for. Some of them have to have a certain amount of profit or else they will not be interested in the deal. When you take the time to find out what they are looking for before you have a contract in place, wholesaling becomes so much easier. Build your list of buyers first and you will have a lot more confidence finding the right deals because you know what they are looking for.

When you call them, say something like, “Hi, my name is ______________ and I am an investor in the area as well. Sometimes, I run into more deals than I can personally finance and I wanted to know: If I had a deal that made sense, would it be okay if I brought it to you?” This tells them why you wouldn’t buy it yourself and it opens up the door to discuss things further. Chances are very high that they will say that they would be interested. Start to gather their information and what they look for in a deal. Now you are building a list of buyers for your wholesale deals.

This simple investing technique can help you leverage the power that real estate has to offer. This is a perfect example of why you do not need to have a lot of money or credit to invest. You simply have to know the right techniques and know how to use them. With this knowledge, you will be able to capitalize on the great deals that you see and make a profit.

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83 responses to “Wholesaling Real Estate – Creating Wealth out of Thin Air

  1. Patrick Porter August 30, 2012 at 7:25 pm

    What are features of a great deal, and what are the best practices for getting these contracts in place with sellers? Why do sellers spend time putting this type of contract in place?

    • Rich Dad Education September 6, 2012 at 11:16 am

      The features of a great deal depend on your target audience. If you have someone that is looking for a starter home, then put yourself in their shoes and see if it is something you would buy. The same thing applies for each type of property you are considering purchasing. You probably don’t want to look at anything that is smaller than 2 bedrooms because it won’t appeal to the majority of the population.

      The first step to a successful wholesale transaction is to get the property under contract. You go out and find motivated sellers who need to sell their property. You give them an offer or a Letter of Intent. As soon as you agree to the price and terms, then you start marketing for a buyer.

      The reason that a seller would do this is typically because they don’t have a traditional property that anyone would purchase. Typically, they need work.

  2. Chris Shoesmitth August 31, 2012 at 1:56 am

    How do I find out more?

    • Kevin September 11, 2012 at 5:48 pm

      You can find the concept of leverage on a video on Youtube. I can’t remember where, but it’s animated and in one segment explains leverage. You can also take a look at Kiyosaki’s “Increasing Financial IQ”.

      • Rich Dad Education September 12, 2012 at 4:52 pm

        Leverage is the main part of wholesaling. You put in little to no money and get money out. You invest your time so that other investors don’t have to. When you do this, then you get a huge return on your minimal investment.

  3. TA August 31, 2012 at 6:38 am

    A real door opener! Thanks for sharing:-).

  4. John August 31, 2012 at 8:35 am

    I just dont see what the benefit is to the seller to tack on a middle man. Why wouldn’t they just hire a realestate agent? Am I missing something here?

    • Kevin August 31, 2012 at 8:18 pm

      Point isn’t to have the original seller to find a middle man, you just become his middleman. Your goal is to make money (basically the fee) from the person you’re selling it to.

    • Sean August 31, 2012 at 9:48 pm

      John, using an agent, you may have to pay them a higher commission thus lowering your profit.

    • Eileen September 1, 2012 at 2:35 am

      A real estate agent typically receives a 3 to 5 percent commission when they find a buyer and complete the transaction. Also the buyer that a real estate agent finds for the property is usually going to need to qualify for financing. Sometimes it takes up to 3 mos for the financing to be approved. Sometimes it takes a long time for the real estate agent to find a buyer. The whole point is for the seller to avoid the commissions (an investor doesn’t charge commissions) and to get all cash for the property and to close in a couple weeks. Make sense now?

    • Nicholas September 1, 2012 at 5:55 am

      Because a real estate agent typicaly will charge 3% commision. If you are buying a $100,000 home, that is a 3,000 dollar commision. Most finders fees however range between 700 and 1200 dollars. So the Buyer will save money by doing business this way.

    • smason99 September 1, 2012 at 5:38 pm

      The typical wholesale deal is a house that cannot be sold via conventional methods because of the needed repairs. So the seller is at a loss as to how to get rid of the house. You buy it from them and sell it to another investor who is an expert at renovating houses. Everyone wins.

    • Andy September 2, 2012 at 10:23 am

      Contacts. Many investors are too busy to find every distressed seller or property so they are overlooked. If the seller knew who the investor was who would ultimately buy the property, you’re right, he could go directly there. A similar argument could be made about a real estate agent. Why can’t the seller go directly to the buyer and avoid that middle man? In both cases, it is contacts.

    • JRM September 2, 2012 at 4:08 pm

      A good wholesaler finds the deals that are not on the mls. It takes a lot of time and effort to find these properties and most investors that buy, fix and rent or owner finance are glad to pay an assignment fee to someone that can bring them deals. Time is money and many investors would rather be working on fixing up the properties you send them instead of spending tons of time mining the territory to find a property. Obviously you need an agent on a short sale or foreclosure but often these deals aren’t as great as they are cracked up to be..

    • Daniel September 2, 2012 at 10:41 pm

      They dont know there is one. You tell them you are buying the house and put and/or assigns after your name on the purchase and sale agreement. Then when you shop the deal you can assign it for a profit. If you get it cheap enough from the seller that there is profit enough for you and the buyer, the seller never has to know that you didn’t buy it, or who bought it. They got what they wanted, their house sold, and you and the investor both profit as well.

    • MikeJ September 3, 2012 at 4:42 pm

      The seller, initially, does not know that the wholesaler is a middle man. And it’s possible that you may be working with the agent and not the seller directly. Some sellers become stressed because of work or life or marriage or mid-life crisis. For some reason or another, they just want to dump the property. If they weren’t in a bad situation, then they would take the time to hire an agent and properly price it. You are right that most properties wouldn’t qualify for wholesaling, but some do and those are the ones to pursue with this technique.

    • Rich Dad Education September 6, 2012 at 11:17 am

      You are faster and less expensive than a Real Estate agent. Also, a lot of agents don’t want to list properties that are difficult to sell.

    • Rich Dad Education September 6, 2012 at 11:27 am

      There are some great comments about this. The basic idea is that the seller doesn’t know where to look for buyers who are interested in a fixer upper. Often, Real Estate agents don’t want to take difficult listings.

      • tish villasenor September 23, 2012 at 3:08 pm

        I’m interested in this process , how do I find a house from a wholesaler in my area ? That is el dorado county , ca. Would like to find a house in Auburn Lake Trails because my daughter lives there . I’ve seen a few short sale homes close to my price range go before I can look at them . Thanks .

      • Rich Dad Education September 24, 2012 at 4:29 pm

        You want to start networking with other investors. You can do this by calling on ads that say “I buy houses.” You can also go to REIA clubs in your area. You can also post an ad saying what you are looking for and what kind of a discount you need to be interested.

  5. ck August 31, 2012 at 11:39 am

    What is a fair price to charge for your fee for selling your position in the contract?

  6. balancedfish August 31, 2012 at 11:40 am

    What is a fair price to charge for a fee for selling your position in the contract.

    • JRM September 2, 2012 at 4:13 pm

      Depends on the market you are in and also the economic level of the property. I’ve assigned for as little as $500 and as much as $7500 but most of the territory I work is pretty low end. I know of some investors that work markets where it is not unusual to get assignment fees of the $10k – $25k range.

    • Rich Dad Education September 6, 2012 at 11:18 am

      Just make sure that you are charging a fee that is reasonable enough that the buyer will want to do business with you again. You are looking at a buyer who can potentially purchase many deals from you. As JRM said, the fee ranges based on the price of the property.

  7. Sherrie Johnston August 31, 2012 at 12:32 pm

    nice and concise, great explanation, thanks very much!

  8. bls August 31, 2012 at 12:44 pm

    Fascinating article. Thanks for sharing it.

  9. Ali August 31, 2012 at 1:58 pm

    Didn’t think of the “we buy houses” and it makes so much sense. Thanks.

  10. Cory August 31, 2012 at 5:11 pm

    This article is a perfect example of why Rich Dad is my favorite financial resource. These are simple, concise, and most importantly, actionable steps to take towards meeting my financial goals.

  11. wILLIAM bELL August 31, 2012 at 7:19 pm

    I HAVE DONE EXACTLY THAT fLIPPING HOUSES IN THE PAST. oN ONE DEAL i iNVESTED $100 FOR A PURCHASE AND SALE CONTRACT. i MADE $77,000 ON THAT DEAL.

  12. JRod August 31, 2012 at 7:28 pm

    I agree, Cory …can anyone tell me if Wholesaling is state specific? all can we apply this leverage in any state of the US?

  13. Sam Sohal August 31, 2012 at 11:23 pm

    I am very interested in real estate investments, please keep me posted. My telephone is (954)474-9011.
    Thank you.

  14. BQ August 31, 2012 at 11:28 pm

    Thank You Rich Dad for educating me on what it really means to achieve financial freedom. I am more than excited; I have been empowered. Coach Gregory is a great instructor and elaborated on this area of real estste in class today.

  15. Gillian "Jill" Molson September 1, 2012 at 12:08 am

    Jill
    This is a very concise plan. Thank you.

  16. Omar Bailey September 1, 2012 at 6:46 am

    Great article…what exactly are the details of a great deal versus a bad deal? What exactly are you negotiating? and How much profit you stand to earn by selling your contract position to someone else?

  17. Richard Weigold September 1, 2012 at 8:04 am

    It does work, We have been flipping and wholesaling property for years. Key is to know who to call when you put togather a deal. If you have a buyer list, it takes the pressure off and you spend less time looking for a buyer and more time looking for your next deal.

  18. April September 1, 2012 at 9:38 am

    So when you sell the contract does this create a double escrow? How do you get around the technicalities of that part since the RPA is also escrow instructions? If it’s a REO or shortsale they will not allow contracts to be assigned.

    • Rich Dad Education September 6, 2012 at 11:25 am

      Typically you are not going to be assigning an REO contract. You would need to use a transactional lender or bring in a partner to close these deals. You can set it up as a double closing, but it is easier to just sell the contract to the buyer.

  19. John patrick September 1, 2012 at 9:45 am

    When u r signing a contract with seller is this from a home owner only or can this be with real estate agent as well

  20. stevev1234 September 1, 2012 at 10:30 am

    Thank you for the great information. Here is a tip also you can advertise the properties for free at http://www.nationwidecontractfordeeds.com there you can list your home in any state for free and find a buyer for the property.

  21. Jean September 1, 2012 at 12:03 pm

    I’d sure like to hear the response to John, Aug 31, 8:35 am. that would include the answer to his question.

    • Karol September 4, 2012 at 12:37 pm

      Real Estate agents typically don’t sell “in need of repair” type of housing, because financing is not available in the general market. Wholesale offers allow the seller to dump the house when they need to act fast, investors buy these properties at a low cost offer and the middle man (you) puts the deal together. Yes both parties could do it individually, but time is usually a factor and not in the best interest of the seller to wait for the right offer.

  22. Bob September 1, 2012 at 11:51 pm

    This is so stupid. As if any seller will sell a house to anyone who is not a real buyer who wants to sell their position to another buyer. The seller would have to be pretty stupid to agree to this. Who writes this anyways for Rich Dad? Obviously anyone who knows nothing anything about real estate.

    • Rich Dad Education September 6, 2012 at 11:30 am

      Actually, this is a very lucrative aspect to real estate investing. Motivated sellers are more than happy to have any help they can get. They are in a situation where they need to sell the house. You are offering to help them find a buyer with no out of pocket expense to them. Why wouldn’t they accept your help?

    • Greg Revel September 8, 2012 at 11:07 pm

      Bob, you’re just too smart for us simpletons. You should tell Robert Kiyosaki your thoughts and I’m sure he will immediately give back the millions he’s made wholesaling and close up shop. Thank you for your wisdom as Robert Kiyosaki obviously “knows nothing anything about real estate”.

  23. GB September 2, 2012 at 8:40 am

    I have the same doubt of John. It’s clear the benefit for the person in the middle, but what are the benefits for the seller? Why should he sign a contract with the person “in the middle”, rather than with a recognized real estate operator?

  24. John September 2, 2012 at 8:49 am

    I agree with the guy above who questions the need for a middle man. I buy and hold plenty of property and I learned early on that I had to find my own deals to maximize my cashflow opportunities. Paying the middleman unnecessarily erodes my profits. I have only worked with a wholesaler once and it cost me $3000. I have avoided them since. You have got to put skin in the game.

  25. Derek September 2, 2012 at 11:05 am

    I think this is a way to make money however it isnt really a mainline buisness – also you speak of signing up the contracts etc which wont work within the new zealand and australian markets as there are differnt regulatory rules around this – and you may find yourself liabile for govt taxes on land and houses in auzzie and fair tradding rules in new zealand there are strict laws in these countrys to stop this type of activity. Its easyier in these countrys to know a real estate person make referals and negotiate a cut or finders fee e.g additional extras to your own houses or a % as a finders fee that would also be taxed etc and would need to be negotiated with the seller. Or to do this as private buyers to private sellers.

  26. buildingmydrms September 2, 2012 at 12:21 pm

    I am reminded of a saying that goes something like this. An item is worth as much as the purchaser will pay for it. If you know how much the buyer will make on the deal, it’s easier to negotiate your part of the profit. For example, if you know that the buyer will make 20K on the deal, he or she should be willing to pay 2-4K for the position. He still makes 16-18K and you get 10-20%. At least that makes sense to me.

  27. buildingmydrms September 2, 2012 at 12:23 pm

    Reblogged this on buildingmydrms and commented:
    I think I found my new hobby!

  28. martin newkom September 2, 2012 at 7:18 pm

    The foregoing manouver in years past was given the term: Double Escrow. It was
    considered legal to do under the Concept of “right of substitution but also unethical.

  29. David September 3, 2012 at 11:06 am

    I recently tried (keyword – tried) to get a house. My question is, how on earth can this be possible with all the banking rules and regulations?
    They made it darn impossible to do anything…

  30. Jimmy September 3, 2012 at 12:47 pm

    Great Article! This works, if you make a good deal, go for the win win… Know your market! First wholesaling deal, I made 2k, 2nd 15K…. all depends on the deal! prosper my friends…

  31. Cap guy September 3, 2012 at 3:32 pm

    I dont get this- why would the seller agree to the assignment? Investors tend to find their own properties- unless the deal is spectacular, in this day and age with Internet etc, does not seem feasible. When was this article written? For what type of markets?

    • Rich Dad Education September 6, 2012 at 11:33 am

      Many investors are so busy rehabbing projects, that they wait for other investors to bring them the deals. The key to successfully wholesaling properties is to get them at enough of a discount that there is plenty of profit for you and the end buyer.

  32. Justin B September 3, 2012 at 6:21 pm

    @John, many Real Estate Agents do not have an interest in selling a property that may be a wholesale deal. For example, the property may need repairs in order for it to be able to obtain financing. This eliminates many potential buyers from Realtors market. Not saying all Realtors are lazy, but most cannot see past the typical deal. I know, I am a Realtor, drive many people crazy in my office with ideas I bring up. An investor can buy with hard money, cash and rehab the property, then use a Realtor who sells retail to retail buyers. Just trying to elaborate. Agents are usually only good for selling to retail buyers. Finding one who understands your investment ideas can be tougher than finding a good wholesale deal, but we are out there.

  33. Justin B September 3, 2012 at 6:23 pm

    @John again, a Realtor is also a middle man, just for the retail type seller and buyers. Wholesaling is creative problem solving.

  34. Darryl Jacobs September 3, 2012 at 9:51 pm

    This article is so timely and true. I am a beginner part-time Wholesaler of HUD properties. I received some great information, completed each task, and began to take action. Now I’m working on my first HUD deal that I own. This system works if you work it. And is RECESSION PROOF.

  35. Rich Dad Education September 4, 2012 at 12:31 pm

    We’re glad to see all the questions and interaction on this article, and thought the following recording might be helpful to those of you new to Wholesale Buying. We don’t offer this webinar live anymore, but it is here at your convenience! http://wia.adobeconnect.com/p77298768/

    The Learn to be Rich online basic training mentioned at the end of this training is now only $79 every day, and can be found here: https://realestate.richdadeducation.com/

  36. g September 4, 2012 at 7:48 pm

    does this strategy also apply to rental properties?

  37. Agata September 5, 2012 at 8:41 am

    Can you please tell me if its possible to make this business in the UK?

    • Rich Dad Education September 6, 2012 at 9:11 am

      The US version of Wholesale buyer is not practised in the UK due to differing legal requirements. This is because when you exchange in the UK you then have the legal obligation to purchase at a set time. If you do not find another buyer, then you legally have to complete on the sale.
      The way around this is to keep an open completion date, or to take out an option to buy.

  38. D Ford September 5, 2012 at 9:09 am

    Wholesaling is a tremendous way to generate cash and learn how to buy houses right. I’ve done about 20 wholesale deals and have gone on to rehab several houses and purchase several rentals. I highly recommend joining your local Real Estate Investors Association (REIA) group.

  39. James Hill September 6, 2012 at 9:22 am

    Hello I’m a upcoming investor , and I love the info , I just wanted to no how u determine what percentage to give the buyer?..And how do you figure how much your fee is ??

    • Rich Dad Education September 11, 2012 at 1:55 pm

      You want to balance your profit on the assignment fee with the profit that the end buyer is going to make. If they are going to make $20k then you can ask $2-4k. If they are going to make $10K and you ask to make $10k then they probably won’t feel good about that transaction and you won’t have any prospective deals in the future. Look at it from the point of view of the buyer. Would you be willing to pay what you are asking for an assignment fee?

  40. kward September 7, 2012 at 6:52 pm

    kward
    With the time spent with you and your wife’s energies combined all these years now, I wonder why you do not offer an alternate theory and class to making and or preserving money besides wholesaling real estate. I did attend your conference in King of Prussia and liked it, but we are all not made for only this “one way”. What is another way to make money and or maintain in this economy besides keeping our day jobs too. Very serious about this.

    • Rich Dad Education September 11, 2012 at 1:58 pm

      We are going to be posting a variety of ideas on this blog. However, Wholesaling is where most people start. Many people need to build up a nest egg before they partner or work with private and hard money lenders. Lease Options and Foreclosures are great strategies in todays market. There are so many people who are upside down in their home. You can go in and lease option these properties and make monthly cash flow. There are also many deals from Banks. They are harder to find, but it is worth looking. Remember that when a bank first puts a property on the market, they are trying to get market value for the home. However, as time passes, they are willing to negotiate.

  41. Jenny F September 9, 2012 at 1:11 pm

    Is wholesaling posible in Puerto Rico?

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