Have you ever thought about starting a wholesale real estate business or are you currently wholesaling right now?
Either way, this post is a must read if you would like to make it a habit of keeping more money in your pocket on each deal by minimizing your risk.
Wholesaling is generally known to be one of the safest ways that you can get started investing in real estate but there is still risk at hand.
In this post I will reveal five ways that you can minimize your risk when wholesaling real estate.
Lets dive into the first way to minimize your risk when wholesaling.
One of the most critical aspects of successful real estate investing is buying at a great price. When you are able to buy at a great price you are not only able to maximize your returns but it can also help to minimize unforeseen expenses or pitfalls that you may encounter along the way.
To ensure that you are, in fact, buying a great price you must have a solid understanding of the properties current value as well as it’s value after fixed up.
The best way to determine these two values is to look at what comparable properties have sold for in the same neighborhood that are very similar in size, year built, lot size, amenities and structure type.
It is also important to take a look at homes that are contingent, pending and active to get an idea where the market may be heading and also what the competition is going to be once the home is fixed up.
The second way to minimize risk when wholesaling is to use an inspection period as your contingency.
The inspection period is very important when wholesaling a property. This is really the only contingency that is needed in your agreement with the seller.
The inspection period allows you and or your buyers to do further due diligence on the property to make sure that there are no major repairs that were not disclosed or encumbrances on title. During this period you are able to back out, if absolutely necessary, without losing your earnest money deposit.
It is very important to never tie up a property unless you are certain one of your buyers can close on it. Backing out of contracts is a sure way to burn bridges and develop a bad reputation in the trade.
A good range for inspection periods is 10-17 days. In some situations, mainly when seller is considering multiple offers, you may need to cut the inspection period down a bit to create a more attractive offer. Before lessening the duration of the inspection period, make sure you have a solid buyer in place.
Low or No EMD From You
The third way to minimize risk when wholesaling is to place little to no EMD down.
EMD stands for Earnest Money Deposit. The EMD that you place into escrow is negotiable. The reason for an EMD is to protect the seller in the event the buyer does not perform. The buyer may be able to keep the EMD if the buyer did not perform according to the signed agreement.
To minimize your risk in the deal it is best to put as little as possible. In situations where the seller is considering a few offers you may want to increase this amount to strengthen your offer.
If you have a solid buyer lined up when it’s time to deposit your EMD, you may be able to have them deposit the funds. This is an excellent way to eliminate the risk of losing money if the deal does not end up closing.
Know Exactly What Your Buyers Want
The fourth way to minimize risk when wholesaling is to know your buyers buying criteria.
I would say this is the most important aspect of wholesaling real estate! Find out exactly what your buyers want and go out and find it. Get to know your buyers very well. They are your customers and the life and blood of your wholesaling business.
Take the time to build relationships with your buyers. Here is a list of what you need to know about your buyer’s business models:
What areas do they buy in?
What price ranges do they focus on?
What type of returns do they need to obtain?
Flat dollar amount. Ex. At least 50k per flip
% of money invested. Ex. 12 Return on investment
Are there certain types of fixers or repairs that they will not take on?
Fire damaged homes
Is there a minimum of bedrooms, bathrooms or square footage that the properties must have? Some investors will only take on 2 or 3 bedroom homes and shy away from 1 bedroom homes. Others may not buy anything unless it has a minimum amount of square feet.
How do they fund their purchases?
Their own funds
Hard money loans
How do they run the numbers? It helps to understand how they determine expenses when they are analyzing potential deals. Some buyers may be licensed real estate agents and will be able to save 3% when they sell the home. It is good to know this ahead of time so that you can write an even stronger offer if needed. Find out what they estimate for:
Real estate commissions when they resell
Closing costs when they purchase & when they sell. Escrow/Closing Attorney/Title
Holding costs- Property taxes, insurance, maintenance, private/hard money loan if applicable.
When you have a solid idea of what your buyers are looking for you will minimize your risk, of having to back out of a deal, buy a great deal.
Proper Due Diligence
The fifth and final way to minimize risk when wholesaling is to conduct proper due diligence.
Minimizing your risk when wholesaling real estate really begins with doing proper due diligence. If you do your homework, ahead of making an offer, you will cut down your risks greatly.
Make sure the property you are interested in fits the criteria of your buyers. Double and triple check your numbers when analyzing the deal.
Take a look at an aerial view and street view of the home to see if there are any red flags such as proximity to railroad tracks, commercial/industrial/retail buildings, under a flight path, on a very busy road, next to a freeway, etc. Check on the market activity in the same neighborhood. Is it already saturated with homes for sale? Are homes sitting on the market for extended periods of time?
If possible, view the home to get an even more accurate read on repairs needed. Take pictures and video to send to your buyers. They will be very grateful that you did.
There you have it. Five ways to minimize your risk when wholesaling.
Make sure to follow these steps to ensure you minimize your risks as a wholesale real estate investor and you will be a success!
I hope that this post was very helpful to you. If it was, please share with someone who you think may benefit from it.
Here’s to your success!!!