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06/30/08 16:30 , Categories: Articles

Lately, I have been working with more and more real estate investor wholesalers. One of the first questions I am asked by people who are new to the business is exactly how wholesalers actually make money.

First, I want to describe what a wholesaler does and does not do and then I will cover how they actually make a profit when they wholesale a deal.

When we are talking about wholesaling real estate, we are specifically referring to you finding a great deal, placing a contract on the property and then selling your rights in the contract to another investor or someone who will be living in the property.

Specifically, you are not "helping people sell their home," like you would be with a real estate license.

So, how do wholesalers make money? They make money by selling their rights to the contract. Here's an example of how a wholesale deal might work.

You find a property that is worth $100,000. You talk with the seller, and they agree to sell you the property for $55,000. You then write up a contract to purchase the house in the next 45 days for $55,000. You also include that you have the right to assign your contract to someone else if you want to.

Next, you go and find another investor who wants to purchase the house or someone who wants to live in the house. For this discussion, we will call them your buyer.

You and your buyer agree that they are willing to pay $65,000 for the house. So, you buy it for $55,000 and you are selling it for $65,000. You have a gross profit of $10,000 (not including your expenses to find the seller, find the buyer and any closing costs you might have).

In future articles, I will cover the mechanics of how the transaction works, but for now realize that your buyer will be purchasing the property for $65,000 and the seller will receive their price of $55,000. This leaves you with a gross profit of $10,000 on the deal.

If your buyer comes from a real estate agent or broker on your dream team, you may also need to pay a real estate commission from your profits. On this particular deal, if you agreed to pay a 3% real estate commission for your real estate agent or broker to bring you a buyer, you would pay them 3% of the $65,000 purchase price or $1,950. In that case, instead of grossing $10,000 on the deal, your profit (before other expenses) would be about $8,050.

The big picture is simple: wholesalers are paid for finding truly great deals, placing them under contract and then selling their rights to purchase the property at the contracted price.

Until my next post,

James

Have real estate investor questions, comments or want more? Please post any comments and questions and I will try to answer them or write a new article as a reply. Register for our FREE Real Estate Wholesaler Program for more articles, downloadable audio and video courses and much more.

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27 comments

Comment from: jc smith [Visitor]

JAMES YOU ARE RIGHT ON ABOUT HOW WHOLESALING WORKS. BUT YOU LEFT OUT ONE IMPORTANT PART. YOU CAN HVE THE SELLER QUIT CLAIM THE PROPERTY TO THE END BUYER ALONG WITH A QUIT CLAIM BILL OF SALE I KNOWE IT WORKS IN CALIFORNIA BECAUSE I JUST DID A DEAL IN JULY.
JC SMITH
WHOLESALER IN CA

08/05/08 @ 12:55

Comment from: James Orr [Member]

That's not what I teach JC, but there are lots of ways to do similar things. Some have good and bad consequences. I would not want someone selling me a house with a Quit Claim deed.

Thanks for sharing.

James

08/05/08 @ 15:06

Comment from: J Carrigan Jr [Visitor]

James, Here in Maryland the new laws do not allow you to flip houses like that. You have to own a house for a certain time frame here before you can sell. If you sell before that time you have to split the difference with the original seller. Have you heard or know about this?

08/08/08 @ 12:19

Comment from: James Orr [Member]

No. I am not familiar with Maryland laws specifically, but I suspect there is more to it than what you just told me. Is that just for houses that are in foreclosure?

James

08/08/08 @ 12:30

Comment from: Linda Sen [Visitor]

James I understand the concept. My questions are concerning contract you hold from the Whole Sale List. How do you get it? Is the contract no money down situation? I'm wondering because you have tie up the bank property for 40 days? You must be able to pick the correct property and quickly process the sale. It isn't hard to find buyers if the price is right. So one must have a great mortgager or be able to fund properties for land contract or rent with some option. What are the options you’ve use in the past.
The REO's from my limited experience have been damaged which must be fixed for certificate of occupancy. So, there is a possibility of loss.

08/12/08 @ 13:28

Comment from: James Orr [Member]

Thanks for the message Linda.

James I understand the concept.

Great.

My questions are concerning contract you hold from the Whole Sale List.

OK.

How do you get it?

You sign a contract to purchase the house with the seller and then assign it to your buyer.

Is the contract no money down situation?

I have other articles where I discuss this in particular, but to over-simplify: you do usually need earnest money (but not a down payment). Your buyer can often pay the earnest money and then the down payment.

I'm wondering because you have tie up the bank property for 40 days?

Whooaaaa! We are not usually talking about bank properties. We are usually talking about individual sellers. Banks are infinitely more difficult to work with to wholesale properties and, while it *can* be done, I do not recommend it for beginners.

You must be able to pick the correct property and quickly process the sale.

Yes. I emphasize building your buyers list well in advance to get it sold quickly.

It isn't hard to find buyers if the price is right.

Yes. You should still build your list in advance.

So one must have a great mortgager or be able to fund properties for land contract or rent with some option.

I do not understand that sentence.

What are the options you’ve use in the past.

I describe this in various articles on this website in more detail than I can cover again here in a few sentences. Please do take time to read the other articles.

The REO's from my limited experience have been damaged which must be fixed for certificate of occupancy. So, there is a possibility of loss.

I am not suggesting REOs for beginners looking to wholesale deals. Work with individual sellers.

Thanks.

James

08/12/08 @ 13:36

Comment from: RODNEY COLE [Visitor]

Hello! I was wandering when you find a piece of property you talk the owner down a few thousand dollars but nothing to back yourself up with, how do you find a backer that is there when you need them and be able to back you up right on the spot when you make deal with owner that wants cash and no owner finanse or renting. Thank You

James replies:

You need to build your buyers list well in advance of that stage. I discuss building a buyers list in the Wholesaler Control Panel. There is a whole series of articles about it and all sorts of other resources for how to build a wholesale buyers list for this exact reason.

Sincerely,

James

08/22/08 @ 10:36

Comment from: Tim [Visitor]

James,

What I have found to work when dealing with a Seller that has a mortgage. We use our lines of credit to purchase the house for cash. Then we can wholesale it without any issues.

James replies:

This is NOT what I recommend, but yes it can be done this way as well. I recommend wholesaling without committing to any type of payment. I do not recommend that people looking to wholesale should use any cash or credit on the house.

Buying the house is a completely different issue, but for straight wholesaling I do not recommend that method.

Sincerely,

James

08/25/08 @ 16:13

Comment from: tim fisher [Visitor]

james how fast can get my first deal working thanks tim in topeka kansas

James replies:

It is possible to do it in one day, but not likely.

There are so many variables like how much marketing are you doing to find deals, how big and good is your buyers list, how good is the deal and so on that it is hard to give an estimate on that.

You'll get full time results for full time work. Part-time results for part-time work. And no results for no work.

Sincerely,

James

08/27/08 @ 14:45

Comment from: Frank [Visitor]

You can wholesale reo's or bank owned properties but yes it is more tricky. First of all banks do now allow assignments so that is out of the question. But what you can do is form an llc which cost depending on who you talk to about 175 dollars. So now you get the house under contract and use the name of the llc as the buyers name on the contract. Once you have your buyer in line you sell the llc to your buyer for the price you would have charged for the assignment of contract. Your buyer closes on the house and you get paid.

09/02/08 @ 19:31

Comment from: marlis [Visitor]

When you buy a REO and like to assign the contract is to build a LLC the only option or could you also put the propetie in a Landtrust and sell it?

James replies:

I have not personally done that, but I don't see any problems with it. You should verify with your own local attorney.

Sincerely,

James

09/04/08 @ 05:43

Comment from: Jamie [Visitor]

Wholsaling is a great way to get into real estate investing. I have done 8 to 10 myself.

When dealing with the home owner LISTEN. Focus on their need for the best deal. Sometimes the motivation is more time than money. Others they are emotionally tied and they don't want to clean out the house. I've said take what you want and leave the rest.

Be creative. Good Luck!

09/07/08 @ 06:43

Comment from: Simona Hill [Visitor]

Okay I'm new to investing in real estate, so whats the catch and whats the pros and cons of this business.

James replies:

It requires HARD WORK... that's the catch. You need to work to build your buyers list. You need to work to find deals, make offers, get them accepted and wholesale them.

As for pros and cons, you may want to read the rest of my articles where I discuss those in detail.

Sincerely,

James

09/08/08 @ 14:25

Comment from: S.L. [Visitor]

I understand the big picture. However, there are details and specifics that I need: 1) how does one find the deal? 2) how does one fund it? 3) how does one build a buyers list?

James replies:

1. I cover in detail how to find deals in various articles on deal finding from the Wholesaler Control Panel (and on this website).

2. For wholesaling, you are NOT funding the deals at all, so for the wholesaling lessons I don't teach funding. If you are wholesaling them you do not need to fund them.

3. Buyers lists... that's a specialty of mine since I grow my own, on average, by about 200 new investors on it per day and I write about it A LOT. See the Wholesaler Control Panel for details too.

Sincerely,

James

09/12/08 @ 15:50

Comment from: Karimah [Visitor]

Hello Everyone,

What is the best approach to purchase REO houses from the bank directly?

Is it possible to contract to purchase a property from the bank and then assign it?

Thanks in advance for the information.

James replies:

I do not teach that. You can wholesale deals from banks, but it is more complicated and I do not teach it here.

Sincerely,

James

09/15/08 @ 14:24

Comment from: eric [Visitor]

as a wholesaler do i get paid when i assign the contract or when the buyer closes

James replies:

You can do it either way, but it is usually done at closing. Your ability to negotiate that with your buyer will determine which way you do it.

Sincerely,

James

09/20/08 @ 22:26

Comment from: Rick [Visitor]

James, That sounds great, but lets say I have about 150,000 in equity in 3 different properties and want to purchase another investment that will put another 100,000 equity but need the money. Hook me up, I am sick and tired of missing out on another million dollars,in another missed year of money??

James replies:

Everyone else reading shut look away now as I do NOT recommend you do this, but if you are set on doing it against my recommendation not to... some things for you to research is private money seconds, blanket loans to refinance all the properties including the new purchase, accessing cash/equity from something you can get at (like a home equity line of credit) or bring in a money and/or credit parter.

NOTE: I DO **NOT** RECOMMEND DOING THESE THINGS. You can know of the evils so that you can avoid them and so that when someone tells you you can do them, you know I said not to.

Sincerely,

James

09/24/08 @ 10:57

Comment from: Richard [Visitor]

In order to start the whole process of wholesaling, is it best to build your buyers list first or find a title company. Because I am simply dying to get started but don't really know what to do first. I don't want to mess this up.

James replies:

You should start to build a buyers list first.

Follow the steps exactly as outlined in the Wholesaler Control Panel. It has it laid out step by step there.

Sincerely,

James

09/29/08 @ 07:27

Comment from: Erick Blasa [Visitor]

Don't you have an expansion plan to other countries like the Philippines? Here in the Philippines I do that stuff to and I usually offer site for the developer for their housing project. We can set it up here andf promote it here and sell real estate properties. We can have those banks enter those properties they porfitted from their loaner...What do you think?

James replies:

Absolutely NOT! I strongly advise all my clients to stay in the United States. I am firmly against investing outside of our own country and tell all people that call me about investing in South America and other parts of the world that it is not something I am interested in myself or recommend to my investors... EVER!

Sincerely,

James

09/30/08 @ 10:22

Comment from: Ronald Russell [Visitor]

I'm a little confused. You said wholesalers are paid for finding truly great deals, placing them under contract and then selling their rights to purchase the property at the contracted price. I have known this as assignment. Most traditional lenders won't allow you to add in the assignment fee so your buyer will have to have cash. Or you can double close. But you will have to have your own funding or rent the money for the day.

James replies:

I'm a little confused.

OK.

You said wholesalers are paid for finding truly great deals, placing them under contract and then selling their rights to purchase the property at the contracted price.

Yes.

I have known this as assignment.

Yes, that is one way to do it: assign your contract.

Most traditional lenders won't allow you to add in the assignment fee so your buyer will have to have cash.

Not true. See my other articles where I discuss, in detail how this works.

Or you can double close. But you will have to have your own funding or rent the money for the day.

That's one way (not the only other way).

I do cover this in much more detail already in other articles. Please do read those.

Sincerely,

James

10/01/08 @ 17:11

Comment from: Nancy [Visitor]

You're right on, James. This is exactly what I was taught throught my WIA class. Can't wait to read more...

James replies:

Thanks and enjoy!

James

10/03/08 @ 23:42

Comment from: Margie [Visitor]

Hi all

Do I need a license to become a real estate wholesaler?

James replies:

It depends on how you do it. I do explain in detail the cases where you need a license and when you don't in another article. Please read that for more information.

Sincerely,

James

10/14/08 @ 16:36

Comment from: Steven [Visitor]

You mentioned writing a contract indicating you had 45 days to sell the property. If I was the seller, I would think that is too long as no one else could attempt to buy the property because the house is already contracted out. Would 14 days be too short assuming I had investors waiting to buy the deal?

James replies:

First, you had mentioned that "if you were the seller", but you're NOT the seller. What you and I would do is very, very different from what other people would do. I would not sell my house and leave my name on the loan, but folks do it by the thousands.

You *could* get it done in 14 days with the right investor and you could add a clause to the agreement to extend it should extra time be needed to facilitate closing delays.

Sincerely,

James

10/18/08 @ 16:12

Comment from: Ruben [Visitor]

What would a simple contract say?

James replies:

It would outline the price, terms and dates between the buyer and seller.

I do have entire articles on contacts. Please read that for more info.

Sincerely,

James

11/01/08 @ 11:26

Comment from: Charlene flickinger [Visitor]

James

In what manner should this contract be drown-up, Is it possible to include any closing in the contract as well?
is the wholeseller paid at closing in escrow?
More Info. please. Not sure about that.

Thanks
Charlene

James replies:

I have an entirely different article on contracts; please see that one.

Yes, you can include closing costs in the contract.

Yes, the wholesaler can be paid at closing.

Hope that helps.

Sincerely,

James

11/10/08 @ 09:27

Comment from: theresa [Visitor]

if you do not sell the property in 45 days do you have to pay for it yourself?

James replies:

It depends on how you write it up. If you read more of my articles, you will find out how I specifically deal with this so that I am not required to buy it if I can not find a buyer.

Sincerely,

James

11/15/08 @ 09:22

Comment from: Anthony E [Visitor]

James can you tell me about an option contact and how is it done? Is this something that you cover in this program?

James replies:

Yes, I do cover options in other articles. Once you get to those articles, if you still have questions, please let me know and I will clarify on that article.

Sincerely,

James

11/24/08 @ 17:20

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