Wholesaling Real Estate: 3 on 3 Interview Series
Wholesaling is the real estate strategy of choice for many new real estate investors because it is perceived as an easy business to start with little or no capital and minimal experience. Unfortunately, there are a lot of misconceptions regarding wholesaling and most people who attempt to wholesale fail to be profitable. However, if done properly and with the necessary education, wholesaling can be a very prosperous business.
To help clear up some common misunderstandings and provide insight into the world of wholesaling, I have reached out to three successful wholesalers who will join me in this installment of the 3 on 3 interview series.
Jerry Puckett – Jerry is founder and Managing Partner of New Refined Images LLC. A former Acquisitions Manager and Navy Sea-Bee, Jerry learned wholesaling right here on BiggerPockets. He has been an active wholesaler for the last 3 years. Recently Jerry has started assisting other investors with their marketing and constructing web sites for their real estate businesses.
Ryan Webber – Ryan started investing in 2003 with rehabs and rentals. Now he mostly wholesales, but also does some rehabs and keeps a portfolio of rentals and notes. Ryan has bought over 400 properties since 2003.
Will Barnard – Will is participating in his second 3 on 3 article as he previously contributed to the rehabbing installment. He is President of Barnard Enterprises, Inc. and a number of subsidiary companies. He has experience in many aspects of real estate investing including: spec building, fix and flip, rehabbing, wholesaling, land lording, short sales, land development, commercial, notes, and more. He does millions of dollars in real estate transactions each year. In 2012, he flipped $3,340,000 worth of single family properties in Southern California alone.
A) There are a lot of people out there trying to wholesale but do not find success…what does it take to be a successful wholesaler?
Jerry: The short answer is: “Be an effective marketer.” The ones who are not finding success are, generally speaking, chasing a pipe dream that was sold to them on late night TV or You Tube Videos. They think they can do 3 to 5 deals off the bat with zero money and everything automated. Let’s be clear, wholesaling is a J.O.B. It’s a Real Estate job, but a job none the less.
To be successful, you have to keep your pipeline full, and to keep your pipeline full, you have to market. You have to market persistently and consistently. Those who are failing are sending out one round of letters and expecting instant success. One fellow I know sent out 250 yellow letters to his list, got a few unmotivated responses, and decided direct mail didn’t work. Then he spent a whole $100 on pay per click, got nothing, and decided that didn’t work.
Of course, you still have to have solid understanding of things R.E. related (comps, repair estimates, property values); legal (contracts and assignments); and interpersonal (negotiation, sales mastery, developing rapport). But without some effective marketing, you’ll likely never get the opportunity to do the rest.
Ryan: Many of the requirements for success in wholesaling are the same as for any business model. Hard work, diligence, persistence, marketing, integrity, income/expense analysis, budgeting, etc. Most people suck at being in business for themselves, so they suck at the business of wholesaling, rehabbing, and land lording. As for aspects that are specifically integral to wholesaling, the number one is marketing. Marketing IS what wholesaling is. There are a hundred different ways to find sellers and to find buyers. Learning to effectively and efficiently market to both is the absolute key to wholesaling. If you can’t find smoking hot deals, you can’t wholesale. And if you can’t find solid cash buyers, you can’t wholesale. It takes being good at both to build a successful wholesaling business. The 3 keys to wholesaling: deals, buyers, and mechanics. Finding deals is by far the biggest component to the puzzle. 80% of your energy/money/time should go into finding deals, and finding cash buyers is a piece of cake if you have a smoking hot deal. Building your buyers list is 15% or less of the puzzle. The last 5% is the mechanics of how to put it under contract, how to assign it or double close it, how much earnest money to give and to get, etc.
Will: To be successful, you need all of the following: Knowledge of the area, a real buyer’s list (I will explain), knowledge of the numbers (again, I will explain), and determination. The later goes with any strategy as there are ups and downs in all aspects of investing and you need to be able to press on through the emotional rollercoaster ride. A real buyer’s list means you need to first build a list of buyers who are proven all-cash buyers who can and will perform. In addition, you need to get their criteria so you can shop for what they are looking for. So often, I see investors locking deals that do not even come close to their buyer’s criteria, then, they wonder what went wrong when they can’t sell it. The other reason is that going after deals before you have a buyer’s list simply does not have any advantages, only disadvantages. For example, finding a buyer after you have a deal in escrow means you have never worked with them before, you have no idea what their buying criteria is or if the deal fits their criteria. You also put yourself into a position to possibly be stressed for a buyer which could cause lower margins or worst case, the loss of your earnest money or need to back out of a deal which can harm your reputation.
The numbers are extremely important. If you are not close on any one of the two numbers you need, you will fail. The first number you need is the ARV (short for after repair value which I call Exit Value). The second is the rehab estimate. So many new wholesalers underestimate the rehab numbers and over-inflate the exit value. By doing this, they either offer too much for the property making it very difficult, if not impossible, to sell it to a rehab investor, or they are artificially adjusting the numbers to make them look better which will result in the end buyer getting frustrated with inaccurate numbers and not wanting to do business with the wholesaler. You need both of these numbers in order to come up with a maximum offer amount. The other number of course is your fee.
B) How did you get started in wholesaling and how long did it take you to before you felt you had established a business?
Jerry: I got started in wholesaling as a spin off from my job as an Acquisitions Manager at J. Ingle Properties, a small Buy and Hold type outfit. I started out there just answering the phones part time. My wife had been diagnosed with stage 3 breast cancer, and I needed work I could do from home so that I could care for her.
As I began to have more and more questions about R.E., I would go online to find the answers, and kept finding myself on Bigger Pockets. I devoured Nick J’s posts about probate and started marketing in that direction with good success. Long story short, at one point we ended up with 2 fully executed contracts, and could only close on one. I said to my boss, “Let me wholesale that”. She said, “I don’t know how.” I replied: “I do!”
I had been reading Ryan Webber’s posts among others, and had it figured out. She agreed that if I could wholesale one of the properties, she’d split the fee. I started calling down my list of BP colleagues, and on the second call, found a buyer. We closed 28 days later for a 10k assignment fee. Afterwards, I decided to go out on my own, so I wouldn’t have to split any more fees.
I did 3 deals my first year, and 15 the year after that. Oddly though, I didn’t really feel well established until I went to the BP conference in Denver, and realized what I had to offer others.
Ryan: I watched a buddy of mine buy a house for $20,000, do nothing to it, and resell it a week later for $40,000. We didn’t call it wholesaling then, we just called it AWESOME!!! Six months or so later when I was focusing on rehabs I got a hold of a package deal of 5 houses. It was too much for me to do myself, so I started marketing them like crazy before I closed. I had two sold by the time I closed and 2 more within a couple weeks. The last one I rehabbed myself and sold a couple months later. I didn’t look back. That year I bought 37 properties – most of them I assigned, double closed, or resold within 30 days of buying them. A handful I rehabbed myself, but I was hooked on the speed of money with wholesaling. I increased my marketing dramatically the next year and I ended up buying 82 properties that year. A third of them I assigned or double closed, a third I resold without doing anything to them, and a third I rehabbed and either retailed them or kept them for my own portfolio. The problem with wholesaling is you are only as good as your next deal. It’s a job. You have to be working, working, working on finding deals or you won’t be much of a wholesaler.
Will: I did not wholesale a deal until I had already done many other RE transactions including rehab flips. It was the rehab flip experience and the contacts I made in order to be successful at that strategy which opened the doors to wholesaling. This is not to say that an investor could not start out wholesaling without ever completing a rehab, only to say that my experience worked out that way. Knowing what a rehab investor wants and looks for, plus the contacts I developed, is what made me a successful wholesale investor.
C) What is one piece of advice you would give to someone trying to break into wholesaling?
Jerry: Don’t give up your day job! Start slow and learn fast. Set a monthly budget for marketing, pick one type of marketing that fits within your budget, and start marketing for deals. Keep marketing for deals until you get one. If you need help getting through that first one, partner with someone. After the first deal is under your belt, and you know what to expect, it gets easier. You’ll be ahead of a good 65% of the folks who talk big but do nothing.
Increase your marketing efforts every chance you get, and do not neglect those efforts when you start working the deals or your pipeline will dry up. You will get to that point where you will know when to throttle up or back.
Ryan: There’s a 95% chance that you will fail. To make it to the 5%, you have to work harder and smarter than 95% of the other people doing the same thing you are. Consistent and persistent action is the key. Most people think they have what it takes, most people think they are willing to do what it takes, but most people are wrong. You will have to change and grow and learn, or you will fail. The most common mistakes that all new investors make, including new wholesalers, is overestimating After Repaired Value (ARV) and underestimating repairs. It’s like clockwork whenever I’m mentoring a newbie. They think it’s a deal, but it’s not because they smudged one of these two factors. Be conservative on all your estimates. Some people will pay cash for giant piles of steaming feces, but it has to be for the right price. Price overcomes all objections. Overpricing giant piles of steaming feces makes you look like an idiot. Don’t do it. You are marketing your deals to professional investors, be professional about it. This business is not hard, BUT it does take discipline and diligence. Set your mind to it, go to work, and don’t quit.
Will: Aside from the info given in answer number one, if I was starting out, I would want to work with (or even for) a rehab flip investor so I could learn the ropes first hand. There is no substitution for experience (excluding hard knocks which is not so fun or profitable). If going at it alone, I would suggest going to some of the large box stores (Home Depot/Lowes) and pricing many of the items commonly needed in rehabs in order to get an idea of what materials costs are. I would also get a few quotes on standard items for labor/installation so I could piece together a rehab budget. I would then get help from a very knowledgeable and experienced RE agent, who knows the area, and could provide some keen insight into market conditions, both past and present, as well as provide exit values for some sample projects. This would allow the investor to “practice” before making real offers.
If you are one of those who has been considering getting started in real estate investing and wholesaling specifically, take the advice from the experts in this article and figure out how to apply their lessons to your business. By understanding the fundamentals and working extremely hard, you can be a successful wholesale, but it will not happen overnight. A huge thanks to Jerry, Ryan and Will for contributing with their experience and thoughtful insights!
Photo: Jaqueline Cliff
This Article is Copyright © 2004-2012 BiggerPockets, Inc. All Rights Reserved.
Wholesaling Real Estate: 3 on 3 Interview Series