Wholesaling is one of the best ways for real estate investors to break into the industry. While looking for potential wholesale opportunities, some investors will look towards the foreclosure category as a potential avenue. Dealing with foreclosures, though, takes a bit of nuance. Let’s talk about how to start wholesaling foreclosure properties and what that might look like.
To start wholesaling pre-foreclosed properties, you’ll need to position your investment business as a solution for the homeowner’s problem. Due to the highly-emotional state that someone going through a foreclosure can be in, it’s important that you balance getting the best deal with solving the problem the homeowner faces.
That sounds pretty intense, I know. Luckily, I’ve got a great breakdown below that covers the ins and outs of wholesaling and what to do if you want to target foreclosed or pre-foreclosed properties before they hit the auction block. Let’s dive in.
New real estate investors see wholesaling as an easy way to break into the market. To be fair, it is, at least in concept. The truth is while the principle of wholesaling is pretty straightforward, it still takes a lot of work to become successful.
Wholesaling properties is a type of real estate investing that makes you the middleman of a real estate deal. You as the “buyer” source potential properties and submit an offer. Once the offer is accepted, you and the seller move into the contract stage. During the contract stage, rather than taking on all of the tasks that come along with closing a deal (due diligence, inspections, getting a mortgage, etc.) you find a new buyer who takes over the contract in your place.
The contract is flipped for a profit and ideally involves you putting little-to-no money down. It’s like running a business where you collect finders fees for other potential investors or even homeowners.
Wholesaling is the method with the lowest barrier of entry when it comes to real estate investing. Since you won’t need to get a mortgage, the hurdles of having a good credit score and solid employment history aren’t a factor. Those with felony records can also find success in wholesaling, thanks to this.
The best part of wholesaling real estate is that it requires very little investment on your end, so it’s a great way for investors who don’t have a lot of capital to break into the industry. You should expect to have a few thousand saved to put down as earnest money in the beginning. Luckily, this is reimbursed when selling the contract to the new buyer.
That’s the good news. The bad news is that wholesaling on its own doesn’t generate a lot of profit as you’re not taking on much risk. You may be able to generate a few thousand dollars in profit per contract, but don’t expect to become rich quickly.
Successful wholesaling real estate investors develop a system that keeps a steady stream of new properties coming in and sold contracts going out. This requires a business owner who is really good at organization and detail or has someone like that on their team. If you’re just starting, it’s best to stick to one or two deals at a time until you get into the swing of things.
Wholesaling overall is a quick process when you’re in a seller’s market. However, if the market turns, you may be left holding the bag, so I want you to walk into this with your eyes open.
Typically, real estate contracts have milestone deadlines that ensure the process continues at a good clip. These milestones usually include things like due diligence, loan approvals, and appraisals. During each milestone, you may be able to walk away from the contract and get back your earnest money, but if you miss those deadlines, it could be trouble. Some sellers may let you out of the deal, but you’ll be out your earnest money. If a seller is really stringent, you may be required to continue, though this is pretty rare.
The ideal buyer for your contract is a potential homeowner, as they’ll give you the best deal. That said, some “retail” buyers are wary of trusting the wholesaling process and will prefer to deal with just real estate agents and the original seller.
Most of the time, your buyer will instead be another real estate investor. Not all investors will expect the same type of deal, though, as they’ll have different price points that need to be hit.
Investors looking to become landlords and rent out the property will usually pay the best price, as they can recoup their costs over time. However, these may be hard to come by as most landlords will have their own system for finding new deals.
Fix & flip buyers are often the most eager to find a good wholesale deal as they’re on a tighter deadline for realizing a profit. The downside to fix & flippers is that they’ll be looking for the maximum amount of profit in the shortest time, so they won’t be willing to pay as much for the contract as a landlord would. If you can remove the pain point of them constantly having to source new properties, you might have a great new business partner on your hands.
Finding potential wholesale deals means looking for properties that are undervalued or untapped. You’re rarely going to find good deals for wholesaling on the MLS; it’s going to take a little more ingenuity on your end.
The most successful method I’ve found is what I call “Driving for Dollars” – it’s THE main strategy that I teach my students. We have videos about how Driving for Dollars works, but essentially it works like this:
So now that we’ve covered the basic run-over of real estate wholesaling let’s talk about the specific considerations that come along with foreclosures.
Foreclosing on a property is both an event and a process, so it can get a little confusing. A foreclosure timeline usually runs like this:
As a real estate investor, if you can get to the homeowner before the public auction, you may be able to avoid a bidding war and get a great deal. How can you get to the homeowner before a foreclosure auction? It’s simple.
While Notice of Trustee Sales are obviously public records since they’re posted in newspapers, Notices of Default are also public records. Finding a NOD and doing research on the property (like a skip trace) can give you contact information for the homeowner.
When looking for homeowners who are in pre-foreclosure, you’ll be dealing with one of these scenarios:
Pre-foreclosure With Equity – These are the easiest to wholesale as the amount owed to the bank won’t be the full mortgage. As an example, say the homeowner has a $150,000 mortgage and has been paying diligently for the past decade but has fallen on hard times. For the sake of simplicity, let’s say the home is valued at $160,000 at the time of pre-foreclosure. That decade of payments has knocked the mortgage down to $60,000. The homeowner, therefore, has $100k in equity and is only defaulting on $60k. You come in to solve their problem by offering $60,000 for the home and have just bought a $160,000 home at a $100k discount. The contract is then sold to a fix & flipper for $90,000, giving you a $30k “finders fee.”
Pre-foreclosure Without Equity – Not only are these more difficult to wholesale, but they’re also way more common. I’ll use the same scenario for this example: a $160k home with a $150k mortgage. This time, though, the homeowner has only been in the house for two years and has paid $15,000 off. While they have a little bit of equity ($25k), it’s not enough to generate a significant profit for you. In this case, you’d want to look for a landlord type of investor as a fix & flipper wouldn’t touch this.
No matter the method, real estate investing means finding a great deal, usually at the homeowner’s loss. This is especially true in pre-foreclosure, so there are some things you should recognize before diving into wholesaling pre-foreclosures.
Fortunately (or unfortunately, depending on your position), foreclosures are always a steady stream of opportunities for real estate investing. With the eviction moratorium on its last leg here in the US, it’s safe to say you should expect an influx of pre-foreclosure opportunities soon.
I’ve pulled together a list of foreclosure rates for the states The Investor's Edge operates in to give you an idea. While the range fluctuates on a per-state basis, you can see that it really doesn’t matter where you live; foreclosures are an abundant source of investment opportunities.
State | Foreclosure Rate, 2021 |
---|---|
Alabama | 1 for every 11,931 homes |
Georgia | 1 for every 11,392 homes |
Illinois | 1 for every 6,381 homes |
Louisiana | 1 for every 12,955 homes |
Maryland | 1 for every 10,375 homes |
Michigan | 1 for every 16,241 homes |
Minnesota | 1 for every 26,217 homes |
Missouri | 1 for every 11,117 homes |
New Jersey | 1 for every 4,809 homes |
New Mexico | 1 for every 9,379 homes |
North Carolina | 1 for every 12,853 homes |
Ohio | 1 for every 7,040 homes |
Pennsylvania | 1 for every 16,174 homes |
Texas | 1 for every 13,420 homes |
Virginia | 1 for every 18,893 homes |
Both wholesaling and foreclosure investing can be great ways for real estate investors to gain experience while generating profit. Keep in mind the considerations I’ve mentioned above and start slowly. The better understanding you have of the process, the higher the chance you’ll walk away with a nice chunk of change to fund more real estate ventures.
Learn how to make money flipping real estate with us by attending our next webinar.