When Starting Out in Wholesaling, Small and Steady Wins the Race

The profit margins for wholesaling are downright attractive to aspiring real estate investors — it's possible to make tens of thousands of dollars on just one wholesale deal. But many new wholesalers who chase that kind of profit right off the bat become frustrated or burned out, all while leaking resources waiting for a huge deal. Smaller profits are within easier reach, and creating momentum that allows new wholesalers to close deals quickly and move on to the next is key to a successful venture. Once you're comfortable with the wholesaling process, you'll be better equipped to chase deals with bigger checks.

We suggest wholesalers aim for a healthy $5,000 profit — at least for the first flip, if not for a few more after that. If that seems like an underwhelming figure, consider that some of the largest wholesaling companies make only $7,000 on each house. The longer you do wholesaling, the better chance you have of landing those giant $50,000 checks you dream about.

Those big bucks are definitely within reach: According to one analyst, the average profit from a flip in 2017 was more than $68,000. However, that figure is unrealistic for beginning wholesalers; it's based on 200,000 deals where renovation was completed and flips might take months.

Starting out with smaller margins is still quite an achievement, and it allows new wholesalers to close a deal and pour those resources into the next. Soon, you'll start closing more and more deals. It takes, after all, only 10 flips at $5,000 profit to make $50,000.

Building Off Your First Deal

Keeping your expectations low to start is not only practical, but it’s also motivating. You set yourself up to close your first deal quickly, move on to the next, and do it all over again.

Wholesaling is all about fast turnaround, so aim to move deals quickly rather than holding out for minimal amounts of extra money. It’s tempting to squeeze as much profit as possible out of a home by lowering the purchasing price or inflating the selling price. But wholesalers must strike a careful balance between the ability to move quickly and profitability.

For example, a seller recently asked me for $65,000 after I had offered $60,000. I thought to myself, what was that extra $5000 for? My gut told me I would make $20,000-plus on this deal, so I told the seller I would meet at her price as long as she did a few things on her end to make the deal go smoothly, such as give me full access to the property right away so I could walk sellers through the house anytime I needed.

The conventional rule of thumb to follow when making offers to homeowners is taking 70 percent of what the house would be worth in perfect condition, then subtract the expected rehab costs and your target profit. That total is approximately what you should offer for the house. The number might seem low, but experience will teach you how to navigate those discussions with homeowners. Often, being transparent about your costs and highlighting your modest expected profit helps to justify the figure to the current owners.

As you gain experience, you will develop a list of buyers whose tastes you can cater to, improve at estimating costs, and refine your negotiation skills. After you have several flips under your belt, you'll likely see regular profits of $5,000 to $10,000-plus on each sale, depending on your real estate market.

Laying a Foundation for Success

Your first sale might be modest, but the sky is the limit on future sales. Learning the ropes has a direct impact on your bottom line. Get a head start by following these tips for new wholesalers:

1. Ask the local experts.

Attend local real estate meetups to learn the ins and outs of your market. Explore what other wholesalers are earning — both now and when they first started out. These groups are designed to facilitate networking and help out new wholesalers and investors, so ask the experts to describe their buying processes, how they find ideal properties, and which neighborhoods are hot.

2. Pick one marketing method.

Familiarize yourself with common marketing options to find motivated sellers. Each marketing strategy will have tradeoffs in time or money. For example, if you look for distressed homes in your area yourself, you won't spend as much money. You could pay someone else to search for you, which would cost more but free your time up to do other things. Alternatively, you could buy a time-saving prepared list of potential homes, but because every other investor has those same lists, you'll need to send more mail to get responses, which will be more expensive.

When you are first starting out, pick one method and stick to it for at least the first few months. That way you can maximize your marketing efforts and make the most of your resources.

3. Repeat your marketing.

The homes you're interested in have probably been sitting that way for a while before you found them — meaning the owners have probably heard from a lot of interested parties before you came along. If your first outreach effort doesn’t produce a reply, don’t give up. I recommend sending out a minimum of three mailers to each prospect.

4. Find a buyer quickly.

Home buying companies will take almost any home you have to sell off your hands. They'll even partner with you before you close on a sale. Because your goal with your first wholesale deal should be simple to complete the deal so you can keep the momentum up, these companies can be smart resources for new wholesalers. Find these opportunities by simply Googling "sell your house" plus the name of your city or market.

Your first flip in wholesaling is important, exciting, and hopefully lucrative. Ultimately, however, it’s the first of many, so don't put too much pressure on your first few flips. Aim for about $5,000 in profit and learn as much as you can, then get busy finding the next house.