Recently heard of reverse wholesaling and wondering how it works?
Then you’ve come to the right place.
In this guide, we’re going to show you how reverse wholesaling works, why it’s great for beginners, the pros and cons, and how to do it step by step.
Let’s dive in.
What is Wholesaling?
Before you can understand reverse wholesaling, you need to understand wholesaling.
Here’s the definition we give in our wholesaling guide: “Wholesaling is a real estate investing strategy that involves finding properties that are being sold below market value and then “flipping” them to cash buyers (i.e. other investors) for a profit.”
Here’s an example.
Imagine that you find a house in distress — windows are broken, floors need to be repaired, and it’s old and dirty. You run comps and determine that once the property is repaired, it’ll sell for $200,000 (this is its ARV, or After Repair Value).
You also estimate that the property needs about $30,000 in repairs.
So you approach the owner and offer to buy it for $100,000 cash. The owner agrees because they need to sell the property fast and don’t have the money to make repairs.
You put the house under contract for $110,000.
You then market the property to other investors and find one who’s willing to buy it (they have the cash, you don’t) for $120,000. You assign them the contract (meaning you transfer your interest in the property to them) and pocket the $10,000 difference.
And that’s how wholesaling works in a nutshell. You buy low, sell high, and don’t put any of your own money into the deal.
Now let’s talk about reverse wholesaling.
What is Reverse Wholesaling?
Reverse wholesaling is a real estate investing business model where the wholesaler finds a buyer before they find a deal. Once they’ve found a buyer and gathered information about the types of deals that the buyer wants, the wholesaler goes out and finds a deal that matches the buyer’s criteria.
The benefit of this model is that it’s much more hands-on with your cash buyers — this is great if you’re new to wholesaling or if you’re just starting to build your real estate investing business.
What’s The Difference Between Wholesaling and Reverse Wholesaling?
The biggest difference between wholesaling and reverse wholesaling is who you find first: the buyer or the deal.
With traditional wholesaling, you find a deal first and then look for a cash buyer to buy it from you.
With reverse wholesaling, you find a cash buyer first and then look for a deal that meets their criteria.
The Pros & Cons of Reverse Wholesaling
As with any business model, there are pros and cons to reverse wholesaling.
Here are some of the pros:
You don’t need much money to get started: Because you’re not actually buying the property, you don’t need much money to get started. All you need is enough money to cover the marketing costs associated with finding a buyer (more on this later).
You have more control over the deals you do: When you’re reverse wholesaling, you’re in charge of finding the deals. This means that you can be more selective and only do deals that meet your buyer’s criteria.
You’re building relationships with cash buyers: One of the biggest challenges in real estate investing is finding good cash buyers. By reverse wholesaling, you’re building relationships with cash buyers from the start. And as you build these relationships, it’ll be easier to find deals that they’re interested in.
Now let’s look at some of the cons:
It’s more time-consuming: Because you’re working with buyers and looking for deals that meet their criteria, reverse wholesaling can be more time-consuming than traditional wholesaling.
You need to be good at sales: In order to be successful with reverse wholesaling, you need to be good at sales. This means you need to be able to find buyers and convince them to work with you.
Reverse Wholesaling Vs. Other Investing Models
Reverse wholesaling is just one of many different real estate investing business models. And while it has its pros and cons, it’s not the right model for everyone.
Here’s a quick overview of some other popular investing models:
Fix and flip: With this model, you buy a property, fix it up, and then sell it for a profit.
BRRRR: With this model, you buy a property, fix it up, and then rent it out. Once the property is rented, you refinance the loan and take out cash to use for your next investment.
Wholetailing: With this model, you find a property that’s already in good condition and then sell it to a retail buyer.
Virtual Wholesaling: With this model, you use technology to find motivated sellers and then resell the property without ever seeing it in person.
Wholesaling: With wholesaling, you find a property, get it under contract, and then sell the contract to another investor.
As you can see, there are many different real estate investing business models. And the model you choose should depend on your goals, skills, and resources.
When To Reverse Wholesale (& When Not To)
Reverse wholesaling can be a great business model for a variety of different investors.
But it’s not right all the time.
Here are some situations when you should consider reverse wholesaling:
You’re new to real estate investing: If you’re new to real estate investing, reverse wholesaling can be a great way to get your feet wet.
You don’t have much money: As we mentioned earlier, you don’t need much money to get started with reverse wholesaling. This makes it a great option for investors who don’t have a lot of capital.
Now let’s look at some situations when you shouldn’t consider reverse wholesaling:
You’re short on time: If you’re short on time, reverse wholesaling might not be the right business model for you. Since you’ll be looking for deals to fit buyer criteria, it takes longer than usual to find deals.
You want to scale: It’s difficult to reverse wholesale at scale since you’re giving more power to your buyers. To scale wholesaling, you need to find a lot of deals and have a good list of cash buyers to send those deals to.
How To Reverse Wholesale, Step By Step
Now that we’ve covered the basics of reverse wholesaling, let’s look at exactly how you can do it.
Here are the steps.
Step 1. Find High-Quality Buyers
Reverse wholesaling is only going to work if you find a very high-quality buyer who is willing to be open and honest with you.
The best ways to find buyers like this is to attend property auctions, network with other investors, and search for other investors on Google.
If you’ve found someone who you think you want to work with, offer to buy them lunch so you can get to know them. Ask them questions about how long they’ve been investing, what their goals are, and what type of properties they’re interested in.
For reverse wholesaling to work, you’ll need to build a lot of rapport with your buyer.
Tell them what you’re doing and ask them if they’d be interested in buying a deal that you find that fits their specific criteria.
Step 2. Collect Information From Buyers
Once you’ve found a buyer (or multiple buyers), it’s time to start collecting information from them.
You’ll need to know exactly what they’re looking for in an investment property so you can find the right deal for them.
To do this, you’ll need to ask them questions about their ideal property, such as:
- What type of property are you looking for?
- How many bedrooms and bathrooms?
- What’s your price range?
- What city and neighborhood do you want to be in?
- When do you want to close on the property?
- Do you have any other specific criteria?
Once you have all of this information, you can start searching for properties that fit their criteria.
Step 3. Find Great Deals
Now it’s time to find great deals.
The best way to find deals is to search for properties that are being sold by motivated sellers.
You can find these types of properties by searching for pre-foreclosures, foreclosures, and probates in your area.
Another option is to search for properties that have been on the market for a while.
You can find these properties by searching for expired listings and homes that have had multiple price reductions.
Here’s our detailed guide on how to find motivated sellers.
Remember: you’re looking for a deal that matches the buyer’s criteria. This might take a little while and require a few thousand dollars in marketing spend… but it’ll be worth it once you find it.
Step 4. Run Comps
There’s a big difference between finding a good deal… and finding what you think is a good deal.
Good deals are just good math.
Remove the emotion from it, look at the numbers, and be honest with yourself.
Comps are properties in the same area that have recently sold. This will give you an idea of what the property is worth and how much profit you can make on the deal.
To find comps, you can search for sold listings on your MLS or get help from a real estate agent (highly recommended if you’re new).
The most important number you’re looking at is the ARV or After Repair Value. This is what the property is worth once it’s been repaired and updated.
You’ll also need to have estimates for the following numbers:
- Repair costs (here’s a guide to estimating repair costs)
- Closing costs
- Holding costs (property taxes, insurance, etc.)
It’s also a good idea to visit the property and take a lot of pictures — you’ll want to present all of this information to your buyer before you make an offer.
Step 5. Approach Your Buyer
With pictures, comp estimates, and other detailed information in tow, it’s time to meet with your buyer.
It’s important that you lay all your cards on the table and be completely transparent with them.
Show them everything you’ve found out about the property — the good and the bad.
Then ask them what they’d be willing to pay for it.
Decrease that number by $5,000 or $10,000 (for your assignment fee) and you’ve got your max cash offer.
Oh — and don’t forget to ask them for their ideal closing date.
Step 6. Make Your Offer
Once you’ve got your buyer’s approval, it’s time to make your offer.
The best way to do this is to write up a purchase agreement and present it to the seller.
Make sure your purchase agreement clearly states that you’re buying the property “as-is”, for cash, and according to the seller’s desired closing date.
During negotiations, don’t go above your max cash offer.
If they accept your offer, congratulations! You’re now under contract.
Step 7. Close The Deal
Now it’s time to close the deal.
This is when you’ll transfer the contract to your buyer with an assignment contract (and make your money). Obviously, you’ll need signatures from both the buyer and the seller.
If you collaborated well with your buyer and if you found a motivated seller, then everything should go smoothly.
That’s reverse wholesaling in a nutshell.
3 Additional Tips For Reverse Wholesaling
If you’re thinking about reverse wholesaling, here are three tips to help you be successful.
1. Find Great Cash Buyers
Your number one goal when reverse wholesaling is to find a cash buyer that you believe you can trust.
This will make up for a whole lot of other potential problems.
If you find a great cash buyer who’s not yanking your chain, they will be willing to get very specific about the types of deals they want, they will pay you what you deserve in an assignment fee, and they will offer advice on comps and negotiations.
Take your time to find a great buyer… because it’ll make a world of difference.
2. Be Transparent
A great cash buyer will only stay great if you’re open and honest with them.
This means being honest about the properties you’re marketing to them, being upfront about any potential problems, and making sure they understand the risks involved.
The last thing you want is for your buyer to feel like they’ve been misled in any way.
Be sure to communicate openly and honestly with your buyer from the start. This will help build trust and ensure a successful transaction.
3. Use This as Your Starting Point
If you’re new to real estate investing, reverse wholesaling can be a great way to get your feet wet.
Use it to learn the ropes, build your cash buyers list, and gain experience in the industry.
But don’t forget, this is just the beginning. As you continue to grow your business, you can branch out into other investing strategies.
Final Thoughts on Reverse Wholesaling
Reverse wholesaling can be a great business model for some investors.
It’s simple, doesn’t require much money, and you have direct access to a real estate investing expert (the buyer) the entire time.
However, it’s not the right model for everyone.
If you’re short on time or want to scale your business, reverse wholesaling might not be the best option.
But if you’re new to investing or don’t have much money, it could be a great way to get started in real estate.