What Is Real Estate Wholesaling? How It Works, Example, and Strategies

Investing in real estate is nothing like investing in stocks and bonds. With the latter two, depending on the type of investment, you may be able to dive right in with perhaps as little as $100. You can exit whenever you wish. It’s not that easy when you’re dealing with real estate. In fact, real estate transactions can be tricky to navigate and they often come with a hefty price tag.

What’s more, it takes time to buy and sell homes. First, there’s the issue of the down payment. You also need financing for what your down payment doesn’t cover. You must fill out all kinds of paperwork. Then, there’s the closing, not to mention the time required to deal with tenants and collect rent.

If you really want to invest in real estate, but can’t bear the thought of all the money involved and going through the purchase process, you have options. Wholesale real estate is one of them. It’s a legal strategy concerning the purchase of real estate that you don’t commit to buying yourself or make a down payment on.

So, how does it work? Read on to find out about wholesale real estate and the profits available from it.

Key Takeaways

• In real estate wholesaling, a wholesaler puts a seller’s home under contract and then finds an interested investor to buy it.
• The wholesaler assigns their rights in the contract to the buyer at a higher price than the price contracted with the seller and keeps the difference.
• Real estate wholesalers generally deal in distressed properties.
• They take on the role of middleman to match investors/buyers with sellers.
• Unlike flipping real estate, a real estate wholesaler doesn’t make any renovations and carries no costs.

What Is Wholesale Real Estate?

Wholesale real estate refers to a short-term business strategy that investors can use to make quick and steady income in the real estate market.

In wholesale real estate transactions, the wholesaler enters into a purchase contract for a home from a seller for a small earnest money deposit. The contract spells out the amount the wholesaler will sell the property for and the required time period for the sale.

After the wholesale real estate contract is in place, the wholesaler attempts to find an interested investor. Once found, they reassign the contract to the investor at an agreed-upon higher price. The difference in prices is known as the wholesale fee and can be 5% to 10% of the property price. This goes to the wholesaler.

Usually, wholesalers look for a distressed property that the owner doesn’t want to spend time or money on. The owner is usually motivated to sell and often doesn’t want to work with a real estate agent.

Wholesale real estate may be well suited for people interested in real estate transactions but who don’t have the financial wherewithal to actually buy and sell properties.

You often don’t need a real estate license to become a wholesaler but check your local laws to be sure. If you have great people skills and are industrious, wholesale real estate may be right for you.

Important

Instead of purchasing a home and selling it, a wholesaler contracts with a seller for the property, finds a party interested in buying it, and sells them their rights to the contract.

How to Wholesale Real Estate

While wholesaling real estate doesn’t require a large amount of money, it does require that a wholesaler do the necessary property research, the networking to find the right investors, and the work to craft a financial deal that the investor will accept.

Here are the steps involved in real estate wholesaling.

1. Conduct Research

Learn about the wholesaling laws in your jurisdiction. In addition, look into the locales and neighborhoods where you want to buy property.

2. Locate a Distressed Property

Look for properties that may be listed below market value and owners who are motivated to sell. Owners of homes that are being foreclosed or have liens may be open to selling for less than what the house is worth. These resources may help you find such properties:

• Multiple Listing Service (MLS)
• Networking organizations, online real estate auction sites
• Social media platforms
• Foreclosure sites

3. Do the Math and Due Diligence

Once you find a property that fits your criteria, make sure your wholesale real estate transaction will make financial sense. First, find out the property’s fair market value. Looking at comparable properties sold in the area, occupancy rates, and cash-on-cash returns can help. Then determine what any required repairs will cost.

This information will allow you to calculate the after-repair value (the fair market value after repairs are done). With that, you can calculate a maximum allowable offer (the highest price you can offer for the distressed property and still make a profit). 

4. Contact the Seller

Explain your role as a real estate wholesaler and how working together may be an ideal way to sell their property. Clearly describe how the wholesale real estate transaction would work. Wholesale real estate transactions are legitimate (as long as state laws are followed) and there’s nothing to hide.

5. Obtain a Property Contract

Present your offer to the seller and get the property under contract. Be sure your contract includes the right to assign the contract to another party. Also, include in your contract a contingency that allows you, as the wholesaler, to withdraw from the deal if unable to find a buyer before the contract expires. This limits your risk.

6. Find a Cash Buyer

Once you’ve found the right property and have a wholesale real estate contract with the seller in place, you need to market your contract to potential cash buyers.

Use your networking skills, both online and off, to connect with potential investors. You might also contact local realtors and ask about cash purchases made over the recent past.

7. Reassign the Contract to the Buyer

Now’s the time to close the deal with the investor who fits your wholesale real estate transaction best. Both of you have to agree to terms and conditions. Of course, as the real estate wholesaler, you want to be paid for the work you did to find the distressed property and to put the deal together.

Pros and Cons of Wholesale Real Estate

Pros

• Real estate wholesaling can school you in the real estate market and help you build high-value negotiating skills.
• It’s a low-risk money-making strategy because it requires little money upfront.
• Money is made quickly. Profits, when they come, are made in a relatively shorter timeframe than other kinds of real estate investments. The fee is partially paid at the assignment of the purchase contract and the remainder at the closing of the property sale.
• No credit score (good or bad) is required.
• No property renovation experience or effort is necessary.
• If you have a good network of investors, you can sell the house fast.
• You may make a large profit in a relatively short time, depending on how many deals you put into play.

Cons

• To make reliable income quickly, you must develop (or already have) optimal networking skills and a solid pipeline of leads that can deliver investors.
• You won’t make any money until you find properties and investors so a lot of sweat equity can be required as you master the process and build your book.
• Some states require a real estate license to wholesale real estate.
• Wholesale real estate transactions involve a profit margin that’s lower than other real estate investments.
• They can be unpredictable due to the dependency on suitable/available properties.
• Wholesalers who fail to find investors may lose their earnest money deposits.
• Property owners may not understand or be comfortable with the wholesale real estate strategy.

How to Succeed at Wholesale Real Estate

Real estate wholesaling isn’t for everyone. It requires a lot of work, time, commitment, and patience. You also need to have great communication and marketing skills.

You must build a network of investors who may be interested in buying the properties that you find.

Of course, finding the right kind of property is one of the keys to successful wholesaling. Homeowners who own distressed properties and are eager to sell make great prospects.

These are the kinds of properties that can attract potential investors. Before you make the seller an offer, you’ll want to review the types of repairs or additions the home will need.

Here are some personal attributes that can help someone become a successful real estate wholesaler:

• A personality that focuses on goals and commits to achieving them
• An ability to organize and tackle tasks efficiently
• An ability to delegate tasks when useful
• A recognition that partnering with those with access to possible leads, e.g., the Multiple Listing Service, can be necessary
• An affinity for technology (such as customer relationship management software and mobile apps) that can make the entire wholesale real estate workflow easier and more effective
• An understanding of the power and value of a well-constructed website to market your services and dispense important information to potential sellers and investors
• A desire to learn more with each wholesaling experience and to make sure both seller and buyer are happy with the wholesale real estate transaction

Example of a Wholesale Real Estate Transaction

Real estate wholesaling may sound complicated but it’s actually very simple.

Let’s say a homeowner has a property they don’t believe could sell because it’s fairly distressed. The owner doesn’t have the resources to fix it up and just continues to live in it, thinking they’ll never get a fair price for it.

Enter the wholesaler, who approaches the homeowner with an offer. Together, they agree to put the house under contract for a purchase price of $90,000. Using a network of investors, the wholesaler finds an eager buyer at $100,000.

The wholesaler assigns the contract to this investor, who then has a profitable fixer-upper project. The wholesaler makes a $10,000 profit without having to buy the home.

Essentially, the wholesaler contracted with the homeowner to find an interested party to buy the house. Under the contract, the buyer paid $10,000 to the wholesaler and then closed on the purchase with a payment of $90,000.

Wholesale Real Estate vs. Flipping

Real estate wholesaling is similar to flipping. Both use property as a means to invest and make a profit. Both require a contract and the sale of a home.

However, the time frame with wholesaling is much shorter than it may be with flipping. Also, the wholesaler does not make any repairs or modifications to the home.

Since the wholesaler never actually purchases a home, real estate wholesaling is much less risky than flipping. Flipping also often involves renovation and carrying costs such as a mortgage, property taxes, and insurance.

Real estate wholesaling requires much less capital than flipping. Earnest money payments on a few properties generally suffice. Success depends on the wholesaler’s knowledge of the market and connection to investors for quick sales.

What’s Involved in Running a Wholesale Real Estate Business?

Running a real estate wholesaling business requires that you be good at finding properties that can be sold for less than market value. You have to be comfortable and proficient at negotiating deals with both home sellers and cash buyers. In addition, you must work hard to build and manage a solid, reliable lead list of buyers. Usually, you’ll also have to invest a small amount of funds in the form of earnest money deposits.

Do You Need a License to Wholesale Real Estate?

You may need a real estate license in some states. An important aspect of wholesale real estate is that you must look into your state laws relating to it (or the laws of state(s) in which you’ll engage in it). Be sure to learn all you can and abide by any rules and regulations. A real estate attorney can help explain the landscape for you.

What Is a Wholesale Real Estate Contract?

A wholesale real estate assignment contract is what the wholesaler and the homeowner sign to start the process of wholesale real estate. It doesn’t provide the wholesaler with title to the property but it gives them some control over it while they try to find an investor to buy the seller’s house.

Once the wholesaler locates that investor, the wholesaler assigns their contractual rights to them. This involves a different contract—an Assignment of Real Estate Purchase and Sale Agreement. This second document states that the investor/buyer assumes the wholesaler’s responsibilities, including buying the property according to the terms in the first contract (made with the seller).

The Bottom Line

Real estate wholesalers are middlemen who bring together homeowners of distressed houses and investors who want a below-market real estate deal that they can make a profit on.

Wholesale real estate offers beginners the opportunity to start investing in real estate. It usually involves little or zero capital investment. With experience, wholesalers can get several deals working at the same time and make a sizable profit quickly.

Real estate wholesaling involves a certain amount of risk, especially if a wholesaler has to make earnest money deposits. However, the potential to make solid profits is there for those who commit to the time and effort required to build a wholesale real estate business.

Read the original article on Investopedia.