What Is Wholesaling Real Estate?

What Is Wholesaling Real Estate?

Real estate wholesaling is an investment option for people who don’t want to commit to long purchase processes or make down payments. Wholesalers profit off real estate without paying any money down or purchasing a property.

It’s the “best of both worlds” regarding real estate investing, offering benefits from the investment with less work. It’s also an excellent way for beginners to safely navigate the industry to see if it’s right for them. Seasoned real estate investors also enjoy taking part in wholesaling to supplement their investment funds.

What is wholesale real estate?

Wholesale real estate is a short-term business strategy in which a wholesaler puts a house under contract and gets an investor to buy it. It is usually a distressed property with great potential for future profit margin after rehab.

The wholesaler functions as a middleman, profiting off the sale by having the investor buy it at a higher price than the contract price with the seller. In return, the wholesaler assigns their rights to the investor. The wholesaler also doesn’t renovate the property or pay for any other costs related to the property.

How to Wholesale Real Estate Step-by-Step

1. The wholesaler finds a distressed property and gets into a wholesale real estate contract (purchase and sale agreement) with its owner.  The wholesaler now has full rights to find a buyer for this property.
2. After the contract is solidified, the wholesaler finds an end buyer to which they reassign the contract for a higher price, also known as the ”wholesale fee.” This is usually 5-10% higher than the property’s wholesale contract price. The wholesaler collects this profit.
3. When the wholesaler has collected their profit, the ball is in the investor’s court. The investor takes over the purchase contract and buys the property.

Note: This process may seem confusing if you’re new to investment properties. To further specify, a wholesaler isn’t selling the property but is selling the contract (the right to buy the property) to the investor. The investor who buys the property is what we typically call a house “flipper.”

What are the benefits of wholesaling real estate?

A wholesale deal benefits all parties in different ways. Wholesalers function as middlemen that assist investors and buyers who want simple transactions.

• The seller doesn’t have to fix their house. They are highly motivated sellers and don’t want to work with a real estate agent. They want their house off their hands. They don’t want to list, market, or do showings via the standard real estate market. They let the wholesaler find a cash buyer and relax.
• The wholesaler gets short-term profit after the investor takes over the contract for a higher price. This profit comes from the wholesaler fee and the earnest money deposit (if applicable).
• The investor benefits by not having to look hard for real estate deals. They also still get the house for under-market value since they are typically distressed properties and foreclosures that can shine with some TLC.

How to Get into Wholesale Real Estate?

Currently, wholesaling is legal in all 50 states. However, each state has unique laws and regulations regarding this practice. To be in compliance with your state, you need to check with local ordinances to ensure you don’t need a real estate license to become a wholesaler. Some states don’t require you to be a licensed real estate agent while others do.

Becoming a wholesaler is easier when you are well-connected with investors and cash buyers in your desired local real estate markets. Thankfully, you don’t need much money to begin, making it a relatively low-risk venture in the real estate industry. Many of your initial costs go into finding deals, so you may expect to spend money on bandit signs, ads on social media, direct mail campaigns, and other methods of reaching out to your desired local market.

For more in-depth insights, check out this YouTube video from a wholesaler who discusses how she got her start! She discusses how you need to establish yourself as an official business with EIN number to make yourself credible to your prospects. She offers lots of helpful tips to start!

Is wholesaling houses worth it?

Wholesaling, like any other real estate transaction, has its pros and cons.

Pros of the Wholesaling Process

• It’s excellent for beginners who want to explore real estate investments.
• Wholesalers can participate in different markets without being physically present.
• You don’t need a lot of money to begin, so it’s excellent for people with moderate personal finances.
• You can make a lot of money off a wholesale property in a short time.
• You help homeowners make a clean break from a house they can’t rehab it.
• To minimize risk, you can practice “reverse wholesaling,” which means you find the buyer first and then get rights to the purchase agreement, ensuring you have a buyer already in place.
• Wholesalers are not responsible for closing costs, which includes fees to the title company, loan origination fees, etc.

 

Cons of a Wholesale Real Estate Deal

• Wholesaling depends on finding suitable properties and cash buyer investors to ensure a profit. These homes must have acceptable after repair values (ARV) for a buyer to be interested in purchasing them.
• The IRS classifies wholesaling income as earned income, which gets fewer tax breaks than buy and hold rental income.
• In general, wholesaling has a lower profit margin than flipping houses.
• It takes time to find suitable properties you can snag for a bargain.
• It’s not a job for individuals who keep to themselves. There is a lot of socializing as a wholesaler, as you must develop a good rapport with property owners and investors.

 

Can you really make money wholesaling real estate?

Yes, you can make money wholesaling real estate. However, you must walk into the situation with your eyes wide open. Buying below market value isn’t enough. You need to know how much an investor would pay to take over the contract, if the house has any problems, and be informed about other risk factors.

• Know the property’s fair market value to understand the top dollar it can earn, the rental price of its comps, and use this to factor in how much an investor will pay you. This helps you make the right contract price for the home seller.
• Never skip the due diligence stage. This will help you know many of the risk factors involved with the property.
• Always include a contingency that allows you to back out of the contract when the situation isn’t favorable.
• Develop a buyers list to streamline your deals. These home buyers have enough cash to close and don’t need lenders. They are interested in low-cost homes that they can turn into rental properties at an acceptable purchase price.

As a wholesaler, you have the potential to help cash buyers more easily find good investments while you get cash upfront for selling rights to purchase the property. Keeping risk and other considerations in mind will help you navigate this process while fully informed.

What Is Wholesaling Real Estate?

Are you a wholesaler looking for investors to grow your real estate business? Marketplace Homes has connections with small to institutional investors who have the cash to take over your contract. Contact us today to chat with our realtors who can connect you with potential buyers. We can also help you develop a solid real estate investing strategy!