Investing in real estate is a great way to diversify your portfolio and increase your cash flow.
Unfortunately, it often requires a lot of hard money upfront, which can be a big barrier to entry. First, you need cash to make a down payment. Second, you need to work with a lender to finance the property. Third, you must pay closing costs. And don’t forget listing the property and finding renters. It’s a lot of work.
Fortunately, there are some real estate investing strategies that don’t come with a lot of upfront costs. Wholesale real estate is one of them.
Let’s take a closer look at wholesale real estate. Use this as a guide to determine if it’s the best real estate investment strategy for you.
Key takeaways:
- Real estate wholesaling is a real estate investment strategy that requires little capital.
- Real estate wholesalers are the middlemen in real estate transactions for owners of distressed properties and cash buyers looking for an investment property.
- Wholesaling differs from house flipping because the wholesaler never owns the property.
- Real estate wholesalers earn their money by charging wholesale fees.
- Depending on market properties, the real estate industry can be very competitive, making it hard to find distressed properties.
What is real estate wholesaling?
Wholesaling is a real estate investment strategy where a wholesaler gets a contract to sell a distressed property to an investor. Distressed properties are listed below market value and often require work the homeowner doesn’t want to do to sell. Moreover, homeowners usually don’t want to work with a real estate agent or Realtor.
The real estate wholesaler finds these distressed properties, gets an agreement from the homeowner, puts down a small earnest money deposit, and signs a wholesale contract. Then, they get to work finding an end buyer for the property.
Wholesalers earn their money by charging wholesale fees, typically 5-10% of the property price.
Wholesaling vs. flipping
At first glance, it may seem like wholesale real estate is a lot like flipping. Both real estate investing strategies rely on investing in distressed properties to make a profit. But they’re very different in how they accomplish this goal.
In house flipping, flippers purchase a property that needs work and invests the resources to fix it. This increases the property’s value, known as the after-repair value (ARV). Flippers then sell the house at this higher market value. In the meantime, they pay the property’s mortgage, insurance, and taxes because you own it.
In wholesaling, wholesalers are not purchasing a distressed property. Instead, they’re acting, in a sense, like the seller’s real estate agent. They have a distressed property and don’t want to fix it up. The real estate wholesaler agrees to help them find a buyer for it.
7 steps to real estate wholesaling
There are several steps to the real estate wholesaling process. Here’s a step-by-step guide to help you understand it.
1. Research the local market
The first step to becoming a real estate wholesaler is to research. Real estate wholesaling laws vary from market to market. Know and understand the laws in your area before you begin a wholesale real estate deal.
2. Find a property
Once you know your market’s real estate wholesaling laws, it’s time to find a wholesale property. A good strategy is to find properties that are listed below market value for a variety of reasons. The most common are motivated sellers, foreclosures, and distressed properties.
Here are some ways to find properties:
- Multiple Listing Service (MLS)
- Foreclosure listings
- Local market “for sale by owner” listings
- Real estate auction sites
- Social media marketing
- Direct mail campaigns
When starting your wholesale real estate business, it’s a good idea to try multiple methods for finding properties. It helps you identify which methods work best in your market. You can narrow it down after that.
3. Perform due diligence
After you find a wholesale property, it’s time to make sure the real estate transaction makes financial sense. Here’s how.
- Figure out the property’s fair market value.
- Look at comps sold in the area.
- Identify any repairs that need to be made.
- Add up the cost of the repairs.
- Calculate the after-repair value (ARV).
- Determine the maximum allowable offer.
You want a net positive after you’ve crunched these numbers. If it’s not, the property is likely not a good investment.
4. Contact the seller
If the property makes financial sense, it’s time to contact the seller to start negotiations. You’ll want to be sure you explain that you’re a real estate wholesaler and why working with you is the best way to help them sell their property.
5. Get under contract
If the seller agrees to work with you, it’s time to present your offer and get the property under contract.
A wholesale real estate contract is different from a traditional purchase contract in a couple of ways. First, it includes the right for you (the wholesaler) to assign the contract to an end buyer. Second, it also includes a contingency that allows you to withdraw from the deal if you can’t find an end buyer.
6. Find a cash buyer
Once you have your wholesale real estate contract, it’s time to market your wholesale property and find a cash buyer. How? Reach out to local real estate agents and market your property on social media. Real estate agents can help you build a buyers list of prospective investors interested in wholesale deals. Social media is another way to connect with potential buyers.
7. Reassign the contract to the buyer
After you find your cash buyer, it’s time to reassign the contract to them. Make sure you both agree to the terms and conditions before signing. And remember to include your wholesale fee in the final purchase price. You want to get paid for your efforts.
Example of a wholesale real estate transaction
Are you interested in becoming a real estate wholesaler? Here’s an example of how it works.
Let’s say you’re a real estate wholesaler. You come across a “for sale by owner” listing and can tell it’s a fixer-upper from a very motivated seller. You call the number and learn more about the property. The homeowner is an elderly gentleman who doesn’t have the financial resources to repair the property. You tell him you’re a wholesaler, and he agrees to work with you.
During the negotiation process, you agree to put the house under contract for a purchase price of $100,000. Your wholesale fee is 15%, so you market the property for a slightly higher price of $115,000. You find an investor who offers $115,000 for the home.
You reassign the contract to the investor. The homeowner gets $100,000 for the distressed property. You make $15,000 without ever owning the home. The investor gets a great fixer-upper they can turn into a rental property.
The pros and cons of wholesale real estate
Real estate wholesaling has pros and cons, just like any other type of investing strategy. Here are some of the most significant benefits and drawbacks of wholesale real estate.
Pros
- Real estate wholesaling is easy for beginners who want to enter real estate investment.
- It requires minimal money upfront and is also very low risk.
- Real estate investors don’t have to live in the markets where they wholesale properties.
- No credit score is required!
- Potential to make a significant profit in a short amount of time.
Cons
- Wholesaling houses offers a smaller profit margin than flipping houses.
- Turning a quick profit heavily relies on building a solid buyers list.
- The real estate market is very competitive for below-market value houses, so it could take a long time before you find a wholesale property.
- Property owners don’t have to work with you if they don’t want to.
- You may have to get a real estate license to wholesale real estate in your state.
- You can lose your earnest money if you cannot secure a cash buyer.
The bottom line
A real estate wholesaling business is a short-term, low-cost, low-risk investing strategy for beginners. Real estate wholesalers are middlemen who help distressed property owners find investors. It requires almost no capital investment and can turn a profit quickly in the right market conditions. But it can be difficult to find wholesale properties, and sellers don’t have to work with wholesalers. Talk to your financial advisor and a real estate attorney if you’re interested in becoming a real estate wholesaler. They’ll help you determine the right investment strategy to help you reach your goals.
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