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Wholesaling provides a great opportunity for those who have limited capital to get immersed in the real estate industry. If you learn how to wholesale correctly, you will have a distinct advantage to finding your own deals to purchase and you will have learned creative ways to go about funding properties you are able to get under contract.
So what is wholesaling exactly? In simple terms, wholesaling is the process of getting a property under contract and assigning that contract to a buyer at a higher price. Becoming a wholesaler requires a lot of sweat equity. In this piece, we'll look at what wholesaling is, cover some of the pros and cons of investing in real estate as a wholesaler, and clear up some of the misconceptions people have about wholesaling.
Wholesaling in a nutshell
A simple way to understand the process of how a wholesaler could operate is to go through a hypothetical example of a wholesale transaction:
- The wholesaler drives around and sees a house that is distressed and seems to have been abandoned.
- The wholesaler jots down the address to look up the owner of the distressed property.
- Once the wholesaler gets home, they use the local county tax website to look up the address to find the owner of the property.
- Once they know who the property owner is, the wholesaler contacts the owner and finds out that the owner would like to sell the property for $60,000.
- From the research the wholesaler has done and after some negotiation, the seller is willing to sell the property for $50,000.
- The wholesaler now has the property under contract for $50,000.
- Instead of buying the property himself, he contacts some of his cash buyers, who are willing to purchase the contract from the wholesaler for $55,000.
- The wholesaler agrees and assigns the contract he has with the seller over to the cash buyer, and at closing, the seller gets their $50,000, the wholesaler gets $5,000, and the buyer has a property ready to fix and eventually flip for profit.
The wholesaler was essentially a middleman in the deal. He was able to get the house under contract for less than market value and then assign that contract to a buyer who can sell the property for much more after they fix up the place. The wholesaler was able to receive the spread of $5,000 because he was able to get the contract under market value.
What are some pros to wholesaling real estate?
The benefits of wholesaling can more or less be broken down into these three things:
1. Learning about the real estate industry
Someone interested in wholesaling will become quickly immersed in the real estate industry. If you start out working with people who have been successful and are utilizing the right resources, you can learn how to:
- Find leads.
- Build trust with a motivated seller.
- Do due diligence on a property.
- Run comps, or comparables, to find the current market value of the home.
- Estimate the after repair value (ARV) of a house.
- Build relationships with real estate brokerages.
- Finding buyers and build a buyers list of people who can close on a property quickly.
And this is only a partial list of what you'll learn as a wholesaler. Once you do a few deals, you'll also know what to look for and what to avoid.
2. Needing minimal capital to start
Wholesaling forces you to become creative when finding funds to acquire property to buy. Typically, most investors will buy with all cash or bank financing or use a hard money loan. If you don't have the best of credit and have limited capital to put down for a down payment, it's going to be a challenge to get a loan from the bank.
With wholesaling, you do not have to deal with those limitations to make money -- you don't have to have good credit or cash to assign a contract to another buyer. You just have to have the discipline and guidance and put in the sweat equity to earn capital at closing.
3. Earning a large sum of money in a short time frame
Once you have a system in place, you should be able to make more money in a shorter period of time because you should have the ability to get more properties under contract.
Typically, people who buy the homes assigned to them from wholesalers are fixing up the distressed properties. They would have to wait a few months going through the rehab process and then sell the home to see their profit. Wholesalers just have to wait 7 to 30 days, or however long it takes to close from when they find a buyer.
What are some cons of being a wholesaler?
Wholesaling real estate isn't all sunshine and rainbows, though. It can be challenging work. Here are a few things that make it tough:
1. Not having a buyer
A buyer has to purchase the contract from the wholesaler for the wholesaler to be compensated. Typically, when a wholesaler gets a property under contract, the contract includes a date when the wholesaler should be able to find a buyer to close. The wholesaler usually gives earnest money to the seller to show seriousness and confidence that the wholesaler will be able to get the deal done. If the wholesaler gets the property under contract for a price that is too high or is greedy and attempts to increase their spread, buyers will be unwilling or unable to make a deal.
2. Income can be unpredictable
Wholesaling is not a 9-to-5 job where at the end of every two weeks, you get a check. There may be months when you have no income coming in. When you start your wholesaling business, you are responsible for being consistent and diligent with your finances until you complete your first assignment and close. Once this happens it would be smart to save a portion of that profit for a rainy day -- or just in case it takes a few months to close another deal.
3. Negative stigma from bad apples
Some people look to become wholesalers without learning the ropes first, and they can do unethical things that shine a bad light on wholesalers in general. Things like advertising that you have a property for sale instead of advertising that you are selling your interest in a real estate contract can be the difference between a legal business deal and an illegal transaction.
Misconceptions people have about wholesaling
- You don't need money to become a wholesaler. This is false. There are certain programs and marketing material you'll need to start finding motivated sellers and other leads. Once you find those leads, you may need to pay for services that can help you find the contact information of the owner. Not to mention possibly paying a mentor to help guide you through your first deal. While it's possible to stumble upon your first wholesale deal with zero dollars, it is highly unlikely.
- You need to have a real estate license or you must be a real estate agent to be able to wholesale houses. This is not true. You don't need any kind of license to start wholesaling distressed property. All you need is a motivated seller, an assignment contract, a buyer looking for an investment property, and a quality real estate brokerage that can ensure you can close. It's important to note that it is illegal to wholesale in Illinois, Oklahoma and Virginia.
- All wholesalers take advantage of people. While there are bad apples in the industry, there are many cases where a wholesaler is helping a family avoid foreclosure and bad credit by giving the seller a way out of a bad situation and the opportunity to have a couple thousand dollars to move to a new place.
The most important thing to have as a real estate wholesaler is a contract or purchase agreement. This is what allows you to make a living. It may be worth it to make an investment and have a trusted real estate attorney draw up a purchase agreement that you can use to aid you in situations where someone might try to go behind your back and buy the home directly from the seller. This is especially important if you are able to lock up multiple wholesale properties at one time. If you don't have the right contract signed, that deal will not happen.
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