What is wholesale real estate?
Wholesale real estate is a business strategy where an intermediary makes money by connecting real estate investors with discounted properties. This is a short-term strategy where the real estate wholesaler attempts to make money within 30 days once they find a deal. Buying real estate at a wholesale price means that you obtain the property at a substantial discount from its current market value. Usually, a real estate wholesaler looks for distressed properties with "motivated sellers" who have reasons to sell their property for less than it's worth.
What is wholesale real estate investing? Wholesale real estate investing is signing a contract to purchase a discounted property and then selling your right to purchase the property to another investor.
What is wholesale real estate contract? A wholesale real estate contract is an agreement between a property owner and a real estate wholesaler with specified pricing and terms to obtain the property.
How does real estate wholesaling work?
Real estate wholesaling works by convincing property owners to sell their property at a discount for fast cash. The property owner signs a contract that gives you the right to buy the property. Once you have the contract, you sell your right to buy the property to another real estate investor who completes the transaction with the seller. The property owner liquidates their property to get quick cash, the real estate investor gets a property, and the real estate wholesaler gets a fat check for coordinating the transaction. You can make $5,000 to $25,000+ wholesaling real estate per property, according to Jerry Norton of Flipping Mastery TV.
What is a motivated seller?
A motivated seller is a property owner with a strong reason to sell their home. The property owner is either unwilling or unable to invest the resources into preparing the property for the standard sales process of using a realtor. Common motivations real estate wholesalers look for when vetting property owners for potential wholesale deals include:
What is wholesale real estate example?
A wholesale real state example is a property owner agreeing to sell you a house for $100,000 when the market value of the house is $150,000. Then, you sell the agreement to an investor with cash who agrees to purchase it for $110,000, earning you $10,000 on the deal.
Wholesale real estate vs flipping
Real estate wholesaling is different from real estate investing, or house flipping, because you flip property contracts instead of actual properties. A house flipper focuses on fixing up a house to sell it for a higher price, while a real estate wholesaler focuses on finding good deals for investors to earn a commission.
Wholesale real estate vs REITs
Wholesale real estate is different from investing in Real Estate Investment Trusts (REITs) because you invest in real estate contracts instead of shares of companies that invest in income-producing real estate. With REITs, you invest your money into a company that manages an investment portfolio of real estate projects. Publicly traded REITs can even be bought and sold on the stock exchange.
What are the pros of real estate wholesaling?
Start doing real estate with little money
According to billionaire American steel mogul Andrew Carnegie, 90% of millionaires get their wealth by investing in real estate. However, around 35% of Americans don’t even have the money to invest in their own home. Fortunately, you don’t need much cash to make money with wholesale real estate. You just need a small sum of earnest money to bind the seller to the contract you sign together, which typically ranges from as little as $100 to up to 5% of the sale price.
Potential for quick profits
Once you get a deal under contract, you can often get paid within 1 day to a few weeks, according to Alex Martinez of Real Estate Skills. There’s certainly a learning curve for finding wholesale real estate deals and investors, but once you get the process down and establish a network of investors to flip deals to, you can make money quickly.
Turn a profit without renovations
Real estate investors that make money by house flipping put time and money into renovating a house before they can sell it. Typically, it takes between 3 and 6 months to complete renovations on a house flipping project, according to real estate education platform VanEd. As a real estate wholesaler, you just flip a piece of paper to make money and let the investor you sell to worry about actually renovating the property.
Remote work
Real estate wholesalers can make money from real estate completely remote. Because a wholesaler spends most of their time researching online and prospecting sellers over the phone, they can work from anywhere. That also means a real estate wholesaler isn’t limited to real estate deals in their current geographic location like other real estate investors are. They have more opportunities with this online business model.
Gain high-value skills and knowledge
Real estate wholesalers obtain an advanced understanding of the real estate market and investing practices. Successful real estate wholesalers also develop high-level negotiating and networking skills, two invaluable skills for making money in any industry.
What are the cons of real estate wholesaling?
Lower profit margins
A wholesaler usually makes between 5% to 10% profit on each real estate transaction, while a house flipper makes between 10% to 20%, according to Flipper Force. Therefore, wholesale real estate makes less profit than flipping houses.
Potential to lose earnest money
Earnest money is used to bind a contract so a seller takes their property off the market until the transaction closes. If a wholesaler does not find a cash buyer in the agreed upon timeframe, they could lose their earnest money deposit to the seller.
A buyer can back out of the real estate deal
Just because you put in the work to find a seller and buyer for a wholesale deal, doesn’t mean it will go through. Sometimes, buyers back out of an assignment after signing. This can be for various reasons, like the property not passing their inspection criteria or if they can’t secure the necessary financing.
No guarantee of income
Real estate wholesalers only make money when a real estate deal closes successfully. If you can’t make any deals, you won’t make any money.
Wholesaling real estate is time-consuming
Putting together a wholesale real estate deal requires extensive research and persistence. Wholesalers can spend months searching for a deal and potential buyer before a deal comes together.
How to wholesale real estate step by step
1. Build a buyer list
Before prospecting wholesale property deals, it’s best to already have a list of buyers to reach out to. This enables you to find an end buyer faster and decrease the likelihood you lose your earnest money. You can find buyers for real estate wholesale deals using tactics like:
2. Find properties
The key to wholesaling houses is to find properties that can be purchased for below market value. You want to look for a distressed property that a seller would be more likely to sell for quick cash. For example, real property going through foreclosure.
The best ways to find real state wholesale deals are by:
3. Negotiate with seller and make an offer on the property
When prospecting sellers, make sure to obtain all the information you need to determine what kind of offer you can make. You should ask the seller what price they would like so sell the property for. Also, you’ll want to ask them about any repairs that need to be made and how recently essential home systems like HVAC have been updated.
There are many methods wholesalers use when determining an offer price. However, the 70% rule is a real estate industry standard. The 70% rule in wholesaling real estate is that the real estate investor won’t pay more than 70% of the after-repair value (ARV) after subtracting out any repairs and wholesaler fees to insure they can profit by taking the wholesale deal. You can estimate the ARV by averaging prices of similar properties that have recently sold in the location on the MLS or use a real estate site like Zillow to compare properties currently listed.
Example:
Estimated ARV: $300,000
Estimated Repair Cost: $50,000
5% Wholesaling Fee: $15,000
Equation = 70% x $300,000 - $50,000 - $15,000
Offer Price = $145,000
The offer price is the starting point for your negotiation with the seller. In the above example, you could go up $10,000 on the property, offering $155,000 to the seller, and still make $5,000 from the wholesale transaction.
4. Enter into a PSA agreement with the seller
A purchase and sale agreement (PSA) is a document you and the seller sign once you mutually agree on the price and terms of the real estate transaction. This document is typically created by a real estate attorney in a wholesale transaction. The PSA includes details like:
A PSA for a wholesale transaction should also always contain the following:
- Inspection contingency to ensure the contract is voided if the property doesn’t meet inspection standards
- Right to assignment so you can transfer the contract to another party
5. Find a buyer for the property
Reach out to your buyer list to determine if anyone is interested in the property as an investment property or rental property. If no one on your buyer list is interested, you can expand your outreach strategy to pitch more buyers on the property.
6. Assign the contract to a buyer
To assign your right to buy the property to a buyer, you need to enter into a wholesale contract. The two parts to a wholesale contract are:
- Wholesale real estate assignment contract
- Wholesale real estate purchase agreement
Wholesale real estate assignment contract
An assignment contract facilitates the transfer of the right to buy the property from the wholesaler to the end buyer in a wholesale transaction. This assignment contains a copy of the original PSA you sign with the seller.
The assignment contract also includes the wholesaler’s payment terms. Typically, the wholesaler receives a portion of their profit as a deposit when the agreement is signed, and the remainder after the property closing.
Wholesale real estate purchase agreement
This is the agreement to buy the property signed between the seller and the end buyer. The purchase contract includes:
What skills do you need to be a successful real estate wholesaler?
- Researching to find wholesale property opportunities and estimate housing values.
- Networking to build your list of potential buyers to transfer deals to.
- Negotiating to get the best price from customers and convince buyers of the opportunity.
There are many real estate wholesaling courses available to teach you these skills.
Wholesale real estate FAQs
It is not illegal in any state to wholesale real estate. However, if you want to wholesale real estate in either Illinois or Oklahoma, you need to be a licensed realtor.
Wholesale real estate is not passive income. You have to actively work to make money with wholesale real estate because it entails seeking out deals and coordinating transactions between two parties.
How are real estate wholesale and local lead generation similar?
Both real estate wholesale and local lead generation entail you finding opportunities for others and getting paid for coordinating the transaction. A real estate wholesaler finds deals for a real estate investor, while a local lead generation agency finds customers for a service business. Real estate wholesale and local lead generation allow you to make money online by providing a valuable service as a middleman to earn cash.
