What is Real Estate Wholesaling? Here’s How to Get Started
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If you’re looking for a simple way to get started in real estate without a lot of money, real estate wholesaling could be a viable option. Real estate wholesaling involves finding discounted properties and putting the property under contract for a third-party buyer. Before closing, the wholesaler sells their interest in the property to a real estate investor or a cash buyer.
Let’s do a deeper dive into the ins and outs of wholesale real estate.
- What is real estate wholesaling?
- How to wholesale real estate: Wholesaling houses step by step
- Pros and cons of wholesaling houses
- Wholesale real estate FAQs
What is real estate wholesaling?
In most cases, real estate wholesaling doesn’t involve buying or selling houses. Instead, a real estate wholesaler sells contracts with the right to buy a property to a third party — typically a cash buyer or real estate investor. Wholesalers collect a fee for their work.
“I would define real estate wholesaling as being a matchmaker. We try to match properties with investors,” said Brett Snodgrass, CEO of Simple Wholesaling in Indianapolis.
Real estate wholesaling example
Here’s an example of how real estate wholesaling works: First, a wholesaler finds someone who agrees to sell their property at a discount.
Let’s say the seller wants $90,000 to sell their property. The seller enters into a purchase agreement with the wholesaler, but the wholesaler doesn’t buy the property outright. Instead, the wholesaler finds an investor who is willing to pay more than $90,000 to buy the property so the wholesaler can earn a fee for connecting the two parties.
The wholesaler finds an investor who agrees to pay $100,000 for the property and then sells the contract to the investor and collects a $10,000 assignment fee from the total $100,000 price. The wholesaler earns the assignment fee, and the investor buys the property from the homeowner for $90,000.
Usually, homeowners who work with wholesalers are considered motivated sellers. They want to sell a house with minimal hassle. But homeowners with houses in decent condition should be careful before working with a wholesaler, because they’ll likely net less money than going the traditional route to sell their home. Homeowners may also net more money by selling their home to an to iBuying company rather than a wholesaler.
How to wholesale real estate: Wholesaling houses step by step
Most wholesale transactions follow a similar pattern. Here are the five basic steps involved in wholesaling real estate.
Step 1: Identify motivated sellers
Most home sellers want to get top dollar for their homes, even if it takes some extra time to sell. However, motivated sellers may want to sell their home quickly with as little hassle as possible. Wholesalers can help motivated sellers by putting a house under contract and selling the contract to a cash buyer. Cash buyers often have the means to close on a house quickly, even if the house is in need of repair.
Here are some ways to find motivated sellers:
- Search for homes that have been on the market for a long time or have been taken off the market.
- Look for homes that are vacant or neglected.
- Search public records to find homeowners who are in default and facing foreclosure, or have liens/judgments against their homes.
- Use direct mail, TV and radio spots and Facebook ads to find homeowners who want to sell a home quickly.
Step 2: Make an offer
Before you make an offer, look over the property closely to estimate how much money an investor will need to put into repairs or renovations in order to earn a higher price when they resell it. The amount a wholesaler offers to the seller should factor in the following items:
- Repair costs
- Buyer’s holding costs (i.e. utilities, landscaping and taxes while the property is being rehabbed)
- Closing costs
- The buyer’s end profit
- Wholesaling fee
When you’re talking with prospective sellers, explain that you’re a wholesaler, and your goal is to sell the contract to an investor. “When you’re doing things the right way, you’re going to disclose everything,” Snodgrass explained. Full disclosures will help sellers to feel more comfortable doing business with you.
Step 3: Enter a contract
When the wholesaler and the seller come to an agreement, both parties will sign a wholesale purchase agreement. A typical agreement gives the wholesaler permission to assign the contract to a third-party buyer. It should also include contingency clauses that apply to the buyer. A real estate attorney who works with investors and wholesalers can help you draft a contract that follows your state’s laws.
Step 4: Assign the contract to a buyer
At this point in the process, most wholesalers find a real estate investor to buy the property and assign the contract to them. Assigning the contract means that the buyer has the right to buy the property for the price listed in the contract. As a wholesaler, you’ll earn an assignment fee when you sell the buying rights.
It can be helpful to build up a list of real estate investors before you enter into a wholesale contract. You can build a contact list through sources like:
- Attending local real estate meetups
- Visiting online forums
- Asking title companies about investors
- Calling landlords in your area who are advertising rentals
- Visiting property auctions to meet investors
Whenever you reach out to potential buyers, you must comply with advertising regulations in your area. In most cases, you cannot advertise the house itself. Instead, you need to advertise that you’re selling your legal interest in the purchase contract only.
Step 5: The buyer closes on the property
Generally, the closing will take place with a title company and, in some cases, a real estate attorney. Wholesalers aren’t involved in the closing, which is between the investor and the homeowner. However, wholesaling involves a “contract handoff” between the wholesaler and the investor. Because of that, closing on a wholesale deal can be somewhat more complicated than a typical home purchase.
Not every title company will understand the complexities associated with the real estate wholesaling process. Finding a title company that works with wholesalers and real estate investors may help the closing go more smoothly.
Pros and cons of wholesaling houses
FAQs about wholesale real estate
Can you really invest in real estate with no money?
You can buy and sell contracts for real estate without putting any of your money at risk or getting financing. But, like all businesses, you’ll have costs.
Is wholesaling real estate legal?
Wholesaling is legal, but wholesalers can run into thorny issues. A real estate attorney should help wholesalers draw up contracts that will limit their financial liability if a transaction is canceled. Wholesalers should explain clearly that they’re advertising a legal interest to buy a property, and not selling the property itself. Additionally, if you hold a real estate license, be very clear that you’re working on your own behalf and familiarize yourself with your state’s laws. Texas, for example, enacted new real estate wholesaling laws in 2017.
Can you buy real estate wholesale without a license?
It’s possible to wholesale real estate without a license. However, having one may help you attract real estate investors and build your credibility with prospective sellers.
What’s the difference between real estate wholesaling versus house flipping?
Flipping a house involves buying a house, fixing it up and selling it at a profit. When you flip a house, you’re selling the house for full price, which is called retail. In wholesaling, you don’t improve the home. Instead, you sell a contract to an investor who, in turn, fixes up the property then sells it or rents it out.