What is wholesale real estate?
There’s no shortage of investment opportunities out there — especially in real estate. But while renting out and flipping houses can be a very profitable game, both require a lot of upfront investment. Wholesale real estate is a way to invest in real estate for much less personal investment, sometimes without ever putting a dollar down.
Real estate wholesaling grew exponentially in popularity during the COVID-19 pandemic. Rather than actually buying real estate, wholesalers act as intermediaries between buyers and sellers. Most of the time, this happens by connecting owners of distressed properties to investors.
Wholesaling has gotten a lot of social media buzz as a kind of get-rich-quick real estate scheme, but it’s absolutely not a get-rich-quick scheme. Wholesaling is a legal way to make money in real estate, but it’s complicated, competitive, and takes a lot of work — especially for new investors.
Wholesale real estate is a short-term real estate investment strategy. In a wholesale real estate transaction, a wholesaler enters into a purchase contract for a home from the seller, usually by making a small earnest money deposit — but not always. This contract dictates a timeframe in which the wholesaler will sell the property or lose their deposit and right to sell the home.
Wholesalers take it upon themselves to find a buyer, usually an investor. When they find that person, they reassign the purchase contract to the investor at a negotiated higher price. The difference between the initial wholesale purchase contract and the investor purchase price is called the wholesale fee and tends to be 5% to 10% of the property sale price. The wholesale fee is what the wholesaler pockets in the transaction.
Essentially, wholesale real estate is a way for interested investors with less money to essentially buy and sell property without investing nearly as much as full-time investors. Of course, the returns are much smaller as well, but volume wholesalers can stand to make a decent living if they have the right connections and work ethic.
You usually don’t need a real estate license to become a wholesaler, but some municipalities do require a license, so make sure to check your local laws before attempting wholesale real estate.
The typical real estate wholesaler looks for distressed properties that are priced below market value. They’re homes that the average homebuyer wouldn’t want to buy because they’ll take a lot of work to become habitable. On the other hand, investors covet many properties like this.
Say, for instance, Tom inherited property from his recently deceased father. His father insisted on staying in the house rather than move to an assisted living facility, but he wasn’t doing the proper maintenance. As such, the property fell into disrepair and is now Tom’s responsibility.
Real estate wholesaler Sandra notices that property tax records show a new owner on the property not long after Tom’s father’s death. Sandra contacts Tom and offers to wholesale the house. Tom, not eager to go through the hassle of cleaning up the house, repairing it, and hiring an agent to go to market, agrees to a wholesale contract, accepting a $5,000 earnest money deposit to put the house under a purchase contract for $120,000. Sandra immediately contacts investor, Charlie, who agrees to buy the property for $140,000.
Charlie and Tom go through the traditional closing process while Sandra receives $20,000 for brokering the wholesale deal, all without ever legally purchasing the property. After a refund of her $5,000 earnest money deposit, Sandra nets the full $20,000.
While $20,000 isn’t a great return on a real estate investment, it took an experienced wholesaler like Sandra a grand total of ten hours of work to find the property, negotiate with Tom, and close a deal with a regular client like Charlie. If Sandra does just ten of these deals per year, she’s making a pretty good living.
In our example above, Sandra is a professional wholesaler with considerable experience reading the market and a powerful rolodex. That doesn’t happen overnight, which is imperative to emphasize for TikTok dreamers. While wholesaling real estate doesn’t necessarily require deep pockets, it does require patience, work ethic, connections, and exceptional negotiation skills.
But if you want to wholesale a deal, this is what you have to do.
First and foremost, find out if wholesaling is legal in your area and what kind of regulations wholesalers face. If you need a real estate license, you’ll have to start there.
Then, research the markets that you’re interested in buying property. Gain an understanding of what homes are worth in the area and survey public records to look for ownership changes. It also helps to just take note of distressed properties when you see them in your daily life.
This is, of course, easier said than done. You want to find properties listed below market value and owners who are motivated to sell quickly. Most often, these homeowners inherited the property, are going through foreclosure, or have liens on the property. A few good resources for finding such properties include:
Remember, you have to find the property before real estate agents or other wholesalers, making it an especially competitive game.
Related article: How to get access to the MLS
The real estate market moves fast, so when you’ve found a potential property, get to work to assess if it’s a good investment. That means:
You don’t want to lose money on a wholesale deal, even if it’s not very much. You must be sure that a property is worth an investor’s time, energy, and money.
When you feel confident you can turn a profit, reach out to the seller. You may be able to find information on the site where you located the property, or look them up in public tax records. Otherwise, you can always leave a note or go up and knock if they’re there.
Explain to them what a real estate wholesaler is and why it’s worth it to them to work with you as opposed to a real estate agent or an iBuyer. Make sure they understand how wholesale real estate transactions work and impress upon them that you’re there to take the hard part out of their hands. That’s how you make your money.
When a seller has accepted your offer, it’s time to get the property under contract. Make sure you have an attorney to help you do this as wholesale contracts are different from traditional property contracts. You need to ensure the contract includes the right to assign to another party. Likewise, you need a contingency to allow you to withdraw from the deal if you can’t find a buyer before the contract expires. This will allow you to get back your earnest money deposit if you fail to find a buyer.
When you have the property under contract, the clock is ticking. This is where it’s helpful to have an existing network of investors or past clients that you can reach out to. Otherwise, you’ll have to hit the pavement both online and off to connect with potential investors.
The easiest way to find cash buyers when you don’t have a network is to ask a local real estate agent to inform you who made cash purchases over the past year. You can also connect with potential buyers over social media or go direct to neighbors who may be interested in taking over the property.
When you find an investor, you can assign them the contract and close the deal virtually. Beforehand, however, make sure you agree to terms and conditions of the sale. Again, you’ll need an attorney to help you ensure you get paid for your work to broker the deal.
All investing strategies have their upsides and downsides. Investment is risk, after all. Let’s look at some of the pros and cons of wholesaling real estate.
In a booming seller’s market with enormous buyer demand and a short housing supply, wholesaling real estate may seem like a viable get-rich-quick scheme. Let us remind you that there is no such thing. Wholesaling real estate can be a highly profitable, lower-risk real estate investment strategy but it requires considerable sweat equity to build the skills and network required to be successful as a real estate wholesaler.
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