What is Real Estate Wholesaling, and How Does It Work?
“How would you like to learn to flip real estate with no cash, no income, and no credit???”
Sound too good to be true? Maybe this guy has a bridge to sell us as well.
In truth, this sales pitch usually refers to real estate wholesaling. Real estate wholesalers don’t exactly flip homes — they flip contracts to buy homes.
Essentially, they act as middlemen between motivated home sellers and real estate investors, much in the same way that a merchandise wholesaler acts as a middleman between the manufacturer and the retailer.
And yes, while getting your start as a wholesaler can be challenging, it can be done with relatively little startup capital.
If you want to get into the real estate game and you don’t have credit, income, or the cash for a 20% down payment—or if you just want a creative way to build wealth through real estate—then real estate wholesaling is a business model to consider.
Table of Contents
- How Does Real Estate Wholesaling Work?
- How Good of a Deal Do Wholesalers Look For?
- How do Real Estate Wholesalers Find Deals?
- Real Estate Wholesaling Case Study
- Real Estate Wholesaling FAQ’s
How Does Real Estate Wholesaling Work?
Real estate wholesaling is functionally very simple. The process is as follows:
- Get a property under contract.
- Find an investor or homebuyer who wants the house.
- Sell the contract for an extra fee.
Notice that at no point in the process does the wholesaler make a down payment or apply for a mortgage. (S)he just acts as a connector between seller and investor and a temporary custodian of the contract. In other words, no credit, income, or huge cash investment necessary on the part of the wholesaler.
The most cash a wholesaler puts at risk is a non-refundable option fee — usually between $10 and $100 — and maybe a small refundable earnest money deposit (again, as little as $100 or less).
Of course, in order to interest investors and leave room for their fee, a wholesaler must find a seller willing to sell their property for a bargain. This usually means finding a highly motivated seller, sometimes known as a “don’t wanter.”
This kind of seller finds the property more trouble than it is worth. Maybe the property has a major defect that they don’t have the cash to fix. Maybe the owner is behind on his mortgage payments and facing foreclosure. Maybe the property is the subject of a divorce or probate, or the owner has abandoned the property for personal reasons.
How Good of a Deal Do Wholesalers Look For?
As we mentioned before, wholesalers are looking for motivated sellers (“don’t-wanters”) willing to let their property go for below market value. How low are we talking about? What kind of bargains do wholesalers look for?
For fix-and-flip investors, the traditional equation is this:
Strike Price = [After-Repair Value (ARV) – Rehab Cost] x 70%
In other words, house flippers want a property that they can buy for 70% of what they expect they will be able to sell the house for once repaired, minus the cost to repair it. This gives the investor a lot of margin of error—even if everything goes wrong, they might still make a little money, or at least break even.
Of course, a wholesaler is looking for an even better deal. Why? Because there needs to be room in the investor’s budget to pay the wholesaler a fee, and still see the purchase as a good deal.
If a wholesaler wants to charge a $5,000 fee, the equation becomes this:
Strike Price = [After-Repair Value (ARV) – Rehab Cost] x 70% – $5,000
If the wholesaler wants to charge a $10,000 fee, the equation becomes this:
Strike Price = [After-Repair Value (ARV) – Rehab Cost] x 70% – $10,000
In other words, real estate wholesalers are looking for extremely motivated sellers, hard-core “don’t-wanters” who just want out of the property, fast.
Of course, this is just a rule of thumb. Some investors may accept a larger percentage than 85%, so a wholesaler who can network with those risk-tolerant investors has a leg up and can offer higher prices.
Also, this equation applies to fix-and-flip properties. An investor might pay more for a property they intend to use as a long-term rental, especially if the property has good bones and is in a great location.
How do Real Estate Wholesalers Find Deals?
Finding these screaming deals is easier said than done. Real estate wholesalers don’t have to tie up much capital in deals, but they often tie up a lot of capital marketing to find deals. Those with little or no money to spend on marketing must invest a lot of “sweat equity.”
Real estate wholesaling marketing methods that cost money include:
- Direct mail. Some indications of possible seller motivation are matters of public record, like foreclosure and divorce. You can also buy lists of addresses that fit these profiles from list brokers. Once they have their lists, wholesalers might send letters or postcards to these addresses. Usually only practical if the wholesaler has a large list to mail in bulk.
- Bandit signs (those “We Buy Houses” signs stapled to telephone poles, often considered “litter” by city officials).
- Paid Advertising, ranging from Google and Facebook ads to billboards, to car wraps and door hangers, to print, radio, and TV ads.
- Advertising Co-Ops, where numerous wholesalers pay for a certain number of leads that come from an expensive ad campaign, like a billboard or TV ad with “We Buy Ugly Houses” messaging.
Real estate wholesaling marketing methods that cost little or no money include:
- Door knocking. If the wholesaler doesn’t have the budget for direct mail, or if they only have a small list, they might summon the moxie to drive out and knock. Face-to-face connection is one of the best modes of persuasion.
- Driving for dollars. This involves prowling neighborhoods by car in search of abandoned houses, fixer-uppers, and “For-Sale-By-Owner” signs. To find the owner of an abandoned house, you may need a cheap online person-finder service called a skip-trace.
- Cold calls. Instead of driving out to the house and knocking on the door, you could call the phone number included on the list you bought from your list broker. Cold-calling is a hard-sales strategy that professional salespeople spend years mastering.
- Email marketing. Alternatively, you could send cold emails to the email addresses on your list. Don’t use an email address you aren’t afraid to lose — cold-email senders can be marked as spam.
Real Estate Wholesaling Case Study
This fictitious case study demonstrates the mechanics of real estate wholesaling.
Wanda is a real estate wholesaler. She locates Sal, a motivated seller.
Wanda performs a comparative market analysis and determines that, completely rehabbed and fixed up, the house will sell on the open market for $300,000. She also determines that it will take about $50,000 to fix up the property and get that price.
Sal wants out of the house as quickly as possible. He agrees to take only $150,000 if Wanda will buy the property as-is and close within the week.
What would most fix-and-flip investors pay for a house like this? Let’s do the math:
($300,000 – $50,000) x 70% = $175,000
It looks like there’s a lot of room for Wanda to collect a fee. Wanda pays a $10 option fee to Sal to put the house under contract with a purchase price of $150,000 and a closing date in seven days. She sends the contract to escrow.
Wanda then puts the word out to her network of investors that she has a great deal on a house flip. She can set any price she wants, assuming it is a price that someone in her network will pay. The contract is for $150,000, so anything over $150,000 will be her fee.
She knows she could probably find an investor interested at a price of $175,000, but she needs a quick close so she makes the deal even sweeter. She will offer the deal to investors for $165,000. At that price, her investors will be chomping at the bit — and it still leaves $15,000 leftover for her as a wholesaler fee.
Ivan, a house flipper, jumps at the deal. He and Wanda make a separate contract between the two of them, called an “assignment agreement.” Per this agreement, Wanda will replace her name with Ivan’s name on the contract, in exchange for $15,000 paid from escrow at closing.
Sal is not a party to this contract. He may not even know it exists; in fact, wholesalers often have to tread carefully to avoid angering the seller. If the seller finds out that there is a buyer willing to pay more than the contract price, he may try to back out of the deal and cut the wholesaler out.
But Sal just wants out, fast. If selling to Wanda (or Ivan) gets him his seven-day closing period, he doesn’t care about Wanda’s fee. Ivan uses his relationships with private lenders to finance the deal quickly. Ivan and his lender wire $165,000 to escrow. Sal gets the $150,000 sale price, and Wanda gets the extra $15,000 as her fee.
Real Estate Wholesaling FAQ’s
Is Wholesale Real Estate Legal?
Most new investors often wonder, “Is wholesale real estate legal?” To take part in real estate wholesaling transactions legally, you do not require being licensed real estate agent; however it’s still wise to research local regulations first before diving in.
Real estate wholesaling can be an efficient and profitable way to enter the real estate investment business, offering many of its benefits while bypassing many of its barriers, such as credit issues and limited funds. But real estate wholesaling comes with risks.
Do You Need a License to Wholesale Real Estate?
If you have researched real estate investing, wholesaling may have come up in your research. Wholesaling involves connecting two parties who want to sell or buy property; by acting as the middleman between these parties and receiving compensation – similar to the role of real estate agent but with key distinctions.
Real estate agents must obtain a license in order to facilitate real estate transactions and earn commission, while wholesalers do not. Wholesalers make money either through selling contractual rights of a property to investors or purchasing it and then selling it.
To be successful in wholesale real estate, one needs a great deal of property research and networking skills as well as the ability to negotiate financial deals that investors accept. Most sellers in today’s market tend to accept wholesaling when conducted properly.
Many wholesalers create cash buyers lists to make it easier for cash investors to be attracted to purchasing the property, however this is not necessary for successful real estate wholesale transactions. One can use the co-wholesaling method (where two or more parties work together on closing an offer).
Is Real Estate Wholesaling a Good Way to Make Money?
Real estate wholesaling can be an efficient and lucrative way to make a quick profit, without incurring too many risks. Furthermore, no license or physical office space are needed – all you need is the internet! But to be successful at wholesale real estate it is crucial that you create a plan and understand its inherent risks; an effective starting point could be compiling a list of end buyers before searching properties which appeal to them so as to sell quickly while turning a profit.
Is Wholesale Real Estate A Good Investment?
Are You Fascinated with Real Estate Market, Following Industry Blogs or Addict to HGTV? Then a Real Estate Wholesaling may be for you – this investment strategy provides investors the ability to acquire properties quickly without taking title to them and sell them off quickly without taking title themselves.
Real estate wholesaling offers an excellent investment opportunity for those with entrepreneurial spirits and who can operate inside the legal boundaries set forth by state real estate laws. Wholesale deals can be quickly and profitably completed, simplifying what can otherwise become a complex process for those looking to buy and flip houses.
Wholesale deals differ significantly from rehabbing properties in that investors don’t need to assume all of the associated risks and costs when concluding deals through wholesalers, who maintain an active list of home buyers that they continually refine to be in a position to purchase properties quickly and at discounts with cash payments.
Wholesalers typically source properties from homeowners who are highly motivated to sell due to financial hardship or an impending divorce or foreclosure, among other circumstances. Once an initial seller signs the contract for one of these properties, wholesalers then begin marketing it to their curated list of homebuyers.
How Hard is it to Wholesale Real Estate?
Are You an Investor or Looking to Break In Quickly in the Real Estate Market? Wholesaling may be something you have heard of or are considering as an exit strategy in real estate investing. Wholesaling allows investors to make money in the industry without needing to acquire and rehab properties themselves, saving both time and effort in getting in.
While being successful requires much hard work and dedication from an investor’s side, many have found this business model can provide fast entry into the real estate market quickly.
Wholesaling involves finding property opportunities at a price below market value and assigning purchase contracts to end buyers at below-market rates. This provides sellers with quick cash sales while wholesalers earn fees for their services. Identifying opportunities requires having access to an established network of cash buyers who know the area well as well as having someone as your mentor who can guide and mentor your wholesaling endeavor.
Importantly, wholesaling can either be legal or illegal depending on how it’s conducted. To stay legal and protect yourself against potential legal ramifications, always engage a reputable attorney when creating any contracts and paperwork necessary for wholesaling operations; otherwise you could end up operating illegally and risk losing your assets.
An integral component of wholesale real estate transactions is staying in touch with both seller and end buyer throughout the process. This can often be an emotional time, so keeping everyone informed on what’s happening is vitally important.
What are the Pros of Wholesaling Real Estate?
Wholesaling real estate offers several distinct advantages for novice real estate investors, including being low risk and cost effective way of starting off in real estate investing. Furthermore, wholesaling provides beginners with experience quickly before progressing further with other methods such as buying/holding properties for investment purposes or renovating them before selling off.
Wholesalers are individuals or firms who acquire undervalued properties from developers or owners and then sell them directly to cash buyers – typically investors or real estate rehabbers looking for discounted properties without all the hassle involved with searching themselves. In exchange, these end buyers pay the wholesaler a fee in return.
To successfully wholesale properties, it’s crucial that you understand what the local market needs and who your buyers are. Working with a mentor who can teach you all aspects of wholesaling can be particularly helpful; such as being familiar with terms like after-repair value, comparables, and estimated rehab costs.
Finding motivated sellers willing to sell at a discount can be an additional difficulty for wholesalers, who often rely on distressed properties for profits. Such sellers often require speedy solutions due to job changes, divorce proceedings or unexpected expenses requiring immediate cashout – one reason many wholesalers specialize in distressed properties.
What are the Cons of Wholesaling Real Estate?
Real estate wholesaling can be an excellent strategy for investors who are new to real estate investing and don’t want to risk their own capital by purchasing properties themselves or risking capital.
Many states don’t require wholesalers to obtain a license! Unfortunately, this form of investing strategy might not suit everyone; here are some drawbacks you should keep in mind before diving in.
Real Estate wholesaling typically results in lower profit margins compared to house flipping as its profitability can be reduced through less time and money invested into deals as well as reduced financial risk for wholesalers.
Real estate wholesalers who want to succeed must work tirelessly to locate properties selling below market value and find cash buyers who are ready and willing to invest. Furthermore, wholesalers must maintain and expand their wholesale buyer list over time.
Real estate wholesalers must also ensure they keep all parties involved informed and satisfied throughout each deal. Too often, wholesalers close one deal before moving quickly on to the next without taking time for debriefing with sellers or end buyers after each one closes.
Real estate wholesaling can be an excellent way for newcomers to gain experience and develop high-value negotiation skills, while at the same time providing a steady source of income if able to identify undervalued properties and find cash buyers willing to purchase them.
But remember, wholesalers don’t actually buy and sell properties themselves – rather, they simply sell contracts related to those properties; provided all legalities are adhered to correctly, wholesalers can make an outstanding living as investors!
Is Wholesaling Real Estate Worth It?
Real estate offers numerous strategies for making money, from buying and flipping homes to leasing and managing rental properties. One method often overlooked is wholesaling, the practice of finding off-market real estate deals before selling them off to investors at a profit. While wholesaling may produce results, it’s essential that prospective wholesalers understand its nuances before venturing into it.
First step of wholesale real estate process is locating properties listed at under market value, either through online research, real estate investing networking events, or asking local investors for leads. When you find an acceptable property that fits your criteria, next step should be drafting up a wholesale contract between seller and wholesaler that outlines terms of sale as well as purchase price.
Once the wholesale contract is in place, the next step should be marketing the property to investors. This can be accomplished via online ads or social media posts as well as reaching out to real estate investor networks in your locality. Your goal should be to find an investor who agrees with all terms of the wholesale contract quickly before closing on it quickly.
Wholesale real estate services not only benefit investors but can also boost the overall real estate market as a whole. Many cities are currently facing housing shortages and need more starter homes on the market; wholesalers can assist by pairing rundown properties that otherwise wouldn’t sell with flippers who can renovate and resell them for profit.
About Author
The South Texas Wholesaler
JR Medrano is a real estate investor who specializes in wholesaling inherited homes. He has been wholesaling real estate in the Corpus Christi, TX area for the past 7 years. If you would like some honest advise about wholesaling houses. Feel free to contact him at anytime.