You might have heard of "wholesaling real estate " before but haven't given it much thought since it sounds like a scam. But wholesaling houses is actually a thing and it is very much legal when done correctly!
To wholesale a property, you need to find distressed properties or motivated sellers, negotiate for the property's price, have the seller sign a purchase contract, find an end buyer and negotiate, assign the property under contract to the end buyer, and close the sale. Through this process, you'll earn a profit but won't take possession of the property.
Although wholesaling real estate sounds complicated, it is actually a great way to earn money. If you want to start your journey in wholesaling, this blog is for you!
Wholesale real estate is an investment strategy wherein the wholesaler finds undervalued properties, puts them under contract, and sells the purchase contract to a cash buyer or another real estate investor for a fee.
As mentioned, real estate wholesalers are after houses that are below market value. Typically, these are distressed homes that need a lot of work.
But aside from undervalued properties, real estate wholesalers also look for motivated sellers. These people want to sell their house ASAP and they don't want to work with a real estate agent.
In wholesale real estate, the wholesaler won't take possession of a property. Their only role is to secure a good wholesale deal and pocket a wholesale fee. Of course, this is only possible if the wholesaling process is done right.
All investment strategies come with pros and cons and wholesaling real estate isn't an exemption. To help you weigh whether this is the path you want to take, check out the list of pros and cons below.
While it seems that wholesaling and flipping are similar because both use houses to earn a profit, they are actually different.
Wholesaling follows a much faster time frame since there are no repairs or renovations involved. Meanwhile, flippers purchase the subject property and make repairs before they sell it at a much higher price.
Real estate wholesalers don't take possession of the property, unlike flipping. In a way, this makes wholesaling a lot less risky since there are no renovation fees involved as well as carrying costs such as insurance, mortgage, and property taxes.
Moreover, wholesaling doesn't need as much capital as flipping which is directly investing in real estate.
The success of the sale depends on the knowledge of the wholesaler regarding the market and the connections he has to other real estate investors and cash buyers.
Before you embark on real estate wholesaling, you should first have a business plan. Wholesaling real estate requires intensive studying and researching, especially if you have zero knowledge of how wholesale real estate works.
Here's an overview of what you should learn in order to come up with a great business plan for wholesaling real estate:
While wholesaling is legal in many states, it still makes sense to research any existing laws regarding wholesaling to avoid any issues later on.
If you can, get in touch with seasoned real estate wholesalers since they know more about these laws than anyone else.
Learning how to generate leads is very crucial in the wholesaling business. There are actually many ways to get leads, such as networking with professionals, looking for HUD foreclosures, and creating a lead-generating website.
But if you don't have the time to do all these, you can simply get high-quality leads from Property Leads. It is the only pay-per-lead platform that generates leads through SEO.
As a wholesaler, you should know how to set a fair purchase price for distressed properties that will make both sellers and buyers want to negotiate.
Typically, the purchase price of a wholesale property should be based on comparable sales, repair costs, and the after-repair value (fair market value).
If you try to manipulate these numbers, seasoned real estate investors will see right through you.
You need to ensure that the purchase price would make financial sense to both the seller and the end buyer but still leave you enough to take home for the finder's fee or wholesale fee.
And since the fee you'll get in this real estate investing strategy is lower compared to other real estate investments, focus on the volume of turnover instead of how much you'll make in each home sale.
When you start wholesaling real estate, finding leads is not the only skill you should master. You should also know how to find the right buyers and, hopefully, build great relationships with them.
Ideally, you should maintain a list of buyers that you can contact whenever you find a property. The list doesn't have to be long. Just make sure that each buyer is trustworthy and reliable.
Important note: Once you have finished a wholesale real estate transaction, find time to talk to the buyer to identify what other properties they are looking for.
This will help you streamline your wholesaling business. You'll know what properties to find and what wholesale real estate deals to make.
Here are some ways to find end buyers for your wholesale business.
Cash buyers are always present during courthouse auctions. Go to the courthouse early so you can network with cash buyers. Give them your business card and follow up on them if you've made connections.
Many cash buyers don't have a huge capital for their business so they seek the help of hard money lenders.
Make sure to get in touch with hard money lenders near you to ask for buyer referrals. They'll gladly help you since they'll also benefit from any transactions that would be made.
You should also not underestimate the power of networking with licensed real estate agents, real estate investors, and landlords.
Some of these people may lead you to active buyers or even someone that is interested in partnering with you.
A lead capture form on your website is another way to find buyers. Through this form, visitors can give you their personal information and connect to you whether they're a seller or a buyer.
To find more buyers through your capture form, you should also increase the traffic of your website.
Subscribing to the buyer's list of the wholesalers in a particular market means receiving lists of properties they are wholesaling through your email.
After a month or two, check out the county records for the name of the investor who bought the property. You can call those real estate investors next time you have a property you're wholesaling.
Entering the real estate wholesaling business means doing a lot of research and establishing great connections.
To get you started, here is a step-by-step guide on wholesaling a property.
Look for properties that are distressed as they sell for less. These properties are usually fixer-uppers, used as liens, or tied to other legal issues. Use your convincing skills to encourage distressed sellers to sell for less.
You can also look for motivated sellers on the web. These people need to sell their houses fast, so they may be willing to sell for less.
Some of the best places to find properties to wholesale are the local multiple listing service, foreclosure sites, social media platforms, real estate auction websites, and networking organizations.
Another great alternative is to use Property Leads to get exclusive access to motivated seller leads in your area.
Note that when finding leads, you should consider your list of buyers if you already have one.
You need to understand their criteria for buying houses so you can find leads that they would be interested in.
As discussed earlier in this blog, you need to find the after-repair value of the property by doing comps and determining the required repairs.
Do the math with due diligence or you'll end up with nothing to take home. Use the property's fair market value to calculate the maximum allowable offer that you can give the seller. Make sure that you'll still make a profit from it.
When you find a seller and you have explained how wholesaling works, chances are, they'll try to negotiate with you.
Since they know you'll keep the difference between the price they agreed to and the buyer's offer, they'll do their best to request a higher offer. Bring your best negotiation skills and be ready to make some adjustments as well.
Create a purchase and sale agreement that allows the right to assign the contract to an end buyer.
Also, add a contingency clause that would allow you to back out of the transaction if you fail to find an end buyer for the distressed properties before the wholesale real estate purchase contract expires. This reduces the risk of the wholesale transaction.
Once the wholesale real estate contract is signed, you should immediately start marketing the purchase contract to other real estate investors. This will be easy if you already have a list of potential buyers and the investment property meets their criteria.
If this is your first wholesale deal, you can start finding potential buyers through courthouse auctions, hard money lenders, networking, lead capture forms, and subscribing to other wholesaler's lists like what we have mentioned in an earlier section.
Similar to the seller, the end buyer knows your role in this real estate transaction. Thus, you need to prepare a list of comps that can justify the price you're selling the contract for.
Also, expect your negotiation skills to once again be put to the test when you sell wholesale houses to these seasoned investors.
Once you have agreed on a price with your end buyer, you can assign the contract to them. The purchase contract must include an agreement on the assignment fee as well as the deposit amount.
Essentially, when you assign the contract, the buyer will purchase the property and you'll collect the difference between how much the buyer is paying and the amount the seller agreed to.
Even though you are not the buyer, you still need to be present at closing to ensure that the real estate deal goes smoothly. When the title company finishes the transfer of the property, you'll get your cut.
Let's say Mr. A has been keeping a distressed property since he has no budget to make the necessary repairs and sell on the local market. The real estate wholesaler approaches Mr. A and they agree to put the property under contract for $80,000.
Once Mr. A signs the contract, the real estate wholesaler will then contact a cash buyer who is eager to purchase the house for $90,000. The cash buyer plans to fix the property and make it a profitable project.
The wholesaler will assign the contract to the cash buyer and make a $10,000 profit without taking possession of the property.
Real estate wholesaling requires patience, determination, and resourcefulness. Your wholesale real estate business plan won't work if you don't do the following:
You'll earn more in real estate wholesaling if you go after volume. However, if you do not organize your list of leads, buyers, comps (comparable properties sold in a particular area), etc, you won't accomplish anything in this real estate investing strategy.
To help you organize and process information with better accuracy, utilize technology. There are many tools that can help you in doing this, such as mobile applications and CRM or customer relationship management software.
Through technology, you can access your data whenever and wherever.
Your online presence is crucial in finding both buyers and sellers. In fact, according to the National Association of Realtors (NAR), 47% of home buyers are looking for properties online. Having an active website can also help establish your credibility as a real estate wholesaler.
For you to succeed in real estate wholesaling, you should also cultivate the right mindset. You should be consistent and dedicated to your wholesale real estate business, even on days when things aren't going your way.
Not all successful entrepreneurs were born with innate abilities and talents. Hence, you should be willing to learn throughout the years.
If many rental property owners have agreed to sell their house through you, you may want to outsource and delegate some work to others.
You can't accomplish everything all at once. You'll end up with a lot of errors and you'll miss many opportunities. Find the right people for certain tasks and your business will grow more.
In wholesaling, you are constantly identifying comps or comparable homes to come up with a fair home price.
It is suggested to partner with a real estate agent or realtor who has access to the MLS to get reliable market transaction data. This way, you won't take weeks or months to search for comps and get the market value of a property.
A double close or simultaneous close is an exit strategy that real estate wholesalers use when assigning the contract to the end buyer is not permissible according to the local laws or when the seller simply doesn't agree. This is still a profitable strategy employed by many wholesalers.
Typically, a double close means the real estate wholesaler will purchase the property and sell it as-is to another investor within 30 days. These are two separate transactions.
Unlike assigning the contract to an end buyer, the real estate wholesaler needs a huge capital since they will be purchasing the investment property. But spending a huge amount may be worth it if the wholesaler wants the property's capital gains under wraps from the homeowner and the end buyer.
Since double closing means going through two separate transactions in real estate investing, both the seller nor the buyer won't also know about your markup price for the property. There's a huge possibility of earning more.
Yes. Wholesale real estate is legal, but you have to ensure that you follow all the laws that protect the seller, the end buyer, and you as the investor or real estate wholesaler.
Before doing wholesale real estate transactions, you must learn about the legality of wholesaling in that particular state. Read and comply with real estate disclosure agreements to avoid landing in trouble. If you do not know where to begin, consult with a real estate attorney
Whether or not you need a license to wholesale real estate depends on where you live. Most states don't have a federal wholesaling law that requires real estate wholesalers to be licensed, except for Illinois.
Illinois enacted a law in 2019 that requires wholesalers who make more than one wholesale deal a year to get a real estate license. Although no other states do this, this might be the beginning of stricter regulations when it comes to wholesaling real estate.
If you wish to get a real estate license, however, you may do so. This may be beneficial to you since you'll get access to property databases, real estate networking events, and attorney-approved real estate contracts.
No. You don't need a real estate agent to wholesale houses since you can find leads on your own and you aren't really selling a property, just the contract.
However, you may find it to your advantage to have a real estate agent on your team to get access to their network of potential cash buyers. You would also benefit from their real estate market expertise.
Once you have already established a great relationship with a realtor, you may want to outsource the identification of buyers to them.
There are two contracts involved in wholesaling houses. The first one is the wholesale real estate assignment contract which the home seller signs allowing the investor or wholesaler to find a final buyer. This contract doesn't provide the real estate wholesaler with the legal rights to the investment property but it gives them the power to sell the contract to another investor.
Once a final buyer is identified, another contract called the Assignment of Real Estate Purchase and Sale Agreement is used to assign the contractual rights to the buyer.
We can't exactly calculate how much you'll earn from wholesaling real estate since this will depend on factors such as the size of the property, the repairs needed, and the price the seller and end buyer would agree to. But one thing is for sure, you would net less money compared to flipping.
To illustrate, according to most wholesaling experts, they only make around $5,000 to $50,000 from every deal.
Yes. Real estate wholesaling is considered a good short-term investment strategy. Since it doesn't need a significant amount of capital, it's a great way to enter the real estate investment business.
Real estate wholesaling would teach novice real estate investors invaluable negotiation skills as well as how the real estate market works. However, if they aren't patient and dedicated, they can go months without any income if they choose this field.
Virtual wholesaling is a form of wholesaling real estate that uses technology. If you have a smartphone or a computer, you can have access to tools that can help you send and sign contracts digitally so you can practically wholesale anywhere.
Virtual wholesaling means you get to save time, you can target the hottest markets, expand your search, and save on travel fees. However, it also comes with downsides, such as you need to do extensive research to find sellers and buyers and you also won't see the issues of the house in person.
Yes. You still need money when starting to wholesale real estate. However, it doesn't need to be as significant compared to flipping rental properties and family homes.
Some of your expenses when wholesaling involve website costs, email marketing software, CRM, analog and social media marketing, as well as real estate attorney consultation fees.
If you wish to find motivated leads fast, you can also reach out to companies that sell leads and pay a subscription fee.
While many websites would tell you that you need zero money when starting to wholesale in real estate, this isn't true.
You need money to create your own website, do marketing, avail of customer relationship management software, travel to the location of the seller, consult with an attorney, and many more. These are hidden fees that you don't really realize until you start your wholesaling business.
If you aren't confident starting on your own, you may want to partner with a real estate agent or someone who knows the market well. Of course, this isn't free and they will charge you for their services.
The wholesale real estate investing industry is a lot less risky than other real estate investment strategies. For starters, wholesalers do not purchase houses or make repairs. They only spend their earnest money on marketing and generating leads.
However, it is important to note that wholesale real estate strategy still comes with some risks, such as deal failure, legalities, no guaranteed income, and instability of the real estate market.
To succeed in wholesaling real estate, you need an effective business plan and the right skill set. Specifically, you need to learn about wholesaling laws, pricing property correctly, and finding leads and buyers.
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