Wholesale Real Estate: A Beginner’s Guide
Victoria Araj7-minute read
July 25, 2023
There are a variety of ways to invest in real estate – from rental properties to flipping houses. However, wholesale real estate can be just as profitable, and you never need to put a dollar down.
Real estate wholesaling is a legal practice you can use to make a profit by conducting real estate deals without ever purchasing a property.
If you’re a new investor who’s looking to give wholesale real estate a try, this article will outline the basics of what you need to know to get started.
Table Of Contents
What Is Wholesaling Real Estate?
Real estate wholesaling is a strategy in which a wholesaler obtains a contract on a property with its seller, and in turn sells the contract to an investor. Wholesalers start by looking for a discounted property to put under contract.
Real estate wholesalers will often look for distressed properties priced below market value. These properties usually need quite a bit of work, and the owner is often motivated to sell and isn’t interested in working with a real estate agent.
From there, the wholesaler will enter into a wholesale real estate contract and then reassign the contract to an end buyer for a higher price. This is known as a wholesale fee and usually costs 5% – 10% of the total property price.
If you’re interested in becoming a real estate investor but are worried you don’t have enough capital, wholesaling real estate may be a good option for you.
What Is An Example Of Wholesale Real Estate?
Real estate wholesaling may seem like a complex process, but it’s simpler than you might think. Here’s an example to help explain further.
A homeowner has a home they don’t believe they can sell because it’s fairly outdated. The homeowner may not have enough funds to repair the home, but never thought to sell it due to its need for restoration.
A wholesaler comes into the situation with an offer for the homeowner – to put the house under contract for $120,000. The wholesaler uses their network to find a potential investor to buy the home for $150,000. The investor takes on this contract as a profitable renovation project. In turn, the wholesaler makes $30,000 in profit legally without purchasing the property.
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Pros And Cons Of Wholesaling Real Estate
Just like any other real estate investing strategy, there are pros and cons to wholesaling. Let’s look at some of the biggest benefits and drawbacks you need to know about.
- It’s a good entry point to getting started as a real estate investor.
- You have the opportunity to close real estate deals in any market, regardless of proximity.
- Very little capital is required to begin, so it’s a low-risk way to get started as an investor.
- There’s an opportunity to make a large profit over a short period of time.
- Wholesaling offers a lower profit margin compared to other real estate investments, like flipping.
- You’ll have to do quite a bit of research to find the right properties and cash buyers.
- It will take time to be successful and start earning a profit as a wholesaler.
- There’s unpredictability, as profit will depend on the availability of the market.
- You’ll rely on property owners feeling comfortable with the wholesale real estate strategy and investors who are open to buying.
Wholesaling Real Estate Vs. Flipping Houses
It’s important to understand that wholesaling is not the same thing as flipping houses. Both strategies involve purchasing distressed homes and selling them for a profit, but they go about it in different ways.
When you flip a house, you purchase a property that needs some work and spend time fixing it up. Once you’ve increased the value of the home, you turn around and sell it for a profit.
With wholesaling, you’re still buying a distressed property, but you’re not doing the work to fix it up yourself. Instead, you’re charging a wholesale fee to the final buyer. As a result, you’ll get less money in a wholesale deal, but you won’t invest your resources into the house.
How To Wholesale Real Estate Like A Pro
If you want to break into real estate investing but you’re short on cash, becoming a wholesaler could be a lucrative option for you. Here are eight steps you can take to get started.
1. Do Your Research
Before becoming a wholesaler, it’s a good idea to familiarize yourself with wholesaling laws. You should also spend time researching the markets in which you’re interested in buying property. For instance, you can use resources like Rocket Homes Real Estate LLC to research specific neighborhoods you’re looking to buy in.
2. Find The Right Property
To be successful, you need to find the right properties listed below market value and find ways to make them more appealing to the end buyer.
Many investors do this by looking for homeowners who are motivated to sell. For instance, homes that are in foreclosure or have liens are a good place to start. You can also find good deals using the following resources:
- Multiple Listing Service (MLS)
- Online networking groups
- Direct mail campaigns
- Social media marketing
It’s a good idea to try a variety of methods in the beginning and pay attention to what works. Over time, you can narrow it down to one or two strategies that give you the best results.
3. Crunch The Numbers
Once you find a property you’re interested in, you need to crunch the numbers to make sure it makes financial sense for you to buy it. To do this, you need to know the property's fair market value and how much it will cost to make any necessary repairs. This information will allow you to calculate your maximum allowable offer, which is the highest price you can pay on the property.
4. Get In Touch With The Seller
Next, it’s time to reach out to the seller to start the negotiation process. Depending on where you found them, their information may not be readily available. You may be able to find their information by looking at public tax records or by searching for them online.
When you reach out to the seller to make your offer, it’s important to be upfront about the fact that you’re a real estate wholesaler. Explain why working with a real estate wholesaler is beneficial to them and how you plan to handle the entire process.
5. Perform Due Diligence
It’s harder to perform due diligence when you’re buying an investment property online, but it is possible. You should start by verifying the fair market value of the property.
You’ll do this by looking at comparable properties sold in that area. You can also look at things like rental income, occupancy rates and cash-on-cash returns to analyze your investment.
6. Get The Property Under Contract
Now it’s time to present your offer to the seller and put the property under contract. When you present the contract to the seller, make sure it includes an inspection contingency.
This contingency allows you to cancel the contract if any unexpected problems come up during the inspection. The contract should also include the right to assign the contract to another party.
7. Market Your Contract To Cash Buyers
Once you’ve found the right investment and worked out a deal with the seller, your work is not over. Now you need to market your contract to potential cash buyers.
One of the easiest ways to do this is by connecting with a REALTOR® in your area, who can help you identify cash purchases made over the past year. You can also connect with potential buyers on social media.
8. Reassign The Contract To The End Buyer
Once you have an interested buyer, you can assign them the contract and close the deal. Technology like DocuSign makes it easy to sign contracts and close the deal virtually as well.
FAQs About Real Estate Wholesaling
Interested in wholesale real estate and want to know more? Let’s walk through different examples of wholesale real estate and what makes a good investment.
Is wholesale real estate a good investment?
Wholesaling real estate requires you to be all-in and have a strong understanding of the market. it’s an alternative way to get started in the industry without requiring significant capital.
If you’re willing to dive into negotiating deals, targeting undervalued properties and have a passion for the real estate industry, wholesale real estate can be beneficial for you.
Is wholesale real estate legal?
Wholesaling is legal when done correctly by following the laws put in place by your state of residence. The legality of wholesaling real estate varies by state, so it’s important to understand and comply with state regulations.
If you’re unsure of the wholesale real estate laws in your state, work with a professional real estate attorney to get a better understanding. Make sure you fully understand your state’s rules and regulations before making any real estate decisions.
What is virtual wholesaling?
Virtual wholesale real estate involves buying and selling a property remotely, without ever visiting it in person. This transaction takes place via a computer or smartphone, and investors will sign the necessary documentation electronically. Virtual wholesaling allows real estate investors to operate in any market, regardless of location.
How do I make money through virtual wholesaling?
Two of the advantages of virtual wholesaling are that you don’t need a lot of money to get started and you can complete the process from anywhere. You’re usually buying houses that are distressed or in foreclosure and working with a highly motivated seller.
Real estate investors make money by attaching a wholesale fee to the transaction. This fee is usually a percentage of the total cost of the property. The wholesaler acts as a middleman in the transaction and earns money by finding and closing real estate deals virtually.
Do I need a real estate license for wholesaling?
No, you don’t need a real estate license or experience to start wholesaling. Anyone can start doing it and make money at it. It’s especially attractive to new investors since you can get started with very little upfront capital.
However, it will take time to make money as a wholesaler, and you may make some mistakes in the beginning. It may be helpful to connect with a mentor who has already been successful as a real estate wholesaler. That person can guide you through the process of getting started.
The Bottom Line
If you’re looking for a low-cost way to invest in real estate, wholesaling could be a good option for you. As a wholesaler, you can tap into new markets and earn a profit on your investment.
If you’re interested in real estate wholesaling or other investment strategies, you’ll want to find a way to pay for those investment properties. Start the mortgage application process today with the Home Loan Experts at Rocket Mortgage®.
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