What is wholesale real estate? A beginner's guide

Wholesaling houses lets you profit from real estate without buying the property yourself. But the industry is changing quickly. Several states and cities now require wholesalers to be licensed and to provide specific disclosures to sellers and buyers. Learn more about wholesale real estate, how it works step by step, the pros and cons, and the legal considerations to review before you start.

What is wholesaling houses?

Real estate wholesaling is a way to invest in real estate without spending much, if any, money up front.

How does wholesale real estate work? First, the wholesaler identifies property that is available at a below-market price. Typically, this is a property in disrepair but with potential. The seller may be distressed seller, the property may be a foreclosed home, or it's being sold via a short sale.

The wholesaler strikes an agreement with the homeowner, signing a wholesale real estate contract or option to buy the property. But instead of buying it, the wholesaler sells the property to another buyer at a markup. The entire transaction takes place without the wholesaler ever having to purchase the property.

How does wholesaling real estate work?

Let’s look at a wholesale real estate transaction from the beginning.

First, you agree to buy a house from the seller, but do not purchase it yourself. You have a contract or an option to buy. Next, you find a buyer interested in the property and sell them the contract. The fee they pay for the contract is your profit. The buyer of the contract then purchases the property from the seller.

Successful wholesalers usually start by looking for discounted or distressed properties priced below fair market value. These homes often need a lot of work, and the owner may be motivated to sell quickly and may not be interested in working with a real estate agent. Absentee homeowners also can be a good match because many of them want a quick, hands-off sale.

From there, you enter into a wholesale contract for the property and then sell that contract to the end buyer for a price. The wholesaler's fee is usually 5% – 10% of the property’s value. In many markets, wholesalers earn $5,000 to $20,000 per deal.

Typically, wholesalers find buyers who will pay cash, especially those who flip homes and are always on the lookout for good deals. Building a strong buyer list can make it easier to move contracts quickly and keep your deals on track.

Some cities require wholesalers to get a license. For example, Philadelphia requires a Residential Property Wholesaler License.

If you're interested in becoming a real estate investor but feel unsure about having limited up-front capital, wholesaling may be a good place to start. With clear expectations and the right connections, it can be a practical, beginner-friendly way to start building experience in real estate investing. But make no mistake, wholesaling houses takes work, time, and determination.

8 steps to real estate wholesaling

Here are 8 steps you can take to learn how to wholesale real estate.

1. Do your research

It’s important to become familiar with your state's laws related to wholesaling real estate. Rules vary from state to state, and a little work up front can avoid surprises later on.

Focus on neighborhoods where you want to find deals, using resources like Redfin to get a sense of pricing, demand, and overall market trends.

Some areas naturally offer more opportunities than others. For example, neighborhoods labeled “up and coming” might be easier to sell to an investor than areas that are already high-priced. Markets with limited inventory may also offer potential because investors may have a harder time finding properties on their own. That makes a wholesaler’s deal a helpful resource.

2. Find the right property

After gaining a handle on the big picture – the laws and neighborhoods – it’s time to focus on individual properties. For starters, look for homes priced below fair market value that you can make more appealing to the end buyer.

Another way to find deals is to look for homeowners who need to sell quickly. For example, properties in foreclosure or with liens can sometimes be great finds.

You can also find deals through resources like:

• Multiple listing service (MLS)
• Online networking groups
• Direct mail campaigns
• Social media marketing

When you’re just starting out, it’s a good idea to try a variety of methods 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, the next step is to run the numbers to make sure it makes financial sense. A big part of this equation is knowing the property’s fair market value so you have a clear picture of what it could realistically sell for. From there, you can figure out your maximum allowable offer (MAO). In other words, the highest price you can comfortably agree to while still making a profit.

To calculate a specific MAO for a property, you'll need to estimate the after-repair value (ARV), which is the amount you believe you can sell it for after needed repairs. From there, you'll subtract the repair costs that will be required to get it to that state, a buffer for unexpected costs, and, of course, the fee or profit you expect. If you plan to purchase the property and flip it, you'll also need to factor in holding and closing costs, among others. The final result will be the MAO, or the amount you can offer the buyer.

You'll also want to think through a few practical details. For example, do you already have an investor in mind who might be interested in the deal? If not, holding the property under contract for too long can put you at risk of losing your earnest money deposit or of running out of time under the agreement if the timeline stretches. Looking at factors such as local demand, investor interest, and how quickly similar properties are moving can help you decide whether the deal is worth pursuing.

Taking a moment to think through these pieces up front can save you time, money, and stress as you work toward finding the right wholesale opportunities.

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 find out who owns a property by searching in public records or online.

When you reach out to the seller to make your offer, it’s important to be up front about the fact that you’re a real estate wholesaler. Be sure to check your state laws on exactly what disclosures you must make. Some states even require you to make disclosures in writing, with a specific form. 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

Doing due diligence is an important step, whether you’re evaluating the property in person or online. Here is a minimum of what you need to do:

• Verify the property's fair market value by comparing recently sold properties in the area.
• Gather as much information as you can from the seller regarding any updates or repairs they have made.
• Ensure any renovations were completed with the proper permits.
• Run a title search to ensure the property has no outstanding liens, disputes, or other legal issues.
• Detail, with costs, any repairs or upgrades needed to attract buyers and complete a sale.

6. Get the property under contract

Now it’s time to present your offer to the seller and get the property under contract. When you share the contract with the seller, make sure it includes a home inspection contingency.

This is also where you’ll want to hire a title company and escrow company to do a professional, thorough title search. This ensures there are no outstanding liens or legal claims on the property that can cause problems – and cost you money – down the line.

An inspection contingency gives you the option to walk away if any unexpected issues come up during the inspection. It’s also important to include the right to assign the contract to another party since that’s what lets you transfer the deal to your end buyer and make your profit.

7. Market your contract to cash buyers

After you’ve found an investment property and worked out a deal with the seller, your next step is getting the contract in front of potential cash buyers. This is where you share the opportunity with investors who may be interested in taking over the deal.

One simple way to do this is by connecting with a local real estate agent who has experience working with investors. They can help you identify which homes were purchased with cash and may even recommend investors who are actively seeking opportunities. You can also reach new buyers by joining investor groups, real estate forums, or social media networks.

Once you contact potential buyers, make sure you understand and follow your state’s laws regarding disclosures and licensing. In recent years, many states have enacted new laws requiring detailed disclosures. Additionally, many states now require wholesalers to have a real estate license or to be registered.

Building relationships with cash buyers takes time, but it can make the wholesaling process smoother and help you move contracts more quickly.

8. Reassign the contract to the end buyer

When a buyer agrees to the deal, your next step is to assign the contract and prepare for closing. With tools like DocuSign available, the paperwork can be quick and smooth. You'll receive your wholesale fee at closing, since it's paid when the deal officially closes.

Not all wholesale sales are this simple, however. Sometimes, there is a double closing involved. This is when you, the wholesaler, complete the sale with the seller and sell the property, at a profit, to the final buyer you have an arrangement with. This often happens on the same day, but it requires you to use a title company to complete your purchase and sale. Hence, the term double closing.

Pros and cons of wholesaling real estate

As with any real estate investing strategy, wholesaling has pros and cons.

Pros

• It can be a beginner-friendly way to get started with real estate investing.
• You can work in almost any market, even if you don’t live nearby.
• It typically requires a very little up-front investment, which keeps the financial risk lower than other forms of investing.
• There’s potential to earn a profit in a shorter period compared with other strategies.

Cons

• Wholesaling usually yields smaller profits than other investing options, like flipping homes.
• Finding the right properties and investors takes effort and consistent research.
• It can take some time before you start earning a consistent stream of income.
• Major changes to laws and regulations over the past five or so years in many states have made wholesale real estate more complex.

Wholesaling real estate vs. flipping houses

When you flip a house, you buy a property that needs work and invest time, money, and effort into fixing it up. After increasing the home’s value, you put it back on the market and sell it for a profit.

With wholesaling, you’re still working with properties that need work, but you’re not the one doing or paying for repairs or renovations. Instead, you secure the property under contract, invest, and earn a wholesale fee by assigning that contract to an investor.

While the profit is usually smaller than a full flip, you’re not using your own money to renovate the home, which makes wholesaling a lower-risk approach overall.

FAQ

Here are answers to common questions about how to start wholesale real estate investing.

Is wholesale real estate a good investment?

It can be, but like any investment opportunity, the potential rewards come with risks. Wholesaling takes commitment, hard work, and a solid understanding of your market,

What is virtual wholesaling?

Virtual wholesale real estate works just like traditional wholesaling, except you do it remotely. The goal is to handle the entire process from your computer or smartphone, allowing investors to sign all required documents electronically.

How do I make money through virtual wholesaling?

Just like traditional wholesaling, you make money by adding a wholesale fee to the virtual transaction – usually a percentage of the property’s total cost. As the wholesaler, you find undervalued properties with motivated sellers and connect them with investors who want to buy.

Is wholesale real estate legit?

Yes, wholesaling is legal when it's done correctly and within your state's laws. But laws and regulations vary by state, so it's important to understand what your state allows and requires.

The bottom line: Understand wholesale real estate before deciding to pursue it

Wholesaling real estate can be a good way to start investing in real estate, since you don’t need a large amount of money to close deals. However, it can take time to learn the ropes, build a network of buyers, and understand the ins and outs of the entire process. There have also been many new laws and regulations introduced in recent times. These vary by state and are vital to understand.

By understanding the steps, risks, state laws, and the time commitment involved, you can decide whether this investment strategy makes sense for you.

If you’re ready to buy a home, explore your borrowing options today with Rocket Mortgage.