Wholesale Real Estate Investing 101 for Beginners
This article will inform you on all basics of real estate wholesaling: what it is, how it works, and its pros and cons for wholesalers. It will help you understand whether or not property wholesaling might be a good strategy for you.
Real estate wholesaling has helped a lot of professionals to get started in real estate investing, including myself a long time ago.
Let’s start with defining the term “real estate wholesaling”.
What Is Real Estate Wholesaling?
Real Estate Wholesaling Definition
Wholesaling in real estate is a deal in which a person or a company signs a property purchase contract as a buyer, but instead of buying the property, they assign that contract to the actual buyer in exchange for a fee.
A real estate wholesaler isn’t usually going to close on the purchase themselves. Wholesalers look for potential real estate investment properties that might seem lucrative deals for investors.
When they find a suitable property, they put it under contract and then sell the purchase rights to an investor. These are usually distressed properties that can be purchased below market value.
What Does “Wholesale Real Estate” Mean?
Wholesale Real Estate Definition
Wholesale property is real estate, typically residential, put under a purchase contract by one party who intends to sell the purchase right to a third another party by assigning the contract to them for a fee.
Normally, we use the term wholesale when the goods are sold to an intermediary before being purchased by the eventual owner. In retail wholesaling, a retailer buys the goods from the manufacturer at a wholesale price. The retailer takes possession of the goods.
The retailer sells the goods to their customers at a higher price. The difference between the wholesale price and the retail price is the retailer’s profit.
Wholesaling real estate property is similar. The contract price for the goods (the wholesale home) is lower than the total cost to the buyer. Instead of charging a higher price, the wholesaler receives an assignment fee.
The most significant difference between house wholesaling and the retail world is that the real estate wholesaler may not take possession of the goods. They just connect the seller with investors who are looking for this type of property.
This may look similar to the service provided by a broker. However, it’s very different. The wholesaler signs a purchase contract with the homeowner. This makes them obliged to buy the property by a deadline unless they assign the agreement to the end buyer before it.
If the wholesaler fails to find the end buyer for the property under contract, they either have to buy it themselves or lose their earnest money deposit.
Is Wholesaling the Same as House Flipping?
No. In house flipping, the buyer completes the contract and owns the property. They then make improvements before selling the property for a profit. Wholesalers don’t usually own the property. They assign the purchase contract to someone else.
House flippers are the kind of investors that often buy wholesalers’ contracts. However, a contract can also be sold to anyone else including landlords, other types of investors, and even the general public.
Is Wholesaling Real Estate Dead?
No, wholesaling real estate is not dead.
Real estate transactions have always depended on people finding buyers who want the property. When someone other than the property owner performs this function, they are paid for their services.
This includes brokers who work with the general public and wholesalers who work with real estate investors.
If someone is selling a desirable property, they will normally use a licensed broker for marketing the home to the general public.
If that property is distressed, they will rather need help finding a smaller pool of specialized buyers. In this case, a wholesaler can help.
There has been a concern in some quarters that homeowners may need the protections provided by working with a licensed broker. Licensing is a matter that is controlled by the states. Any state could decide to require wholesalers to become licensed.
However, it is doubtful that property owners’ rights will be restricted by not allowing them to enter a contract that is assignable. At present, there are no signs of real estate wholesaling disappearing as an industry in the near future.
Is Wholesaling Real Estate Legal?
The states determine real estate laws. You need to be aware of the laws in your state involving real estate transactions, contracts, and activities that require a license.
Wholesaling involves one person signing a contract to buy a property from a second person and then assigning that contract to a third person for a fee. They are not selling the property. They are selling the contract.
Most states do not have laws restricting the sale of contracts. It’s still easy to cross the line into broker activities. Some inappropriate activities include:
- Marketing the property for sale
- Bringing a buyer directly to the property owner or telling them that you intend to do so
- Telling investors about the property or showing it to them before the contract exists
In some states, you may have to show that you entered into the contract as the buyer. Not as an intermediary. To do this, you may have to prove that you have the financial ability to close on the purchase if necessary.
Some wholesalers use a double close strategy to stay away from the question of broker activity. The wholesaler closes on the home and then immediately sells it to an investor. Sometimes the investor provides the funds for the wholesaler’s closing.
Another method is to use an LLC to put the property under contract and then sell the LLC. This method puts more of an arms-length to your involvement.
Licensing requirements exist primarily to protect the public. Those who object to wholesaling believe that the seller’s best interests are protected if they are dealing with a licensed broker.
The easiest way to ensure that your wholesaling activities are legal in your state is to get a real estate license. This should remove any objections.
Is Wholesaling Real Estate Ethical?
The process of wholesaling real estate is ethical if the person doing it is acting ethically. The determining factor is not the nature of the transaction. It’s the behavior of the people involved.
After all, licensed brokers who are participating in a traditional listing transaction can and sometimes do behave in an unethical manner.
The critical question is this: are the property seller’s interests being well served, or are you taking advantage of them?
The best way to make sure that you come down on the right side of this question is to be open with the seller and document everything.
There are times when it’s in the property owner’s best interest to sell the property to an investor. If the seller doesn’t have the time and money to bring a distressed property up to market standards, an investor purchase can be their best option.
When a wholesaler helps make this happen, the best interests of the property owner are achieved.
If the property could sell for a higher price in a traditional transaction, and the wholesaler hides this from the seller, it could become a problem that has to be resolved in court.
Can You Make Money Wholesaling Real Estate?
A person can make money wholesaling real estate if they are willing to learn the best techniques and apply them diligently.
Like any other business, wholesaling involves building and maintaining a pipeline of opportunities. Not every deal goes through. The more chances you have lined up, the more sales you will close.
The great benefit of wholesaling is to help you to build a larger real estate investing business. You can use the funds you generate from wholesaling to make your own investments.
At that point, wholesaling is one portion of your diversified real estate business. Wholesaling can continue to generate short term income while creating other investment opportunities.
How Much Do Real Estate Wholesalers Make?
That depends on the market and the size of deals that you do.
Most wholesalers agree that you should try not to spend your time on anything that pays a fee of less than $5,000.
Some markets have available properties that will generate five-figure fees. Wholesaling real estate contract assignments that result in six-figure profits are possible.
How Does Real Estate Wholesaling Work?
Wholesalers consistently spend part of their time building a list of investors who buy real estate on a regular basis. They also continually research their markets for properties that are likely to fit their investors’ purchase criteria.
Pre-purchase preparation is crucial for a successful wholesaling transaction. When a wholesaler finds an appropriate property for wholesaling, they need to have buyers who are ready to close. The purchase contract will give the wholesaler a limited amount of time to do all of this. They need to be prepared.
The wholesaler should ask the seller a lot of questions to learn their motivation and expectations. Next, they need to explain their role in the transaction carefully. Clarity will help to avoid misunderstandings that can turn into complaints by the seller.
Unless they are licensed, the wholesaler must be careful not to appear to be selling the real estate. Otherwise, someone could accuse them of performing broker activities without a license.
They are either selling the right to the purchase contract, selling an LLC that holds the purchase contract, or buying the property.
The wholesaler needs to negotiate a price with the seller that lets the investor-buyer make their expected profit while covering the wholesaler’s fee.
When the purchase contract is signed, the wholesaler will have several days to provide earnest money. The purpose of earnest money is to show the seller that the buyer is acting in good faith. Earnest money is credited to the purchase price at the closing.
The amount is negotiable, but a wholesaler can expect to put up $1,000 to $2,000. These funds will be held in an escrow account by an attorney and can only be released if both parties agree.
In reality, most real estate contracts allow the buyer to back out of the purchase within the inspection period without losing their earnest money. For this reason, some states require a second fee, sometimes called a diligence or inspection fee.
The diligence fee allows the buyer to cancel the contract for any or no reason within the inspection period without losing their earnest money.
The diligence fee is non-refundable and goes directly to the seller. The amount is negotiable. The longer the inspection period will be, the higher you should expect to pay in a diligence fee. Depending on the inspection period’s length, you will have to pay from $500 to $2,000.
When they sell the contract, the wholesaler will receive a refund of their earnest money deposit and diligence fee in addition to their assignment fee.
The wording of any legal contract is essential and should be written or reviewed by an attorney.
Assignment language is common in commercial contracts. This allows the buyer to create an ownership LLC before closing. It also allows them to sell the right to the contract if they discover that the property doesn’t suit their needs or can’t get their financing.
Wholesale real estate purchase contracts do the same thing. With the assignment language, the seller agrees that the property will be sold to the wholesaler or their assigns.
The length of the inspection period is a crucial negotiating point. It will impact the size of the earnest money or diligence fee. If the time period that you request is too long, the seller will not allow it.
The wholesaler needs to create enough time in the inspection period for:
- Finding an investor-buyer
- Investor-buyer’s inspections
- Completing the contract to either assign their rights or resell the property
- Closing on the sale of the LLC if necessary
The wholesaler could consider negotiating language that allows them to buy more inspection time later for an additional non-refundable fee.
Once a wholesaler assigns a contract or sells it through an LLC, their deal is complete. If the transaction is a double-close, the wholesaler needs to prepare for both closings.
Any further inspections or reports will involve the input of the eventual buyer. They will need to be satisfied to ensure their purchase closes.
However, the wholesaler should proceed as if they will hold the property. They need to protect themselves in case the second closing doesn’t happen. The wholesaler needs to be sure that they will have a property that is marketable to other investors.
The same attorney will handle both closings. You may need to use an attorney who is selected by the investor-buyer. The wholesaler’s attorney should still review all documents to protect their interests.
Do You Need a License to Wholesale Real Estate?
At this time, you do not need a license to wholesale real estate. However, you should examine your state’s laws regarding real estate licensing before beginning your wholesale real estate practice.
Some states have requirements that will impact how you operate.
Do You Need an LLC to Wholesale Real Estate?
It depends on whether you are using an LLC to structure your business or to serve as the buyer in a transaction.
Most business owners consider structuring as an LLC for two reasons:
- To limit personal liability
- For tax purposes
In general, LLCs are opened to protect (to a certain extent) assets of the business. As a wholesaler, you aren’t supposed to own assets (unlike a flipper or a landlord). So in terms of asset protection, wholesaling real estate without an LLC is not a problem.
However, you should consult with your attorney and your tax preparer to determine if this structure is right for you.
Using an LLC as the buyer in your transactions may depend on:
- Your state’s attitude toward wholesaling real estate.
- Your attorney’s advice.
- What the standard practice in your area is.
How to Find Properties to Wholesale?
There is no one way to find wholesale real estate deals successfully. You have to pursue leads using different tools, and you have to do it repeatedly. You are looking for distressed properties and motivated sellers.
Distressed properties are normally properties that need significant repairs. This may have happened because the owners:
- Don’t have the money to do repairs.
- Live elsewhere and haven’t kept up with the condition of the property.
- Are deceased, and their heirs can’t keep up with the property.
Finding houses to wholesale can be as easy as driving targeted neighborhoods regularly. Once you see distressed or vacant properties, you can look up the ownership information on the county tax records.
Learning how to find motivated sellers to wholesale real estate properties requires a plan that you will stick to every week. It’s like punching a clock. You should have a schedule each week with time set aside to follow up on these sources:
- Banks/REO – foreclosed properties that don’t sell at auction. They are held by the bank and shown on their books as Real Estate Owned (REO). These are non-performing assets that are not good for their balance sheet. Find the REO person at the local banks and communicate with them regularly.
- Pre-Foreclosure – Once a borrower receives a Notice of Default (NOD) from their lender, the property is in pre-foreclosure. The NOD is often a matter of public record. Check your county courthouse for these filings. Sometimes you can find the public notice in the local paper.
- Bandit signs – You’ve seen them at intersections, “I pay cash for houses!”. Learn your area’s signage regulations, so you don’t hurt your profit with improper signage fees. Control the follow-up process by using a number that doesn’t indicate who you are, such as a Google Voice or Skype number.
- Auctions – These are usually mortgage foreclosure auctions or auctions by the county for unpaid taxes (tax foreclosure). Some auctions are estate sales. Auctions typically require full payment within 24 hours. Some auctions don’t allow inspections. Auctions can generate good wholesaling properties, but they have a steep learning curve.
- Expired MLS listings – houses that can’t be sold the traditional way are often prospects for wholesaling. Building a relationship with local investor-friendly real estate agents can be a source of business for you.
- Marketing – Craigslist, direct mail, and online marketing are ways to get your name out there to homeowners who can benefit from your wholesaling efforts. These are often the same resources that you can use to build your buyers list.
Make sure that you have the opportunity and the time to scrutinize the property. Your offer for the property needs to reflect the After Repair Value (ARV) minus the cost of repairs and profit. You need to accurately know what it’s going to take to repair the property.
Note: some professionals also wholesale short sale homes. However, this is not advised for newbies (and even for many experienced wholesalers) due to legal complexities and risks. Learn more about it from the article about wholesaling short sale properties.
How to Find Cash Buyers for Real Estate Wholesale Deals?
I wrote two extensive articles about wholesale real estate property marketing and ways to build a cash buyer list for real estate wholesaling. But here, let’s go over the basics.
The most effective online marketplace for wholesalers that I know of is the one created by HouseCashin.com, so let’s start with it.
HouseCashin Investment Property Marketplace
HouseCashin Investment Property Marketplace was made to connect wholesalers with professional real estate investors looking for off-market deals.
At HouseCashin Marketplace, investors are furnished with evaluation tools that make HouseCashin their preferred online destination for shopping investment properties.
Wholesale property buyers can search for suitable houses based on:
- Property type
- Deal type
- Deal status
- Asking price
The investor dashboard gives users tools to calculate rehab costs, determine after repair value (ARV), and analyze their profit potential.
When you list your contracted deal on HouseCashin marketplace, it becomes available to hundreds of investors looking for wholesale properties in your area.
In addition to the property’s information, potential buyers will see information on you, including your photo and other deals you are marketing. They can bookmark the page or contact you instantly. It’s a great way to build mutually beneficial relationships with serial investment property buyers.
HouseCashin even gives investors access to the best local hard money lenders from your property listing page with a “request funding” button. Hard money loans are normally used to fund fix-and-flip projects, but you can try this functionality too for finding financing for earnest money deposits.
You can also register in our directory created for investors to help them find the best local real estate wholesalers throughout the US. Cash byers looking for wholesalers in your area will be able to find you in the directory and inquire about your services.
Finally, we have a directory where you can find real estate investors near you and reach out to them.
A crucial part of your online presence is your own website. It needs to be up to date and effective in capturing viewers.
Another important part of your marketing strategy is building your own list of reputable cash buyers and keeping it up-to-date.
Other resources for finding cash buyers include online marketing platforms such as Craigslist and eBay. Make sure that you understand the rules for advertising there.
eBay can be confusing for real estate deals. To stay within the various states’ real estate laws, real estate bids on eBay are non-binding.
Some online sites like Craigslist have had complaints about scams taking place on their site. These sites are starting to charge for ads partly to discourage this activity.
Social media is having a substantial impact on business marketing. You can take advantage of these tools by either participating in groups or paying for advertising.
Paid advertising on social media provides targeted advertising to your chosen audience, ongoing management of your ad campaign, and management of your advertising budget.
Using social media groups to get free advertising isn’t as useful as paid ads. Many groups don’t allow advertising. Facebook algorithm monitors group ads and will suspend your account if it feels you are overusing the venue.
What Is Virtual Real Estate Wholesaling?
In virtual wholesaling, the entire process is done from a distance. The transaction is done electronically by email, fax, phone calls, and videos.
Other types of real estate transactions have been done this way for a long time. States have adopted electronic communications laws long ago that allow documents to be signed and delivered electronically.
With the 2020 COVID-19 pandemic, remote showings and closings have been required to the point that they are commonplace.
Is Wholesaling Real Estate Easy?
Like any other business opportunity, it’s easy to do real estate wholesaling badly. Doing it well takes effort and experience.
Wholesalers need to work at their profession every day using a focused strategy. Their weekly/daily activities need to include:
- Networking: bank REO officers, hard money lenders, brokers, etc.
- Following up with buyers on your list.
- Researching your market, including driving target neighborhoods.
- Reviewing marketing and branding campaigns including online presence.
- Reviewing your pipeline of potential properties for purchase.
- Reviewing your pipeline of active deals.
No one thing on your to-do list is hard on its own. But doing everything on the list repeatedly takes persistence and a strong work ethic.
Pros and Cons of Wholesaling Real Estate
3 Advantages of Wholesale Real Estate Investing
1. Low Initial Investment Threshold
Wholesaling is an excellent way to start a career in real estate investing without a lot of money or credit. If you’re willing to learn and ready to work, you can become a wholesale real estate investor.
2. No Licensing Requirements
If you do it correctly, you don’t have to be licensed to be a real estate wholesaler.
3. Opportunities to Grow as an Investor
Wholesaling will teach you the basics of real estate investing. This creates a foundation that you can use to grow as an investor and deal maker.
2 Disadvantages of Wholesale Real Estate Investing
1. Ethic-Related and Legal Intricacies
The pitfalls of wholesale real estate include the resistance to real estate wholesaling from people in the traditional real estate profession.
If you take shortcuts, you can leave home sellers with the impression that you did not act ethically. If this happens, you can find yourself being investigated by your state’s real estate commission.
If they determine that you performed broker activities without a license, you can face stiff fines.
If you buy properties under an LLC which you then sell, that might protect you. Or, you could use the double-close method and buy the property temporarily.
The simplest way to keep from being charged with selling real estate without a license is to get your license.
Being licensed adds credibility when marketing yourself and presenting offers to property sellers. The ongoing training required for brokers is beneficial to any real estate professional.
2. Purchase Agreement Deadline
Another pitfall is the deadline in the purchase agreement you sign with the homeowner. If the property isn’t sold by this deadline to the end buyer, you are risking to lose your earnest money deposit.
Is Real Estate Wholesaling Worth It?
If you pursue it diligently, real estate wholesaling can be the start of a financially rewarding real estate career.
If you compare the benefits of wholesaling with the easily mitigated downside, you’ll see an opportunity that can be achieved by almost anyone.
Eventually, you could be making long-term real estate investments on your own or in partnerships. Wholesaling could be a continuing source of short-term income that complements your other investment activities.
The low cost of entry and high return on sweat equity make real estate wholesaling an opportunity worth considering.