Wholesaling Real Estate: What Is It & How Does It Work?

Real estate is one of the most popular investment strategies in the United States. In fact, 45% of Americans consider it the best long-term investment — better than stocks, bonds, gold, and other investments.

There’s no one right way to invest in real estate. One possible approach is the wholesale real estate strategy, which is essentially arranging a real estate transaction without buying it yourself. It can be a great option for someone without much capital who is new to the real estate game. Keep reading to learn more about becoming a real estate investor through wholesaling.

What does it mean to wholesale real estate?

Wholesaling real estate is an investment strategy where someone, known as the wholesaler, enters into a purchase contract on a home. But the real estate wholesaler doesn’t intend to buy the home. Instead, they turn around and find another buyer for the property.

“Essentially, wholesalers act as middlemen between the seller and the ultimate buyer,” said Robin Simon, a partner at the private real estate lender Easy Street Capital.

This strategy often works on distressed homes that need repairs, but whose owners aren’t able or willing to fix them up. Buyers for these homes are often real estate investors who plan to flip the home. This is why wholesalers typically look for undervalued properties that are priced below what they could sell for (aka their fair market value).

The wholesaler then turns around and finds a buyer willing to pay a higher price for the home. This allows the real estate wholesaler, rather than the home seller, to pocket the difference, which is often between 5% and 10% of the price.

For example, a wholesaler might enter into a contract for a home priced at $150,000 and sell it for $170,000. They managed to make $20,000 without ever having to buy a piece of real estate themselves.

Pros and cons of wholesaling real estate

Real estate wholesaling has some major benefits, but it also has some downsides you should understand before you dive in.

“There are many wholesalers out there who have been doing it for quite some time,” Simon said. “Inexperienced wholesalers may find it difficult to survive, especially if they don’t have the relevant local connections, or even an eye for discerning which deals/properties are worth wholesaling.”

To get a better idea of whether real estate wholesaling is best for you, you may want to consider speaking with an investment advisor.

How to start wholesaling real estate

Because of the low upfront cost, wholesaling is a great starting point for those hoping to get into the investing side of the real estate business.

The most important first step in real estate wholesaling is doing your research. It’s important that you understand the process, as well as the laws in your state. Additionally, you may want to hire an attorney to ensure that you’re legally running your business. You should also familiarize yourself with the local real estate market.

The next step — which will be key to being a successful real estate wholesaler — is to network with other professionals in your area. Connect with real estate agents, investors, and other professionals.

“You can start by joining real estate groups in your area, or attending real estate-based meetups, to network with like-minded individuals,” Simon said.

Once you’ve done your research and have a local network, you can start the search for your first property.

Wholesaling vs. flipping

Wholesaling real estate has some similarities with flipping in that both involve finding a property, often a distressed one that’s for sale, and acting as a middle person between owners. However, that’s largely where the similarities end.

“Both practices involve profiting off of a property that ultimately will not be a part of your real estate portfolio long-term,” Simon said. “The difference lies in that with wholesaling, you never actually own the property to begin with.”

Flipping houses is the process of buying a distressed property, fixing it up, and selling it for a profit. The goal of flipping a house is to sell it for more than you paid for the house itself, plus the renovation costs.

Because of the renovation goals, the process of flipping homes does require that you purchase them, meaning that there’s a significant upfront cost required. You must generally provide a down payment and the costs of the renovation. Until you can sell the house, you’re also on the hook for the mortgage payment.

At the end of the day, both real estate wholesaling and flipping real estate have a similar goal: to turn a property around for a quick profit. But if flipping a property sounds more up your alley, take a look at these mortgage lenders for a better idea of what loan terms you may qualify for.

FAQs

Do you need a real estate license to wholesale real estate?

Whether you need a real estate license to wholesale depends on where you live. It’s generally not required that you be a licensed real estate agent, but you should check with your state’s laws.

What is a wholesale real estate contract?

A wholesale real estate contract is an agreement between a seller and a wholesaler. It allows the real estate wholesaler to find a buyer on behalf of the seller and keep the difference between the contract price and the final sale price.

Is wholesale real estate a good investment?

Wholesaling real estate can be an excellent investment. It has low startup costs and the potential to turn a reasonable profit.

However, it may not be right for everyone, as it requires networking with sellers and real estate professionals in your area. Whether it’s a good investment also depends on where you live and the local real estate market.

Is wholesale real estate legal?

Yes, wholesaling real estate is legal. However, because different states have different laws regarding this practice, you should check with your state’s laws to ensure that you’re doing it in a way that is legal.

Is wholesaling real estate a good way to get into real estate?

Real estate wholesaling can be a great first step for someone who wants to get into real estate but doesn’t have the money to do so. Because you aren’t buying any property, the costs are quite low. And, you can use the money you make in your early real estate deals to fund larger real estate investments.

Find the right financing to get started in real estate

Real estate wholesaling is just one of the many ways to make money from real estate investing. But if you’re more interested in flipping homes or buying rental properties, you’ll need to know your financing options.

We’ve rounded up a list of the top mortgage lenders to help you fund your next home purchase.

Erin Gobler

Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.