Wholesaling real estate is an investment strategy that involves acting as the middle person in a transaction, going into a contract on a home, and finding a different buyer without ever owning the property yourself.
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.
Here is a list of the benefits and drawbacks to consider.
- Low startup cost. First, wholesaling real estate has a low startup cost, meaning it can be easy and affordable to get started. Other types of real estate investing require that an investor have thousands — or tens or hundreds of thousands — of dollars to purchase a property. That’s not the case with real estate wholesaling.
- Potential for high profits. And not only does wholesaling real estate have low start-up costs, but it also offers the potential for a major profit. Someone can make tens of thousands of dollars on a single transaction. “Real estate investors can earn a profit without putting up a significant amount of capital when wholesaling,” Simon said.
- Lower profit margins. First, while it can result in an easy profit, the margins are lower than in other forms of business in the real estate industry. And unlike rental properties, there’s no ongoing income that results from it.
- Must be willing to network. Another downside is that it requires connections. Since you first have to find sellers to purchase the property from and then find buyers to connect them with, you’ll need to spend a lot of time networking.
“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.
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.
- Wholesaling is a real estate investing strategy that involves acting as the middle person between the buyer and the seller.
- When you wholesale real estate, you enter into a contract with the seller but don’t purchase the property.
- Wholesaling has low startup costs and the potential for a good profit, but it’s also a competitive field and requires plenty of networking in your area.
- Real estate wholesaling is different from flipping homes because flipping requires buying the home and fixing it up before finding a buyer.
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.
View Article Sources
- Arizona’s New Wholesaling Disclosure Requirement — State of Arizona Department of Real Estate
- What is credit counseling? — Consumer Financial Protection Bureau
- Real Estate Brokers – Brokerage Services – Real Estate Wholesaling — Maryland General Assembly
- How to Invest in Real Estate: An Expert Guide for Beginners — SuperMoney
- 7 Tips on How To Double Your Money — SuperMoney
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- What is the Worst Day to Close on a House? — SuperMoney
- What is an Air Loan Scheme? — SuperMoney
- What Is a Mortgage Origination Fee and How to Avoid Them? — SuperMoney
- Investing In Real Estate Pros and Cons: 2023 Update — SuperMoney
- What is a Straight Loan in Real Estate? — SuperMoney
- What is Leverage in Real Estate? — SuperMoney
- The Ultimate Guide To Buying A New Home — SuperMoney
- How to Use a Real Estate Certificate of Deposit to Buy Property — SuperMoney
- What Is The Role of a Subagent in a Real Estate Transaction? — SuperMoney
- How to Finance a House — SuperMoney
- How to Buy a House — SuperMoney
- United Wholesale Mortgage — SuperMoney