Investing in property can be complicated, but it can also be lucrative — in the right situation. Pursuing wholesale real estate investments is a way for people to buy and sell real estate contracts without putting down too much money as an initial stake.
It takes a lot of work, but this strategy can pay off for the savvy stakeholder looking to do some real estate investing. When done right, the wholesaler walks away with a nice finder’s fee and never takes possession of the property.
What Is Wholesale Real Estate?
Before we go too far into the pros and cons of this strategy, let’s answer this question: What is wholesale real estate? Essentially, real estate wholesaling is a short-term investment strategy for investors who find undervalued properties and put them under contract with a seller — without doing any renovation or construction work.
The next purchaser then will make the necessary improvements and either sell the property for a higher price or rent it out.
In other words, the wholesaler never takes possession of the home— they secure it but then sell the contract.
See What You Qualify For
Example: How Does Wholesaling Real Estate Work?
Here’s how the process goes: The wholesaler starts a wholesale deal or contract with a motivated seller who wants to unload the property for a variety of reasons. The owner may be at risk of foreclosure, for instance, or they may be motivated to quickly sell a distressed property and don’t want to worry about fixing it up.
The wholesaler then looks for interested cash buyers — often real estate investors — who are willing to fix up the home or have the money to pay someone to do it. The wholesaler sells the contract to the investor for a transaction fee, also known as a “spread,” and thus completes the wholesale deal.
Pros Of Real Estate Wholesaling
There are several potential benefits to this method of investment:
- Because you don’t take possession of the property, you generally get paid quickly.
- The entry costs are typically low.
- Even if you have a low credit score, you can participate in the wholesale market.
- You don’t need experience doing renovation work, or a real estate license.
- If you have an extensive investor network, you should expect a quick turnaround time.
- This method of investment can offer a steady cash flow, which can provide a solid way to build income.
- It allows you to diversify your portfolio — so if you already have a 401(k) and own stocks, adding a stream of rental income is another way to accumulate earnings.
- Real estate tends to appreciate over time and can often offer tax advantages.
See What You Qualify For
You can get a real, customizable mortgage solution based on your unique financial situation.
Cons Of Real Estate Wholesaling
- The process typically requires having a strong network of investors, and it can take time and effort to build that.
- You may experience long periods of time without generating income.
- Investing in physical property requires patience and can take time.
- You may not have as high of a profit margin as with other forms of investing.
- Every investment carries risk, and real estate investments are no exception. In other words, you could lose money.
- The investment is not a liquid asset, which means you can’t turn it into cash quickly if necessary.
How To Wholesale Real Estate
Getting started in wholesale real estate is a complicated process, so here’s how you get started.
1. Look Into Local Wholesaling Laws
For starters, you must be sure the process is legal. To determine this, consult with an attorney who specializes in real estate law. Each state has its own regulations and laws regarding wholesaling real estate, so it’s important to get advice from an experienced professional before you dive in.
2. Find A Distressed Property Or Motivated Seller
To make real estate wholesaling work, you must find motivated sellers of distressed properties. These motivated sellers typically want to sell the property fast and often don’t want to use the normal channels that involve a real estate agent, mortgage lender,earnest money and home inspections or appraisals.
Instead, they want to sell to a buyer who can close on the property quickly before going into foreclosure. Motivated sellers will often sell the property for less than the market value simply because they want to get out of the home quickly.
If you bid a price well enough below the market value, you’ll have room to put the homeunder contractat a higher price. This will help you make a profit — or a “finder’s fee” — for facilitating the deal.
To find the owner of distressed properties, you should market yourself via direct mail, social media and word-of-mouth as a cash buyer of distressed properties. The more people that know of your services, the more homes you’ll have at your disposal to put under contract.
3. Calculate Your Expected ROI
To determine your return on investment (ROI), you’ll need to take several different factors into account.
- For starters, consider thelocal market conditions, which take into account the number of homes for sale and the number of buyers. If there are more buyers than there are available homes, you may need to make a higher offer to beat out the competition. If there is an abundance of homes on the market and not as many buyers, your offer could be lower.
- Compare the home to similar properties in the area. Your real estate agent should be able to put together acomparative market analysisthat shows you the listing and final sale prices of local homes in the last several months.
- Pay attention to the property’s history. Has the property been on the market for several months and experienced multiple price reductions? If so, there may be more motivation for the seller to sell the property. The buyer may be willing tonegotiate the asking priceto a lower offer.
- The condition of the property should also play a role in your offer, as move-in ready homes typically bring in a higher price than properties needing extensive cosmetic repairs.
4. Make An Offer And Negotiate
Once you’ve checked these boxes, make sure that you’re pre-approved for a mortgage — a Verified Approval Letter will prove that you’re ready for the next step. To make an offer on a property, it’s often best to work with an agent to help you finalize the deal.
Next up is the negotiation process, and there are several steps that can help you increase your leverage for a lower purchase price as you negotiate the purchase agreement. You will propose the conditions of the contract, including theoffer price, which the seller will then agree to, reject or attempt to negotiate.
If you’re negotiating, here are some tips:
- Conduct a home inspection — it could reveal structural or cosmetic issues that would allow you to begin with a lower offer.
- Ask the seller to contribute to closing costs.
- Don’t give up if the seller rejects your offer. Think of the negotiation process as a two-way conversation, and you can always counteroffer.
5. Draw Up a Contract and Sign
After you’ve agreed to the terms and conditions, both parties then sign the purchase agreement — a binding contract between a buyer and seller that outlines the details of a home sale transaction.
Keep in mind that a purchase contract is as legally binding as is stated in the agreement itself. A purchase agreement should stipulate acceptable reasons for a buyer backing out of a purchase. Otherwise, once it’s signed, you stand to lose your earnest money deposit if you break your contract.
6. Find a Buyer and Negotiate
To find an end buyer —in other words, someone who will buy the property that you purchased —you’ll need to use your network of real estate investors. While you may not directly know someone who is interested, someone you know may know someone. You can build your network through social media and events like local real estate meetups.
Just like you negotiate the price with the seller, you’ll then negotiate with the end buyer how much you stand to make on the sale of the contract. This is where you negotiate your transaction fee, which can be a standard fee or a more specific price.
7. Assign the Contract to Your Buyer
To assign the contract you signed with the seller to the buyer, you must complete an agreement that transfers the contract you signed with the seller to your end buyer for the agreed-upon amount. The amount stated in the contract is the difference between the amount you agreed to pay to the seller and the buyer’s agreement to pay you for the home.
The buyer then agrees to buy the home and take possession of it. As seller, you agree to accept the fee as assignment of contract, thereby relinquishing your rights to the home.
Take the first step towards buying a house.
Get started today to see what you qualify for.
Tips for Succeeding When Wholesaling Houses
There are some ways you can increase your odds of success during the wholesaling process:
- Start networking before buying: Developing a strong network of real estate professionals, including wholesalers, investors and agents, can help when it’s time to sell your property. By building strong relationships within these areas before you begin the wholesaling process, you will have a greater chance of finalizing deals than if you were starting from scratch.
- Budget for marketing: Setting aside a budget for marketing efforts can help you reach a wider audience for the final sale. This might include targeted online advertising or aggressive social media campaigns to raise your visibility within this critical community.
- Acquire some soft skills: While knowledge of the real estate industry is certainly important, developing soft skills like negotiating, communicating and problem-solving can also be critical to success in wholesaling houses. These skills can help you build relationships with buyers and sellers, navigate complex negotiations and find creative solutions to challenges that may arise during the wholesale process.
Wholesale Real Estate FAQs
As you begin to explore the world or wholesale real estate, some questions may arise. They include:
What is the difference between wholesale real estate and flipping houses?
Wholesale real estate involves buying houses and then selling them — typically to a real estate investor —without doing any work on them. House flipping is when you buy a property as a real estate investment and then, often, renovating the property and selling it to a private buyer.
Do I need a real estate license to wholesale real estate?
No, you don’t need a real estate license or experience to start wholesaling. It’s especially attractive to new investors, since you can get started with very little upfront capital.
How do I become a real estate wholesaler?
As a beginner, start by educating yourself on the basics of real estate and wholesaling specifically. Next, start building your network of contacts in the real estate industry, including other wholesalers and investors.
Once you have a network established, start looking for potential wholesale deals, then reach out to the property owner and negotiate a price that is lower than market value.
Can you make a living from wholesaling houses?
Yes, it is possible to make a living wholesaling real estate. However, the amount of money you can make will depend on several factors — some you can control (including your level of experience and your network of contacts), and some you can’t (the real estate market).
The Bottom Line
Wholesaling can be a competitive and challenging field, and success may not come overnight. Consistency, hard work and a willingness to learn the ins and outs of the industry can increase your odds of making a living as a real estate wholesaler.
To determine whether wholesaling real estate is for you, a good place to start is to decide whether real estate is a good investment.
1Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance and appraisal as well as a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid for self-employed clients. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply..
Find A Mortgage Today and Lock In Your Rate!
Get matched with a lender that will work for your financial situation.
