A Guide to Wholesale Real Estate

A Real Estate Investment Strategy

From buying rental properties to flipping houses, real estate offers many opportunities to invest. Another approach to investing is wholesale real estate. Wholesaling can involve lower upfront costs, which makes it appealing to beginner investors, but it's best to understand how it works and the laws in your state before getting started.

What Is Wholesale Real Estate?

Wholesale real estate is an investment strategy where you, the wholesaler, secure the rights to purchase a property and assign them to another buyer for a fee. In most cases, the property will be sold below market value. Unlike with flipping houses, you usually don't make repairs or take ownership of the property yourself.

Wholesale real estate is regulated differently in each state, so it's crucial to understand your local laws when using this investment strategy. Contracts must be compliant, and some states require wholesalers to have a real estate license.

How Does Wholesale Real Estate Work?

If you want to know how to wholesale real estate, think of it like this: A wholesaler acts like a middleman between a seller and the final buyer. They find a property and then sell it to another investor. Here's how the process works:

1. The wholesaler researches and finds a property below market value. The house may be a fixer-upper, or it may be from a motivated seller.
2. The wholesaler enters into a contract to buy the property. They then find someone who'll buy the property at a higher price.
3. The eventual buyer pays cash for the contract and the wholesaler's fees. These fees are the wholesaler's commission and can range from 5%–10% of the property's final sale price.

People who buy from a wholesaler may be other real estate investors or those looking for a home.

Wholesale Real Estate Deal Example

We'll go over a wholesale real estate example to help you better understand what wholesale real estate investing could look like :

Let's say a wholesaler finds a house listed as a fixer-upper. The house is listed at $250,000. They make an offer, put down earnest money, and enter into a contract for it. Then, they contact people they know who might be interested. They offer to sell it to them for $250,000 plus a 5% fee. Someone agrees to pay $262,500 for the contract and purchases the property. The wholesaler makes a profit of $12,500.

Wholesale Real Estate Pros and Cons

As an investment strategy, wholesale real estate can be a great way for some people to earn money from selling houses. But it can come with some downsides, too.

Pros:

• May need less money to start than other investment types
• May have the potential to make money quickly
• May come with less risk than other investment types
• Can help build skills for other real estate work

Cons:

• May have legal considerations
• Can be easily affected by housing market volatility
• Requires a good understanding of the housing market
• Can be difficult to find buyers
• Can be considered taking advantage of homeowners in difficult situations

A wholesaler usually puts up earnest money when buying a property. If the wholesaler can't find a buyer, they may not get their earnest money back.

Who Makes a Good Real Estate Wholesaler?

Selling wholesale real estate can be an option for many people who are dedicated to learning the process and meeting the necessary requirements for their state. Here's what can contribute to success:

1. Real estate knowledge: Wholesalers will need to know how the real estate industry works. This will help them find properties and identify good deals.
2. Research skills: A wholesaler starts by finding a property they believe they can financially benefit from. They will need to research the neighborhood to find comparable homes and identify the best deal.
3. Negotiation know-how: A wholesaler will need solid negotiation skills to work with sellers and buyers. They will first negotiate with the seller to get the best price possible. Then, they will work with the buyers to set a price that allows them to profit.
4. Networking abilities: A wholesaler needs to build up lists of buyers and sellers. To do this, they should be comfortable meeting and speaking with people. Being able to network can help the wholesaler build their lists.
5. Marketing skills: Anyone getting into wholesale real estate will need to know how to market themselves and the properties they want to sell. These skills can also help the wholesaler build out their contact list.

Wholesale Real Estate FAQs

Here are answers to the most common questions we've received about wholesale real estate.

What Happens if a Wholesaler Can't Find a Buyer?

If a wholesaler can't find an end-buyer by the contact's deadline, they may need to exit the deal. This can usually be done without penalty if the contract has an assignment clause or contingency in place. If it doesn't, the wholesaler could lose their earnest money deposit or even need to purchase the property themselves.

Do You Need a License To Wholesale Real Estate?

Not all states require wholesalers to have a real estate license. Be sure to check state laws to understand any limitations you may face. For example, Illinois requires wholesalers to be licensed real estate agents.

How Do I Wholesale Real Estate?

Wholesale real estate involves one person serving as the go-between for the buyer and seller . The wholesaler enters a contract to buy a house, for which they plan to transfer the rights to buy to another party. The other party agrees to purchase the contract and pays the wholesaler a commission.

Wholesale Real Estate Summary

For people looking to start investing in real estate, wholesale real estate may be an option. It tends to carry a lower upfront cost than other types of real estate investing. But it's very important to understand and follow your state's laws. If you're ready to learn more about real estate investing, discover mortgage options for investment and rental properties.

Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions.