Wholesale Real Estate Investing For Beginners: How To Be Profitable
Although there are several real estate investment risks, real estate provides one of the best risk-adjusted returns among various income-producing assets. However, it can be hard to get started due to the knowledge needed and the upfront money involved.
Wholesale real estate provides an excellent real estate learning experience and also much-needed funds. Once you accumulate enough capital and expertise with real estate wholesaling, you could branch out into other real estate investments such as house flipping or even real estate crowdfunding.
What Is Wholesale Real Estate Investing?
Wholesale real estate investing is when you buy the property with the intent to sell it to someone at a higher price immediately. Unlike flipping, the wholesaler doesn’t do any renovation or put money in the deal. The wholesaler acquires the contract from the property’s seller and assigns that contract to a buyer for a fee.
Wholesaling real estate isn’t selling the property but instead selling the right to buy the property.
In real estate wholesaling, you are typically looking for distressed properties that are below market value. Since the properties are not in good condition, the owner might not sell them via an agent or Multiple Listing Services (MLS). By offering to buy these properties, you help the sellers who don’t have the time or the money to fix the properties themselves before selling.
The buyers of wholesale properties are typically house flippers. Or they are long term buy and hold investors. They would spend the time and money to renovate the property back to livable condition. They might then either sell it on the MLS or even use it as a long term rental.
If you wonder “how does wholesale work in real estate,” the process is complicated due to the multiple parties involved in a transaction. Let us look at an example.
William, a wholesaler, notices a run-down house in his neighborhood. He searches the county property tax records and contacts the owner. Owen, the owner, received the property from his aunt, but he lives out-of-state and no longer wants this property.
The property is in bad condition, and Owen doesn’t want to fix it. He wants to sell it “as is.” Since the property is in bad shape, homeowners will not be interested as it would not be possible to get a loan from a bank.
William knows that a similar house in good condition sells for an After-Repair Value (ARV) of $300,000. It would cost a flipper approximately $50,000 to fix up the house. He meets with Owen and gets the home under a “purchase and sale agreement” for $150,000. The flipper purchases the wholesale contract from William for $180,000.
The wholesaler makes a profit of $30,000 from the deal.
The owner has sold a house he did not want and received $150,000.
Flipper purchased the contract from the wholesaler for $180,000, spends $50,000 in repairs, and sells the updated house for $300,000, netting him a profit of $70,000.
Everyone wins!
| Steps in real estate wholesaling | Dollar amount |
|---|---|
| Wholesaler signs the purchase contract with owner | $150,000 |
| Wholesaler assigns the contract to house flipper | $180,000 |
| Wholesaler’s profit | =($180,000 – $150,00) = $30,000 |
| House flipper’s cost to fix the house | $50,000 |
| House flipper’s sale price after fixing | $300,000 |
| House flipper’s profit | =($300,000 – $180,000 – $ 50,000) = $70,000 |
Wholesale real estate investing is when you buy the property with the intent to sell it to someone at a higher price immediately. Wholesaling real estate isn’t selling the property but instead selling the right to buy the property.
What Are The Steps To Wholesale Real Estate?
- Research your local market, so you have an idea of the average home prices.
- Create a list of potential buyers who would be interested in buying in your area.
- Find properties that are distressed or available off-market for lower than market value prices.
- Develop a relationship with the seller and understand how you can help the seller. It could be a fast close or a higher price, or maybe the seller wants regular cashflow.
- Evaluate the property, so know the ideal selling price and buying price for you to make a profit.
- Convince the seller to assign you the contract at a fair price and inform them that you plan to wholesale.
- Sign the “purchase and sale” agreement, also known as a wholesale real estate contract with the seller.
- Contact your buyers’ list and find the right buyer based on the seller’s needs.
- Depending on your local laws, arrange the appropriate type of closing with the title company, the seller, and the buyer.
- Close the deal successfully and collect your fee.
What Is Wholesale Real Estate Contract?
A real estate wholesale contract is a document between the seller and the wholesaler, giving the wholesaler the exclusive legal right to buy the property at a predetermined price.
The wholesale purchase agreement signed between the seller and wholesaler states that the wholesaler can legally assign the contract to another buyer. Makes sure the wholesale real estate contract does not prohibit the wholesaler from future assignments. Your contract sometimes may include an earnest money deposit.
The assignment agreement legally transfers the ownership rights to the buyer.
The buyer can now buy the property directly from the seller.
How To Get Started Wholesale Real Estate Investing?
Before you ask, “how do I start real estate wholesaling” figure out if you would enjoy this niche of real estate.
To start wholesaling real estate; you need to find properties to wholesale and buyers interested in buying the properties. There are several ways to achieve both these objectives based on the steps listed below. But the most important factor is your people skills. Compared to any other real estate niche, wholesaling real estate requires you to conduct a lot of face-to-face negotiations.
To be a successful wholesaler, everyone needs to trust you, especially the seller of the property. Many of them will not understand your role. So you must be patient and explain what exactly is the part of a wholesaler. And how you can help the seller of the property. You should also be able to convince the buyer of the property’s potential and close within the required timeframe for the seller.
If you hate dealing with people or do not have the right temperament, you cannot be a successful wholesaler.
How To Find Wholesale Real Estate Properties?
The most challenging part of wholesaling is to find the properties. These properties are not typically on the MLS. Most of these buyers have not yet decided to sell the properties. You need to identify the properties, meet with the buyers, and convince them to assign you the contract.
- Driving for dollars: You would typically drive around neighborhoods or even walk and look for signs of distressed properties. Any house with overgrown lawn, broken windows, junk in the yard, etc., indicates that the owner has no money.
- Mailing services: Send periodic mailers to everyone in your target neighborhood. Even if the property is not currently distressed, homeowners would have your contact information when they eventually decide to sell.
- Out-of-state landlords: Being a landlord is not as glamorous as shown on T.V. Often, people acquire properties and then realize that they do not have the necessary skills. Being a landlord is more challenging if you are an out-of-state landlord with no local team. Your local county office would have all property owners’ details, which can be used to filter the out-of-state landlords.
- Bandit signs: You might have seen the “we buy houses” flyers or posters in your neighborhood. Go ahead and create some with your contact information. Be aware of local laws for posting signs.
- Social Media: Inform everyone you know in real life and social media that you buy houses. You might get your next lead from your church group or a long lost Facebook friend.
- Website: Many wholesalers are still old school and have not moved online. Since it is easy to start a website in 10 minutes, you can have constant leads coming in even when you are asleep. Check out my article for step-by-step directions to get started for only $3.95/month.
- Existing landlords: Rental ads provide great leads to existing landlords with all their contact information. Even if the landlord is not currently interested in selling, you can send them your contact information for future reference.
How To Find Buyers for Wholesale Real Estate Properties?
Once you find a motivated seller, you need to market your property to your buyers. It is advisable to have a buyers list and keep it always updated.
The wholesaling strategies you use to identify potential sellers can be reused to find potential buyers. Attend local meetups and network in real life and social media to identify potential buyers in your area. Cash buyers at courthouse auctions would make a good addition.
Some of the potential wholesale buyers on your list could be
- Flippers: Flippers are the ideal buyers for distressed homes.
- Turnkey operators: They can rehab the house, find a suitable tenant, and sell to an out-of-state investor.
- Local Buy and hold investors: Wholesale properties make great buy-and-hold-investments.
- Out-of-state investors: Based on the local county records, you already know them. If they are not potential sellers, they could be great buyers looking to expand in your area. After all, they already own properties in the same neighborhood.
How To Close A Wholesale Property
After the seller has assigned the wholesaler the contract, the closing needs to occur. Depending on your local laws and your agreement with the title company, there are two closing types.
Double Closing
In a double closing, the buyer wires the funds to the title company. The wholesaler assigns the contract to the buyer. The seller receives his sale price, and the wholesaler gets his fee. Since both the buying and selling between all the parties is done simultaneously, it is known as the double close or the double escrow or simultaneous close.
Many title companies do not prefer double closing. Hence as a wholesaler, you need to find a wholesale friendly title company in advance. Also, it depends on your local laws.
Back-To-Back Closing
Two individual closings occur in this scenario. In the first closing, the seller sells the property to the wholesaler. In the second closing, the wholesaler sells the wholesale property to the buyer.
Many wholesalers do not prefer this method because they have to pay the buyer for the first closing to take place. And wholesalers do not have that much money. Typically in the back-to-back closing, the wholesalers need another lender to loan them the money for a short duration, which cuts into their profit.
How Much Does It Cost To Start Wholesale Real Estate Investing
The best part of real estate wholesaling is that it is one of the lowest-cost options to get involved in real estate. If you wonder, “how much money do you need to start wholesaling,” the answer is; it depends on your strategy to find wholesale properties.
If you do walking for dollars, the cost is almost zero.
“Driving for dollars” path then obviously the cost of gas.
Making bandit signs or using mailing letters cost money but is comparatively inexpensive.
You can start at the lower end and then slowly add to your marketing efforts to acquire more wholesale real estate properties. Wholesaling is a marketing game. And although marketing is not free, you can drastically lower the cost in several ways.
Is Real Estate Wholesaling Profitable?
If you are wondering, “Is wholesale real estate investing worth it?” and “can you make money wholesaling real estate?”; the short answer is Yes!
As long as you can wholesale the rental property for an amount more than what you purchase the contract, you make money.
It would be best to consider the time and effort involved since wholesaling real estate is not a steady income. You get paid only after you wholesale a property.
How much do real estate wholesalers make a year is dependent on the number of transactions and the neighborhood. Typically each deal generates from $5,000 to $20,000 profit. If you follow the steps outlined in this article, you can ensure a continuous pipeline of deals, increasing your annual income to over $100,000.
Pros And Cons Of Wholesaling Real Estate
Real estate wholesaling, like every other niche, has its pros and cons.
Pros
- Easy to get started with little cost.
- You have a pulse on a local real estate market and understand the trends.
- Develop contacts with other real estate professionals such as flippers, landlords, title companies, contractors.
- Minimal risk due to market cycles compared to house flippers or buy and hold investors.
- Can turn a quick profit.
Cons
- Does require time to find the wholesale real estate properties.
- Many sellers may not prefer to deal with wholesale and need education.
- Buyers list takes time to build.
- Real estate wholesaling does not provide continuous passive income from real estate. It would be best if you keep hustling for the next deal.
Best Time To Wholesale Real Estate
The wholesaler does not have any money in the deal; it is the ideal niche during any market cycle, including recession. A steady market with no rapid movements in prices works well for wholesalers.
The number of deals will decrease during a hot market cycle where houses’ prices increase rapidly, and sellers would prefer not to deal with a wholesaler. The buyers are also less in a declining market cycle when prices drop, and there would be fewer flippers who would want to buy wholesale deals.
The best cycle for wholesaling real estate is the early phase coming out of recession. The buyers scarred by the recession are eager to sell. The flippers recognizing the changing economic cycle would be receptive to buy at higher prices.
Tax Benefits Of Wholesaling
There are no unique tax benefits for wholesalers as per the IRS. The benefits of interest income deduction, depreciation, etc., available to buy and hold rental property or real estate crowdfunded equity deals are not applicable.
Dealer Status as defined by IRS section 1221(a)(1) might not be applicable as a beginner, but be mindful of it as your wholesale business expands. As per the IRS, you are considered a real estate “dealer” if your real estate activities are conducted in such a way that the real estate is considered “inventory.” Inventory is more applicable for flipping compared to wholesaling, but you should consult with a licensed real estate professional.
Is Wholesale Real Estate Easy?
Wholesale real estate is easy to get started; however, it takes effort to keep going. You may wholesale property, and it would take a long time before you get your next property.
A real estate wholesaler needs to generate leads for the next property before closing on the previous one. Also, keep adding buyers to your list so you can assign the contract as soon as possible. You need to invest a lot of effort in networking, due diligence on properties, and negotiating skills.
Is Wholesale Real Estate Illegal?
Several beginners are confronted with the question: “Can you wholesale real estate without a license?“
The short answer to this question is: It depends
Real estate agents often debate that wholesaling real estate is not legal since only licensed professionals can sell properties. Agents are permitted, but wholesalers are not authorized to sell properties. But all laws are subject to interpretation and vary widely based on jurisdiction.
Real estate wholesaling isn’t selling the property but instead selling the right to buy the property. As a wholesaler, you cannot take a commission or any other fee to introduce the buyer and the seller. This activity is considered brokering a real estate deal, and similar to what a real estate agent does. It is against the law to act as a real estate without a license.
Before jumping into wholesaling properties, make sure you understand local laws. Also, always disclose to the seller that you are a real estate wholesaler. You do not want to be in a situation where the seller believes they have been defrauded or backs out on the closing day.
Final Thoughts On Wholesale Real Estate
Wholesale real estate is an excellent way to get started with real estate if you do not have a lot of capital. And you want to develop your real estate knowledge and network with other professionals.
Real estate wholesalers fill a need between motivated sellers and investors.
Real estate wholesaling is profitable, but you need a robust lead generation to ensure a steady income stream. Minimal risk due to market cycles compared to flipping houses or buy and hold investors.
After you have accumulated some money you can look into real estate crowdfunding platforms. The crowdfunding platforms help you avoid the sweat equity and stress involved in the wholesaling houses while providing you the passive income returns for a fee.
Fundrise is one of the top real estate crowdfunding platforms for non-accredited investors. Sign up for free and look at passive real estate investment opportunities with low minimum (only $10).
EquityMultiple is a real estate investing platform that gives accredited investors direct access to individual commercial property, allowing you to review, compare, and personally choose the deals that meet your investment criteria. EquityMultiple has a low minimum of only $5,000 investment.
Readers, have you considered wholesaling houses to get started in real estate. If you are an investor, have you worked directly with wholesalers to get good deals?
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
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