How Wholesaling Real Estate Works
Getting Started in Real Estate Wholesaling: What is Real Estate Wholesaling and How Does it Work?
If you’re getting started in real estate but have limited capital or credit, or simply want to explore a path that avoids rehabbing, tenants, and broken toilets; wholesaling properties is an excellent opportunity for you.
Wholesaling real estate will require some ambition and a bit of specialized knowledge. But it is one of the most tried and true methods for generating cash quickly.
In the real estate market of today, where demand from investors for good real estate deals continues to grow, effective wholesalers who can bring these deals to investors are in high demand and can make a lot of money in almost every market in the US.
Here’s real estate wholesaling explained…
What Is Wholesaling Real Estate?
To put it simply, wholesaling real estate occurs when a property is available to be bought for less than it’s worth—often because it’s in bad condition or because the seller is motivated to drop their price.
Your job is to get it under contract at that “wholesale” price. Then, you sell it “as-is” for a little bit more to a cash buyer, who makes a substantial profit when they resell it again someday, or by keeping it in their portfolio as a rental property.
How do you make money? Simple…you make the difference between the contract price (between you and seller) and what your buyer agrees to pay for it. This usually means $3,000-$10,000 or more!
How Does Wholesaling Real Estate Work?
As a wholesaler, you’re focused on finding two things – a good deal and an investor to buy it. Finding a great deal often means looking at distressed properties that require a significant investment to renovate or improve, and making offers to buy them, typically for around 70% of their future value, minus any repair costs.
Watch this Max Offer Tutorial video to learn more about calculating the cost of your real estate rehab projects.
Think of all the boarded-up, junky houses you might have seen in your city or county while driving around. If the price is low enough that an investor feels they can make a healthy profit, the property’s condition becomes irrelevant.
The idea with wholesaling is that you do NOT have to purchase the property yourself or come up with funds to close on the deal. Instead, you’re simply selling or “assigning” the contract to another buyer.
There will be situations where you may want to or need to do a “double closing” but the idea is to avoid those situations.
Who is Your Target Buyer?
The objective is to flip the house as quickly as possible to a seasoned buyer who can pay in cash and close quickly without having to qualify for a loan. So how do you find private money investors with the funds to buy these homes?
It’s not hard. In this market, there are many investors looking for great wholesale real estate deals. Building a network of investors is something that happens as you network locally, or by talking with those who respond to your “For Sale” ads.
What happens if you can’t find a buyer? If you’re unable to sell the property prior to the expected closing date (usually 30 days or less), the contract is terminated, and you can simply walk away as long as you have included some kind of contingency in your agreement. (More in this in future articles in this series).
What Are the Benefits of Wholesaling Real Estate?
There are several reasons why if you’re considering getting started in real estate, wholesaling may be the most attractive method for you:
- A wholesaler does not need to invest any funds of their own into a property.
- You do not have to have good credit or be able to qualify for a loan.
- Low risks: Once the sale is complete, a wholesaler no longer has any legal responsibility to that property. This is much less stressful than being a landlord and worrying about repairs, lawsuits, and unclogging toilets!
- You can turn a fast profit within 30 days, unlike rental property, which takes longer to see a return on investment.
Look at who else benefits… The seller is able to sell their problem property, which may or may not have sold otherwise. And, they did so without having to invest any cash and sweat equity of their own. Additionally, they get to sell the property quickly, without having it linger on the market for weeks or months!
And, the investor/buyer you found is able to purchase an excellent investment property well below market value without needing to do any of the searching on their own.
In layman’s terms, a wholesaler could be considered a middleman of sorts. A seller offers to sell a house, a wholesaler puts the house under contract, and a buyer purchases it (from the seller directly, usually).
To give a more specific example, a wholesale real estate deal might look like this:
- A house would have a fair market value of $150,000, but it needs an additional $25,000 in renovations or improvements first.
- The seller does not want to invest that $25,000 so they put it under contract to a wholesaler like yourself for $80,000.
- You email an investor, who looks at the house and is willing to purchase it with cash for $90,000 in its current condition, within 2 weeks’ time.
The result is that:
- The seller sold his or her house without needing to invest any more money in it.
- You made a $10,000 profit in less than a month.
- The buyer, or investor, has the potential to make $30,000 in profit or more after the renovations are complete.
*These numbers are just an example. Depending on your market, you may be able to find deeper discounts on properties or have your buyers accept smaller discounts in a higher-competition markets.
So, if you have a keen eye for a great deal and the ability to network and negotiate deals, wholesaling could be a very profitable opportunity for you—even if you’re brand new and just getting started in real estate.
The learning curve is low, and both sellers and investors will love you. All you need to succeed in this business is the ability and willingness to learn and hustle.
Some Helpful Resources
- [Software] Get the brand new cloud-based Rehab Valuator Lite software to help calculate max offer and create marketing and deal summaries for your cash buyers
- [VIDEO] Watch this case study of a wholesale deal
- [VIDEO] Watch case study #2: Wholesaling Rental Properties
- Confused by some real estate terms you see in this article? Check out our Real Estate Glossary!