Investing in real estate is nothing like investing in stocks and bonds. With these two markets, you can dive right in with as little as $100, and enter and exit whenever you wish. But it's not that easy when you're dealing with properties. In fact, it can be tricky to navigate and often comes with a hefty price tag. And it takes time to buy and sell homes. First, there's the issue of coming up with a down payment, getting financing, filling out all that paperwork, and then closing. Not to mention the time you need to take to deal with tenants and collecting rent.
If you really want to make money in real estate, but just can't fathom the idea of saving up all that money and dealing with the purchase process, you still have several options. Real estate wholesaling is one of them. It's a legal strategy you can use to your advantage without ever having to make an offer to purchase or put down a down payment. So how does it work?
Read on to find out more about real estate wholesaling and how you can make a profit from it.
- In real estate wholesaling, a wholesaler contracts a home with a seller, then finds an interested party to buy it.
- The wholesaler contracts the home with a buyer at a higher price than with the seller, and keeps the difference as profit.
- Real estate wholesalers generally find and contract distressed properties.
- Unlike flipping, a real estate wholesaler doesn't do any renovations or additions, and carry no costs.
What Is Real Estate Wholesaling?
Real estate wholesaling is a short-term business strategy investors use to make big profits. Contrary to what you may think, real estate wholesaling has nothing to do with retail wholesaling. In retail wholesaling, the wholesaler sells a large quantity of goods to a retailer, who repackages and sells it to consumers at a much higher price. Because of the volume of goods sold to the retailer, the wholesaler can charge the retailer a much lower price.
Real estate wholesaling doesn't involve the sale of multiple properties at lower prices at all. In fact, it's a whole different kettle of fish. In this strategy, the wholesaler contracts a home—usually one that is distressed—with a seller, shops that home around to potential buyers, and then assigns the contract to one of them.
Instead of purchasing a home and selling it, a wholesaler contracts it with the seller and finds a party interested in buying the property.
The goal in real estate wholesaling is to sell the home to an interested party before the contract with the original homeowner closes. This means no money exchanges hands between the wholesaler and the seller, not at least until a buyer is found by the wholesaler. So how does the wholesaler make money? He makes a profit by finding a buyer willing to purchase the home at a price higher than the amount agreed upon by the seller. The difference in price—paid for by the buyer—is the profit, retained by the wholesaler.
Wholesaling real estate is best suited for people who want to get into the business, but don't have the finances. One of the best things is that you don't need to take a course, pass an exam, or get a real estate license to become a wholesaler. If you have great people skills and are fairly patient, wholesaling may be right for you.
Example of Real Estate Wholesaling
Real estate wholesaling may sound complicated. But it's really very simple. Let's use this example to demonstrate.
Let's say a homeowner has a property he never thought he could sell because it's fairly distressed. The owner may not have enough resources to fix it up himself, but continues to live in it, thinking he'd never get a fair price for it. Enter the wholesaler, who approaches the homeowner with an offer. Together, they agree to put the house under contract for $90,000. Using his network of investors, he finds an eager buyer at $100,000. He assigns the contract to this investor, who then has a profitable fixer-upper project. The wholesaler makes a $10,000 profit without ever owning the home.
From this example, we see that there was never actually an offer to purchase from the wholesaler. He agreed to contract the house out for the homeowner to an interested party. Under the contract, the buyer pays $100,000 to the wholesaler, who pays the homeowner $90,000, keeping the rest for himself as profit.
Succeeding at Real Estate Wholesaling
Real estate wholesaling isn't for everyone. It requires a lot of time, commitment, and patience. You also need to have great communication and marketing skills. And it doesn't hurt if you have a network of investors at your disposal who may be interested in buying the properties you wholesale.
Finding the right kind of property is the first key to wholesaling. Homeowners who own distressed properties and are eager to sell, as noted in the example above, make great prospects. These properties can be very attractive to potential investors, especially if they are in the right location, come with already desirable features, and have the right price attached. Before you make an offer, you'll want to review what kinds of repairs or additions the home will need.
Knowing what kind of offer to make really helps. Go too low and you may scare off a potential seller. But if you go too high, you may not be able to find a buyer who is willing to take on the risk of buying and fixing up a distressed property.
The key to wholesaling is to add a contingency to the purchase contract that allows the wholesaler to back out of the deal if he is unable to find a buyer before the expected closing date. This limits the wholesaler's risk.
Real Estate Wholesaling vs. Flipping
Real estate wholesaling is similar to flipping in a lot of ways. Both use property as a means to invest and make a profit. And both require contracting and selling a home in some form or another.
However, there are key differences between the two. The time frame with wholesaling is much shorter than it may be with flipping. And the wholesaler does not make any repairs or modifications to the home.
Since the wholesaler never actually purchases a home, real estate wholesaling is much less risky than flipping. The latter often involves renovation and carrying costs such as a mortgage, property taxes, and insurance.
Real estate wholesaling also involves much less capital than flipping. Earnest money payments on a few properties generally suffice. Success depends on the wholesaler's knowledge of the market and connection to investors for quick sales.