Have you ever driven around your neighborhood and seen signs that say “Cash Offers for Your House” or “We Buy Houses As-Is?” Chances are these bandit signs were posted by a property wholesaler. Wholesaling is an interesting strategy that requires less cash and long-term work than buy and hold or fix and flip investing. In this guide, we’ll take a look at how wholesaling works, how it compares to other real estate investing strategies, how to get started, and how you can be successful.
- What is Wholesale Real Estate?
- Pros & Cons of Wholesaling
- Wholesaling vs. Fix & Flips
- How to Become a Wholesaler
- How to Wholesale Successfully
What is Wholesale Real Estate?
Put simply, wholesale real estate is when someone (a wholesaler) signs a contract with a seller of a property that’s going for below market value. This lower price can be because of a foreclosure or other reason a property is distressed, but the contract gives them the right to buy the property at a specified price. The wholesaler then quickly sells that contract for slightly higher than the agreed-upon price to an interested buyer, and keeps the difference. The buyer is usually someone who is familiar with repairing these distressed properties, either for fix and flip or buy and hold purposes.
Wholesale contracts to buy a property at a specific price often also have a cutoff date that the wholesaler needs to find a buyer by. This is why they have to act quickly to sell the contract before the contract ends.
Who Should Become a Real Estate Wholesaler
Since wholesaling doesn’t involve actually purchasing the property or even getting a broker’s license, it’s a great strategy for someone looking to get started in real estate investing with fewer assets or cash on-hand. To purchase a rental property, you’re probably going to need a minimum of 20% cash down. For property flipping, you’re going to need cash down AND to front the expenses of all construction.
While wholesaling requires much less cash, it still requires a lot of time and sweat equity. You need to be motivated and understand how to find good opportunities, as well as have a team of people to help you assess property price, required repairs, ARV, and more. Another part of the time you spend is on market research and networking to build your list of potential buyers. Wholesaling is a fantastic way to get your foot in the door of the real estate industry and learn the ropes, but just because it requires less money doesn’t mean it doesn’t require anything else to make up for that.
Pros & Cons of Real Estate Wholesaling
So if you think you’re motivated and fit the bill for being a wholesaler, let’s dive into the pros and cons of this strategy to see if it’s worth it for your situation.
As we just mentioned, one of the biggest upsides of real estate wholesaling is the entry point to the industry with limited funds. Some other benefits include:
- Quicker returns on investment: Buy and hold investors are playing the long game to build wealth over time and to have steady monthly cash flow. Fix and flip investors, while considered short-term, still have to go through a renovation and repair period before making their sale. Wholesalers profit much faster in comparison due to acting as a middleman and having a shorter turnaround, which can be as short as one month.
- No construction or improvements: Fix and flippers can go through extensive renovations, and of course, buy and hold investors are responsible for all ongoing repairs and maintenance. Wholesalers never even touch the property because they don’t actually own it.
- Greater volume potential: Since fix and flipping and buy and hold properties are very hands-on strategies, it’s hard to acquire multiple properties per month. A good wholesaler can turn upwards of ten properties per month. This balances out the higher returns of a strategy such as a fix and flip.
While there are many great benefits of wholesaling, we also need to consider the downsides to get a fuller picture. This is something that will come in handy if you do end up starting to wholesale properties.
- Hinges on finding a buyer: None of the benefits of wholesaling can come to fruition without a buyer. If you are unable to secure a buyer, you could be responsible for the purchase of a home, in addition to not having income. That is not something you want to take lightly if you do not have the capital.
- Can have a negative reputation to some: People often question the legality of wholesaling due to it not requiring those involved to be licensed brokers. However, the key point of wholesaling is that you’re selling a contract and not a property. While this means wholesaling is legal (in most states), there are always bad apples who use unethical or illegal tactics to find buyers or sellers. NOTE: Wholesaling is illegal in Illinois, Oklahoma, and Virginia.
- Requires a lot of time: A major drawback to wholesaling is the time and sweat equity it requires. A wholesaler is a middleman that finds properties that could be profitable to buyers looking to repair them, as well as finding buyers who are looking for similar properties and are interested in purchasing the contract. This means that all of the research and networking are on your shoulders. You need to constantly be networking and staying on top of potential buyers and properties and lots of due diligence to assess opportunities and connections.
Wholesale Real Estate vs. House Flipping
We’ve discussed in-depth how fix and flip loans work before, but the primary differences between these two strategies are their experience required and cost. Flipping houses is a more common strategy for those who are much more hands-on and experienced in the real estate market. Because it’s much more involved and the investor is handling the repairs and reselling, fix and flips take much more money, capital, and time. On the other hand, wholesaling is much quicker and doesn’t require funding for both purchasing and restoring the property, meaning it’s also less risky.
How to Become a Real Estate Wholesaler
If you’ve weighed the pros and cons and want to begin wholesaling, you’ll need to follow these steps to get started on the right path:
1. Have the Right Mindset
It may sound cheesy, but ensuring that you have the right mindset and going into this industry wanting to help people is what prevents bad apples from giving it a bad reputation. Wholesaling is a great way to help people in difficult situations sell their property and avoid something like foreclosure.
2. Organize Your Finances & Schedule
One of the first steps to considering any potential investment should be determining your budget and whether you have the means to pursue it. With wholesaling, you should know exactly how much money and time you can spend on it. You need to plan ahead for what you’ll have to do in order to get set up with the proper legal documentation, marketing strategies, and prepare for the following steps.
3. Do Your Research
The key to wholesaling is research, research, research. While it’s a less risky investment strategy than something like house flipping, you are still spending money and time to make your investments work out. Research should also include your state’s legal requirements for real estate investing and wholesaling, as this will vary from state to state.
Additionally, wholesaling is typically seen as an entry-level way to get involved with real estate investing. If you’re a beginner and looking into becoming a wholesaler, you need to do even more research on the basics of real estate vocabulary, calculations, and more to get up to speed and begin looking for opportunities.
4. Build a Buyers List
As mentioned in the cons section, wholesaling is useless without a buyer. However, you’ll need multiple potential buyers before looking for your first property because buyers want different things in properties and your job is to serve as the middleman and cater investments to them that they’ll be interested in.
Networking events, Craigslist, bandit signs, social media, and even signing up for other wholesalers’ buyers lists to check who ends up purchasing their advertised properties can help you start building a comprehensive buyers list of your own. If you’re looking for even more places to find buyers, try talking to hard money lenders. They finance short-term fix and flip or construction projects and can be another source of referrals because of their incentive to get more projects financed.
5. Search for Properties
Once you have a buyers list of a range of interests and needs, you can start looking at properties in your area that could be profitable for them. This could simply be driving around the neighborhood and noting the addresses of abandoned-looking houses and contacting the owner, or it could be through networking that you hear of a seller who’s motivated to get rid of a property.
When looking at properties, you should keep a running list or spreadsheet of their condition, appraised price, what repairs would be required, how much they might cost, what the ARV should be after repairs, and more. This will involve your team of appraisers and contractors to help you come up with these data points, all of which will help you decide not only whether a property is worth it or not, but who on your list of buyers might be interested.
How to Wholesale Real Estate Successfully
Up until now, we’ve explained what real estate wholesaling entails and how to get started. Now let’s take a look at tips and strategies for being good at wholesaling and maximizing your profits.
1. Have the Right Mindset
Yes, we already talked about this in How to Get Started, but it bears repeating. To be successful in wholesaling, you have to be considerate and understanding of all parties involved. That means knowing what your buyers are looking for, but also understanding that the seller is likely in a difficult and stressful situation. Being sympathetic is not only part of being an ethical and good professional, but also people will want to work with those who aren’t trying to screw them over or take advantage of their situation. This mindset will take you a long way in wholesaling and strengthen your connections with both buyers and sellers.
2. Get Your Numbers Right
Accurate information can make or break a successful wholesale opportunity. There are a lot of places where an inaccurate estimate can be amplified and wildly affect outcomes or viability of a property. This is why it’s important to get reliable experts to help your assessments of things like repair costs and ARV for the buyer. These numbers will all factor into your offer to both the buyer and seller, and experienced real estate investors will be able to pick up on if your numbers are inaccurate or manipulated. Successfully finding the balance of being beneficial to both the ends of the transaction, as well as leaving a margin between the two numbers for your revenue, will help make you a successful wholesaler.
3. Spend Time on Your Buyers List
Another factor that we’ll continue to repeat is the importance of your list of buyers. Because the entire business model of a wholesaler relies on finding a buyer, you should spend a lot of time managing your list. Not only building it and finding new people, but also maintaining relationships with them, making sure you understand what they’re looking for, and being transparent with them is critical to having a solid list. Doing this will make them more likely to want to work with you again and perhaps even more likely to recommend other buyers to you.
When to Switch from Short-Term to Long-Term Real Estate Investing
Ultimately, wholesaling is likely not as easy, nor as unethical, as some people would make you think. There are positives and negatives, but it takes a very specific type of person to succeed and not fall behind. With such a fast-paced strategy, it can be easy to become overwhelmed and lose track of all the different opportunities and people you’re working with.
Longer-term strategies like buy and hold or rental properties, while more involved and hands-on, can be easier to focus and really work on. This often develops a stronger understanding of real estate concepts and relationships because you’re in contact with tenants, insurance companies, and more, which gives you exposure to different parties in a manageable amount. Long-term investments also give you predictable and consistent cash flow so you don’t have to worry about months where you can’t find a buyer or property to wholesale.
If you’re interested in becoming a broker for rental properties or a long-term strategy like buy and hold, check out our Broker Resources, full guide to buy and hold investing, or contact us about a loan today.