Definition and Examples of Real Estate Wholesaling

Real estate wholesaling is a business venture in which a wholesaler sells a property on behalf of the owner for a profit. The wholesaler and seller enter into a contract, which the wholesaler ultimately sells to another buyer.

The wholesaler doesn't purchase the property. Instead, the temporary contract with the owner gives them the right to sell it on their behalf, keeping the profit for themselves.

The properties that wholesalers sell are often distressed off-market properties. The owner no longer wants the home, nor do they want to do the work necessary to get it ready for a traditional sale. They contract with a wholesaler instead who takes it off their hands.

How Does Real Estate Wholesaling Work?

A wholesale real estate transaction involves a contract between the seller and the wholesaler. The wholesaler agrees in the contract to sell the property for a minimum amount by a certain date. This may require that they invest some earnest money. A wholesaler might agree to sell a property for $150,000 within 90 days.

The wholesaler finds a buyer after the contract is signed, often a real estate investor. The buyer takes over the contract. The wholesaler’s goal is to sell the property for more than the amount listed in the contract. The wholesaler might try to sell the property for $175,000 if they have a contract that lists the price as $150,000. The difference between the contract price and the sale price is known as the “spread.” It’s the wholesaler’s profit. It would be $25,000 in this case.

Pros and Cons of Real Estate Wholesaling

Pros

  • Little upfront investment required

  • Potentially large profits in a short period

  • Gets your foot in the door of the real estate industry

Cons

  • Lower profit margin

  • Dependent on other buyers and sellers

  • Unpredictable income

Pros Explained

  • Little upfront investment required: Real estate wholesaling doesn't require that you purchase the property. The only upfront investment required on your end is your time, your marketing efforts, and, in some cases, earnest money.
  • Potentially large profits in a short period: A wholesale real estate deal might not take more than a few months to complete and could result in a substantial profit.
  • Gets your foot in the door of the real estate industry: Wholesale real estate can be a great opportunity for those who are trying to break into the real estate industry. You'll learn a lot about the business and have an opportunity to network with other investors.

Cons Explained

  • Lower profit margin: Real estate wholesaling can be profitable, but it often has lower profit margins than other forms of real estate investing such as flipping. This lower profit margin reflects the lower risk and financial investment required on the part of wholesalers.
  • Dependent on other buyers and sellers: You'll need property owners who are willing to sell via a wholesale real estate deal and investors who are willing to buy.
  • Unpredictable income: There's no guaranteed profit with wholesale real estate. You may lose out on the deal if you don't sell the home within the time period in the contract. You may also find that you go through seasons of lower inventory to sell.

What It Means for Individual Investors

Real estate has been a popular investment strategy for decades. Gallup polling consistently shows that Americans believe real estate to be the best long-term investment, beating out stocks.

Real estate can otherwise be intimidating for an individual investor because of the upfront investment required to buy homes and the ongoing yearly investment of time and money.

Real estate wholesaling can be a good entry point into the world of real estate. There's little investment required on your part, outside of what you pay to market the property to buyers and sellers. You might consider real estate wholesaling if you've thought about getting into real estate but don't have the savings to do so.

Is Real Estate Wholesaling Worth It?

As with any business or investment opportunity, you might find yourself asking if wholesaling is worth it. The answer is: It depends.

Wholesaling real estate can be profitable, and it has the benefit of requiring little upfront capital. But you must also consider whether it's something that interests you. Real estate wholesaling requires marketing and networking. You'll also likely need a deep understanding of real estate and the local market.

You might find that the effort required to earn a profit isn't worth it if you don't enjoy marketing and networking.

Real estate wholesaling can be worth it if you have a passion for real estate but need the capital to help you get there. Wholesaling real estate gives you the experience and profits to reinvest in your next business venture.

How To Start Real Estate Wholesaling

You'll first need a marketing strategy to attract sellers and to find off-market properties. Marketing strategies might include direct marketing, online advertising, cold calling, and search engine optimization (SEO).

Check into the laws regarding wholesaling in your state or have a local attorney do so. Some states enforce regulations that you must abide by.

You'll also need a network of willing buyers. The buyers in wholesale real estate transactions are often real estate investors who are willing to pay cash. You can find investors via social media platforms like Facebook or LinkedIn. You can also join local real estate investment meetups. Some investment groups even offer wholesaling training courses.

You'll have people to call when you have a property to sell after you've built your network.

Key Takeaways

  • Real estate wholesaling is a business venture in which a wholesaler enters into a contract with a property owner and then assigns the contract to an end buyer for a profit.
  • The wholesaler makes money when the buyer agrees to pay more than the sale price that’s been promised to the seller.
  • Wholesale real estate doesn’t require much capital upfront because the wholesaler doesn’t purchase the home. It’s a more accessible form of real estate investing as a result.
  • Real estate wholesaling requires significant marketing and networking to find sellers and buyers with whom to do business.
  • Real estate wholesaling may have lower profit margins than other forms of real estate investing because of the minimal risk and investment required for the wholesaler.

Frequently Asked Questions (FAQs)

How much should I offer for a home?

You want to ensure a profit, so about 70% of the home's after-repair value is typically a good place to start. But don't forget to account for the cost of those repairs.

Do I need a real estate license to be a wholesaler?

Check with a local attorney to be sure, but most states don't require a license, provided that you're not actually managing the sale. You're simply acting as an intermediary in the transaction.