The field of wholesale real estate has proved highly lucrative for many driven, ambitious, and disciplined people. Read our comprehensive guide to learn more. Wholesaling houses can make you big money!
Wholesaling houses is an excellent avenue for hard-working and ambitious people to enter the financially rewarding world of real estate. It requires little to no capital, you don’t need an extensive real estate background, and it will provide you with a detailed understanding of how the property industry works.
What wholesale real estate does require for wholesaling houses; however, for you to be truly successful, are these vital personality traits: focus, drive, organization, and discipline. And it would be best if you had these qualities in abundance, too.
As the famous and well-respected U.S. investment banker Marshall Field III – whose name even sounds like a prime plot of real estate… – once said:
“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”
What is “Wholesale Real Estate”?
Wholesale Real Estate (wholesaling houses) is where an individual – known as the “wholesaler” – acquires a contract from the seller giving the wholesaler the right to sell the property on the seller’s behalf.
The wholesaler can then assign this same contract to an end buyer. Importantly, the wholesaler does not purchase the property – just the right to sell it.
Wholesalers make their money by earning revenue – known as the wholesaling fee (often a percentage of the property cost) – through the transaction.
- How Does Wholesale Real Estate Work?
- Method 1: Assigning the Contract
- Method 2: The “Double Close”
- Wholesaling Real Estate: What You Need to Know
- What Makes a Successful Real Estate Wholesaler?
- What Types of Real Estate Can I Wholesale?
- Do You Need a Real Estate License to Wholesale?
- Wholesale Real Estate Contracts & Legalities Explained
- How Do I Build My Own Wholesale Buyers List?
- How Do I Generate Wholesale Leads?
- The Pros & Cons of Wholesaling Real Estate
- The 5 Advantages of Wholesaling Real Estate
- The 5 Disadvantages of Wholesaling Real Estate
- Wholesale Real Estate / Wholesaling Houses: Common FAQs
Does Wholesale Real Estate Work?
Wholesale real estate refers to purchasing a property or properties with the intent of reselling them to another buyer or investor, usually at a higher price.
The real estate wholesaler acts as a middleman or “wholesaler” between the seller and the final buyer.
The wholesaler typically finds properties sold at a discount, such as foreclosures, abandoned or derelict houses, unwanted inheritances, off-market houses, or properties owned by people looking for a quick sale.
They then assign a purchase contract to a third-party buyer for a fee, typically a small percentage of the purchase price.
The third-party buyer – the end-buyer – then normally closes on the property, using cash or a loan, and legally becomes the owner.
What is an “Off Market” Property / “Pocket Listing”?
If you’re using a home-browsing website, you may have seen a house labeled “off market” – this means the home is not currently for sale, based on the platform’s available data. Or, you may have heard someone talk about buying an off-market property. In this instance, “off market” means a house sold without being listed on the Multiple Listing Service (MLS) databases of homes for sale. These “off market” properties – called “pocket listings” by agents – often give savvy buyers and investors an excellent opportunity to find a deal.
Wholesaling real estate creates steady income for investors who can identify properties being sold for under-market value, initiate an agreement with the seller of the property, and finally assign the purchase contract to another buyer.
A wholesale real estate contract – which we discuss later in this article – between the seller and the wholesaler is required for this transaction. In the agreement, the wholesaler promises to sell the property for a specified minimum price within a specific timeframe.
Wholesale Real Estate: Example
A typical wholesale real estate contract states the wholesaler is contracted to sell the property for a minimum of $150,000 within three months. After finalizing the contract, which has been agreed upon and signed by both the seller and the wholesaler, the wholesaler seeks a buyer. The wholesaler’s objective is to sell the property for a higher price than the contract stipulates.
Minimum Selling Price = $150,000
Actual Selling Price = $170,000
Wholesaler’s Profit = $20,000
If the contract sets the property’s minimum selling price at $150,000, the wholesaler should attempt to sell it for around $170,000.
The “spread” – the difference between the stated contract price and the actual selling price – is $20,000, which becomes the wholesaler’s profit once the deal is closed.
Two main methods are used for closing a deal: the assignment of a contract (as used in our example above) and the “double close” – also known as a double escrow.
Method 1: Assigning The Contract
In wholesale real estate, “assigning a contract” refers to the process of transferring the rights to purchase a property from the original buyer (i.e., the wholesaler) to another buyer (i.e., the end-buyer).
This is typically done by executing an “assignment of contract” agreement, which transfers the rights to purchase the property from the wholesaler to the end buyer.
When a wholesaler assigns a contract, they agree with the end-buyer, in which the end-buyer agrees to purchase the property, and the wholesaler agrees to transfer their rights to purchase the property to the end-buyer.
The end-buyer typically becomes responsible for closing the transaction and purchasing the property.
Method 2: The “Double Close”
The “double close” is another method of completing a real estate transaction often used in wholesale real estate. In this method, the wholesaler first enters into a purchase contract with the seller of the property and then immediately assigns that same contract to a separate end-buyer.
The end-buyer then closes on the property, using cash or a loan, and becomes the owner.
The double close allows the wholesaler to avoid the legal risks of holding the property and also allows them to avoid the financial risks associated with having to buy and then resell the property.
This is because the wholesaler is not purchasing the property and reselling it to the end buyer. Instead, they only act as an intermediary and assign the contract to the end buyer, who will be the one to close the transaction.
In a double close, the wholesaler usually receives a fee from the end buyer for the contract assignment. This fee is typically a small percentage of the purchase price, and the wholesaler’s profit comes from the spread between the contract price and the price the end buyer is paying.
How Do I Wholesale Real Estate?
Suppose you are interested in learning how to wholesale real estate yourself. In that case, you’ll be relieved to know that the actual process is relatively straightforward to understand and put into practice.
To start wholesaling properties, you need to follow these simple steps:
- Do research on your local real estate market.
- Create a buyer’s list for your desired neighborhood.
- Find a financing option that suits your needs.
- Begin looking for sellers and properties to wholesale.
- Decide between assignment of the contract or double close.
As simple as they sound, they take hours and hours of hard work on your part. So do you think you have what it takes? Here are the primary skills, qualities, and personal traits you need to possess to make wholesaling real estate an enriching career.
What Makes a Successful Real Estate Wholesaler?
Let’s look at the skills, qualities, and traits you need to be successful in wholesaling real estate and see if it’s a good fit for you. Here are the main attributes you need:
- Negotiation Skills: A real estate wholesaler must negotiate effectively with sellers, buyers, and other industry professionals.
- Drive: Real estate wholesaling can be competitive, and successful wholesalers must stay persistent and motivated.
- Communication Skills: Good communication skills are essential for building and maintaining relationships with clients, partners, and others.
- Networking Skills: Real estate wholesalers need to build a network of contacts in the industry, including potential buyers and sellers, real estate agents, and others.
- Understanding of the Real Estate Market: Successful real estate wholesalers should have a sound understanding of market trends, property values, and other factors that can affect the value of a property.
- Financial Management Skills: Real estate wholesalers must manage their finances effectively, including budgeting and forecasting.
- Tech-Savvy: Those who incorporate technology into their workflows tend to be able to process more information with accuracy while also maintaining organization, and your business website – active, informative, and promoting your brand – is a must.
What Types of Real Estate Can I Wholesale?
Houses and other properties that make financial sense to those who wholesale real estate are usually bought at a discount and then resold to another buyer at a higher price.
The properties typically good for wholesale are those that need repairs or are otherwise distressed. These are often sold to investors who plan to fix them up and rent them out or resell them at a higher price. Common types of properties that are wholesale include:
- Single-family homes
- Multi-family homes
- Condominiums and Townhouses
- Apartment Buildings
- Mobile Homes / Manufactured Homes, and
- Land or Lots
Do I Need a Real Estate License to Wholesale?
No federal regulations exist for wholesaling real estate, so your licensing requirements depend on the state laws where you operate your business.
In some states, anyone can buy and sell real estate without a license as long as they are not acting as a real estate agent and do not represent themselves as such.
However, in Illinois, a real estate license is required to engage in any activity involving buying or selling real estate, including wholesaling. Failure to do so can result in a $25,000 fine per violation.
It’s worth noting that even if a real estate license is not required to wholesale property, compliance with local regulations, such as zoning, rental, and building codes, may be necessary.
Wholesale Real Estate Contracts & Legalities Explained
One of the most critical areas of being successful at wholesaling real estate is the paperwork – the legal contracts you enter with the original seller and the end buyer.
Let’s look at how these contracts work in practice, the information they contain, and the clauses that are written into them that facilitate their transfer to another person – in our case, the end-buyer.
What is a Wholesale Real Estate Contract?
A wholesale real estate assignment contract (its full legal term) is a legal agreement between a buyer and a seller that outlines the terms and conditions of a wholesale real estate transaction.
The contract usually includes details such as:
- The purchase price of the property
- Any contingencies that must be met before the sale can be completed (such as the buyer obtaining financing or the seller making repairs to the property), and
- Any specific deadlines for completing the transaction
A wholesale real estate contract usually includes an “assignment clause.” This clause allows the wholesaler to assign the contract to another buyer, and it gives the wholesaler the right to sell the contract to another investor, often called an “assignee” – without obtaining the consent of the original seller.
The assignee takes over the rights and responsibilities detailed under the contract and completes the transaction with the seller.
What is Reverse Wholesaling?
This process can work in reverse, and, quite aptly, this is called “reverse wholesaling.” This is where the wholesaler initially finds a buyer before lining up an actual available property.
Once a suitable property is located and secured, you can immediately initiate the wholesale contract. The main benefit of doing this is simple efficiency, as it saves time and money.
Purchase & Sale Agreements: The Specific Details
|1. Parties Involved||The names of both buyer(s) and seller(s), including signatures from all parties listed on the title|
|2. Description of Real Estate||The property’s address, legal description, and type|
|3. Personal Property Included in the Sale Price||Anything not attached to the building or the land. In most cases, this will include home fixtures|
|4. Purchase Price & Financing||The purchase price, deposits, and finance terms|
|5. Where Deposits are Held||Outlines how deposits are held|
|6. Financing Contingency||Outlines the financial terms or if paying by cash|
|7. Conditions of Premises||Highlight the physical condition of the property that will be presented to the buyer|
|8. Inspection Contingencies||If the property does not meet the standards of a buyer, as listed from the conditions of the premises, this will allow for an inspection period (typically 14 days). At that point, the buyer can back out|
|9. Statement regarding Lead-based Paint||Disclosure related to lead-based paint|
|10. Occupancy, Possession & Closing Date||Establishes a deadline for the closing date|
|11. Deed Type||Confirms the type of deed to be conveyed|
|12. Marketable Title||If the seller cannot pass the title or the buyer cannot obtain title insurance. This option will reject the purchase and return the deposit|
|13. Adjustments||This will vary by state but normally includes modifications for taxes, water, sewage, and other charges|
|14. Buyer’s Default Clause||This outlines the seller’s rights if the buyer defaults on the agreed-upon terms of the contract|
|15. Seller’s Default Clause||This outlines the buyer’s rights if the seller defaults on the agreed-upon contract terms|
|16. Addenda||Common disclosures and addenda of the contract|
|17. Risk of Loss & Damage||Protects the buyer in case of damage to the property while under contract|
|You can download a wholesale real estate contract online; here’s an example contract.|
How Do I Build My Own Wholesale Buyers List?
Another critical document you will want to create and update regularly is your Wholesale Buyers List. Your success in wholesale real estate depends on your list of potential investors in properties you have identified and then contracted with your right to sell them on.
Consider your wholesale buyer list your audience – so you need to give them what they want.
The information on your list of buyers should include the following:
- Buyer’s First & Last Name
- Contact Phone Numbers (preferably both work and home)
- Email Address
- Buying Criteria
- Type of Funding
- Personal Information (this can be anything about them, as you need to create a good relationship with everyone)
- Source Of Referral
How Do I Generate Wholesale Leads?
An integral part of your work is constantly generating new leads – for both sellers and buyers, particularly finding potential buyers or sellers of properties at a discounted price. Your goal is to find motivated sellers or cash buyers willing to purchase properties at a discounted price, allowing you to make a profit.
Lead Generation for Wholesale Real Estate Transactions
One of the cornerstones of real estate wholesaling is networking. Although starting out may seem slow, real estate networking can significantly improve your results.
Networking with local real estate investors, landlords, and real estate agents can lead you to meaningful encounters and help you develop long-lasting business relationships.
Online marketing can expose your brand to millions of people. With access to such vast and diverse audiences, the primary outlet almost everyone uses to connect is social media.
As well as having your own branded website, you also need your social media accounts on all the major social media platforms, such as Facebook, Twitter, and LinkedIn (to name just 3).
|Other Avenues for Generating Leads|
A real estate marketing campaign aims to get your brand and business message out to the public. Here are several other ways to do this:
– Craigslist: Craigslist is an excellent resource for placing ads for wholesale deals and identifying potential buyers.
– Wholesaler’s Buyers Lists: According to the CEO of DealMachine, David Lecko: “The best way to find cash buyers for wholesale deals is to subscribe to the top 5 wholesaler’s buyers lists in your city, so you start receiving their properties for sale via email. Then after about 1 month, go back and look up those properties’ county records and see who purchased the properties. Then, skip trace, and call those owners next time you have a property that you’d like to sell.”
– Hard Money Lenders: Cash buyers often enlist the help of a hard money lender to help close a deal, making hard money lenders an excellent source of cash buyer referrals. It is in their interests to help you in future deals in return.
– Courthouse Auctions: Buyers must have all cash at courthouse auctions, so this is a direct approach to finding cash buyers. Visit courthouse auction sessions early and regularly to network with this group of active cash buyers.
Other Avenues for Generating Leads
A real estate marketing campaign aims to get your brand and business message to the public. Here are several other ways to do this:
Craigslist: Craigslist is an excellent resource for placing ads for wholesale deals and identifying potential buyers. Wholesaler’s Buyers Lists: According to the CEO of DealMachine, David Lecko: “The best way to find cash buyers for wholesale deals is to subscribe to the top 5 wholesaler’s buyers lists in your city, so you start receiving their properties for sale via email. Then after about 1 month, go back and look up those properties’ county records and see who purchased the properties. Then, skip trace, and call those owners next time you have a property that you’d like to sell.”
Hard Money Lenders: Cash buyers often enlist the help of a hard money lender to help close a deal, making hard money lenders an excellent source of cash buyer referrals. It is in their interests to help you in future deals in return.
Courthouse Auctions: Buyers must have all cash at courthouse auctions, so this is a direct approach to finding cash buyers. Visit courthouse auction sessions early and regularly to network with this group of active cash buyers.
The Pros & Cons of Wholesaling Real Estate
It’s important to understand that wholesaling has its challenges and difficulties. Success can vary depending on the current market conditions, your ability to find discounted properties, and your ability to successfully market them to buyers. It is certainly not a passive income – it requires much hard work and dedication.
The 5 Advantages of Wholesaling Real Estate
- Low Financial Risk: Because wholesalers do not take ownership of the properties, you significantly limit your financial risk.
- Flexibility: Wholesaling allows you to work on your schedule and at your own pace. You can find and close deals as quickly or slowly as you want. You can take on as many or as few projects as you are comfortable dealing with.
- No Experience Required: Wholesaling is a great way to get into real estate with little industry experience.
- High Earning Potential: Successful wholesalers can make significant amounts of money if they can find properties at a low enough price and resell them for a high enough price.
- Networking Opportunities: Wholesaling provides countless opportunities to network with other real estates professionals, like realtors, investors, contractors, and people from other related fields.
The 5 Disadvantages of Wholesaling Real Estate
- Low-Profit Margins: Because you will be buying properties at a discount and reselling them for a slightly higher price, profit margins can be thin, certainly, to begin with.
- Legal Complexity: Real estate laws and regulations can be complex, and it’s essential to be aware of them and understand them when entering into wholesale transactions fully.
- Risk of Fraud: Wholesalers new to the industry are at risk of fraud. Therefore, you must do due diligence and constantly be cautious when working with new buyers and sellers.
- Difficulty Finding Buyers: Finding qualified buyers for wholesale properties can be challenging, especially in markets where there are a lot of other wholesalers.
- Dependence on Current Market Conditions: The profitability of any wholesale real estate business relies heavily on market conditions, such as the local housing market, interest rates, and the economy as a whole.
Wholesale Real Estate: Common FAQs
1. What Is A Wholesale Real Estate Contract?
A wholesale real estate contract is a legal, written, and signed agreement between a home’s owner and a real estate wholesaler (sometimes called the investor, although they invest no actual money).
While the specific details of these contracts will vary from deal to deal, the core purpose remains the same: The agreement gives the wholesaler/investor the right to sell the property to an end buyer.
In return for finding an end buyer, the homeowner pays the wholesaler for their service, often in the form of a flat fee or a small percentage of the sales price. The wholesale real estate contract will state how much the investor will pay.
2. Do I Need A License To Wholesale Real Estate?
No federal requirement stipulates that real estate wholesalers must be licensed agents. Most U.S. states, except Illinois, do not require a specific license either.
3. Is Wholesaling Real Estate Legal?
Wholesale real estate transactions and contracts are perfectly legal when carried out correctly. Many wholesalers have lucrative careers by wholesaling properties while simultaneously strictly abiding by local laws.
4. What Is Virtual Wholesaling?
Virtual real estate wholesaling refers to wholesaling real estate entirely online or remotely, including finding properties for sale online, communicating with sellers and buyers through email and phone, and even signing and executing purchase agreements and closing documents remotely.
5. How Do You Make Money with Virtual Wholesaling?
Virtual wholesalers make money similarly to regular wholesalers – by attaching a fee to their services.
Better Off Home Buyers: We Wholesale Real Estate
At Better Off Home Buyers, we pride ourselves on being an expert national real estate solutions company and are highly respected in wholesale real estate.
The field of wholesale real estate is an excellent opportunity for ambitious, hard-working people to enter the world of real estate. It requires little to no capital and is a great way to learn about the real estate industry.
A wholesaling career may be highly profitable if you are highly driven, highly organized, and highly disciplined.