There are several ways to make money in real estate investing. Real estate wholesaling is one of those ways. For many, wholesaling real estate provides a relatively easy and low risk way to enter the world of real estate investing if you are willing to educate yourself and do the work
Wholesaling real estate provides you an opportunity to build income now while the requirement for capital or credit is very low as compared to other real estate investing opportunities.
What is Real Estate Wholesaling?
First of all the definition of real estate wholesaling can vary slightly but basically wholesaling is when you secure (not necessarily buy) a property (typically distressed property) at a low price (it has to be really low) and then you assign or resell the property to another buyer, usually an investor. The difference between the price you secure the property for and the price you sell it to the buyer is your profit.
For example, since I am an investor let’s say you find me a property that once it’s fixed and it’s renovated the way I renovate properties, can sell for $150,000. Now, you can get it under contract for $70,000. Then you approach me with the deal and offer me the contract for $77,000. I do my due diligence and verify that yes I can probably sell it for $140 -150,000 when it’s rehabbed and that it will take about $30,000 in rehab costs to get it back in shape giving me a potential profit of $20-30k. Then if I agree to pay $77,000 for the property and you have it under contract for $70,000 you just made $7,000.
Now, there is a lot involved in the example above so let's review some of the most important details of real estate wholesaling.
The 2 Most Important Thing in Real Estate Wholesaling
Although there is a lot you have to do to pull off the deal, above all the main focus of a wholesaler is:
- Finding properties at low enough prices – you have to buy very low so that after adding your profit the price is still attractive to your buyer and you can sell it quickly.
- Finding buyers - this means creating a network of buyers, typically other investors, that you know have the money and are looking to buy properties. You create your “buyers list” over time by talking to dozens of investors and finding out what they are looking for.
Other key points of real estate wholesaling you need to consider:
- You don't buy, you secure a low price – this is a crucial difference. The purpose of wholesaling is that you don’t have to come up with the money to buy the property so that your need for capital is zero. What you need is to secure the property by getting the seller to sign a contract where he agrees to sell you the property at the price you agreed on.
- Distressed properties – the reason you can get a property for a low prices is because there is something wrong with it. Whether it’s a cracked foundation, a basement covered in mold, a seller that is inherited a property and doesn’t want it, etc…There are a thousand reasons why a seller would agree to sell a property for a low price. You have to find it…
- Short time to find a buyer – typically when you get a house under contract to buy you have to specify when you are going to close the purchase. As a wholesaler you want to get as much time as you can so that you can find a buyer but rarely will a buyer agree to more than 45 days, 30 is typical.
- Assigning contracts – you can assign the contract you have with the seller to the buyer that you find. This way the buyers name is substituted for yours in the contract. Then you collect an “assignment fee” from your buyer. Be aware that if buying a property from a bank they will probably not let you assign the contract.
- Double closing – with this method you buy the property from the seller, using the funds from the buyer you found and then turn around right at the same closing table and sell the property to your buyer. The key is that you buy it from the seller at X price and sell it to your buyer at Y price. The difference between X and Y is your profit.
- Sell to investors – typically you will be selling to either rehabbers like me who are not afraid of dealing with a house that needs thousands in repairs or landlords looking for properties that will cash flow. You are looking for a cash buyer so you can close quickly and not have to worry about a loan being approved. Additionally if the house needs a lot of repairs it is unlikely a bank would approve a loan to purchase it.
- Low risk – since you have to put little or no money down to secure a property this makes real estate wholesaling very low risk. Do bear in mind that most contracts require some kind of deposit. This is typically known as “earnest money” and can be anywhere from $100 to $1,000. Your objective is to make it as low as possible however the lower it is the weaker your offer looks to the seller.
In case you are wondering if there are people out there making money with real estate wholesaling I can tell you there are. If you look at my updates on House #8
, this is how I bought this property, through a wholesaler.
The thing about wholesaling is that although it’s low risk and low capital it requires a lot of legwork, driving around, and talking to a LOT of people. But if you are willing to do that then you can make some good money that you can then use to reinvest into your own properties.
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