What is wholesale real estate?
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Wholesale real estate is a way to buy and sell real estate contracts. Wholesalers act as intermediaries between sellers and buyers, who are usually investors. A wholesaler will usually contact owners of distressed properties and convince them to open a wholesale contract with them.
A wholesale contract is not a promise to buy the property but is a contract giving the wholesaler a set period of time to find a buyer for the property. The wholesaler usually doesn’t need to put down more than an earnest money deposit or fix up the property in any way. This process is a popular way for people with limited means to dip their toes into real estate transactions.
During the pandemic, wholesaling has “seen a gargantuan rise” says Ryan David, lead investor with We Buy Houses in Scranton, Pennsylvania. He adds that “when many people were stuck home [they] watched YouTube videos on wholesaling and decided they would try it for themselves.”.
If you’re here because of a TikTok about someone who makes $50,000 a week wholesaling that started with only $500, there are several things you need to know about wholesaling before you jump right in. Sometimes things seem too good to be true for a reason.
How to wholesale real estate
You can wholesale the correct way with “good contracts and paperwork, prepared by a real estate attorney in [your] state” or the wrong way with an “over-the-counter agreement [you bought] at Staples,” says David. While doing things the right way does take time and cost money, going for the cheap fix could be a “big mistake,” says David.
Most wholesalers develop their own ways of finding buyers and sellers. Each system will depend on your local market conditions. One way of finding sellers is driving through neighborhoods and noting properties that look to be in poor repair. When you get home you can use property tax records to locate and contact the owner listed. Another common method to find sellers is to visit an area several months after a natural disaster. Homes that aren’t fixed up typically had poor homeowners insurance coverage and could be a sign that the owners need the money.
Finding and contacting sellers in this way takes tact and people skills. If an elderly relative of yours hit hard times, how would you want a wholesaler to speak to them? While you may be finding your sellers by looking for homes in poor repair, it’s a bad idea to start your conversation by saying “I noticed your home isn’t taken care of.” Working with a mentor can help you learn the best ways to find sellers, and more importantly, how to talk to them.
Finding buyers can usually be done by attending your local real estate networking events or reaching out to your own friends and family. Anyone that fixes up properties to sell or rent is a potential buyer for your wholesale contract.
Example of real estate wholesaling
John has recently inherited his grandmother’s property. His grandmother was a hoarder and the house is in extremely bad repair. John is unsure what to do with the property. Jane is a real estate wholesaler and keeps an eye on properties in the area. She notices in the property tax records that the owner has changed and contacts John offering to take the property off his hands with zero hassle. John is relieved to not have to put the property on the market or clean it up, so he agrees to the wholesale contract. Jane contacts her friend Judy who buys hoarder homes and fixes them up. Judy wants John’s house so she agrees to buy the contract from Jane and pay Jane a wholesale fee of $10,000.
Pros and cons of wholesale real estate
The biggest pro of real estate wholesaling is that “if done the proper way, it can easily become a win-win solution,” says David. In the example above John got rid of a house he didn’t want to deal with, Jane made money, and Judy got a house to fix and flip, the neighborhood got a vacant hoarder house cleaned up, and Judy’s eventual buyers got a house to live in.
The cons of real estate wholesaling are plentiful. Unscrupulous wholesalers can cause real harm to communities. Too many wholesalers coming into an area and selling to investors who will flip homes to rent them can create a community of renters. When all the less-desirable homes in an area are purchased by wholesalers, first-time homebuyers are priced out of the market.
Agreeing to let a property be handled by a wholesaler can result in the homeowner getting less money than they would if they listed the house.
Yes, real estate wholesaling can be risky. “I’ve seen a wholesaler be convicted over false promises and lies,” says David. Make sure you have the right legal contracts in place, and that you and all parties involved understand them. There’s also “never a guarantee that the wholesaler will get paid,” adds David. To make money you need to find people to buy out your contracts before your deadline.
This is highly dependent on where you live. While you don’t need a license to wholesale real estate in many places, that is rapidly changing. Some areas are “making laws that only licensed real estate agents can wholesale property because agents are bound to ethics or they risk losing their license,” says David. So check the rules in your local area before proceeding.
Wholesaling has a low initial buy-in compared to other real estate investments and depends highly on your personal performance. If you have excellent people skills and can easily find a steady stream of sellers and buyers it can be a good investment.