There are several ways to invest in real estate. They each have their place. Today, we’re going to talk about one of these ways. We are going to discuss real estate wholesaling and how it works.
Unfortunately, when talking about real estate, the “real”, or physical, part of it gets in the way. Real estate is expensive. Sure, some parts of the country are cheaper than others. Land might be cheaper than a house, but it often takes money to make money. With real estate wholesaling, you usually don’t need much money. If you can do the work and can make the deals, you can often make money with little to no capital to invest. How does real estate wholesaling work, and how can we do it with little or no money? Let’s look at that.
What Real Estate Wholesaling Is
When you think of wholesaling, retail wholesaling might come to mind. This is where a company buys products in bulk and resells them in smaller amounts, usually to other companies. Well, in real estate, the term wholesaling is about where the similarity ends. We aren’t going to be buying houses in bulk. We are going to sort of repackage them and sell them to someone else though.
In real estate wholesaling, the wholesaler acts as a middleman. They negotiate the purchase of a house or other property and then sell it to someone else. Sometimes, this happens without the wholesaler ever taking possession of the house. They often assign the sale contract to the new buyer for a higher price. The wholesaler then pockets the difference, often several thousand dollars.
Wholesaling is similar to flipping.
That buyer is often another real estate investor. The good news is that they know the drill and how it works. The bad news is that they are looking for a deal too. So the wholesaler needs to find a deal with enough room in it that the seller is satisfied, the investor can make money, and the wholesaler can make money. This can be tough.
Some title companies and banks won’t do deals with someone who isn’t the final buyer. This means that the wholesaler who wants that deal needs to close on the property before they can sell it to the final buyer/investor. In this case, the wholesaler will usually need access to capital briefly to purchase the house. Of course, if all goes to plan, they’ll recover that money very quickly, often the same day, when they sell it to the buyer.
An Example of Wholesaling in Real Estate
To put some numbers around it, let’s say that you found a property for $70,000 that you want to wholesale. You think that the property is probably worth $120,000 after it has been fixed up, which is called its After Repair Value (ARV). You make the offer to the seller and it’s accepted.
Using your buyer network, you find an investor who is willing to buy the house for $80,000. So, you assign the contract to the investor. They buy the house and you pocket a $10,000 profit ($80,000 final sale price – the $70,000 contract you negotiated.) While you have some elbow grease and maybe some marketing expense, that’s profit. Not too bad.
Simple, But Not Easy
Just because wholesaling doesn’t require much money, that doesn’t make it easy. A wholesaler needs a source of deals and buyers. This involves a lot of networking and marketing to find sellers and to build a list of potential buyers.
Because they need deals with enough margin to make money for them and the investor, these deals aren’t usually found on the internet. These are usually off-market deals with distressed sellers who need to sell their houses. Often these houses aren’t in great shape or have a title or other problems, so they aren’t selling them traditionally.
You also need buyers who can close quickly and with cash. Otherwise, you may get stuck holding a house you don’t want. You could also get a reputation for not closing on deals, and you won’t get more deals.
Real estate wholesaling doesn’t take much money, but it does take hustle and work. You will want to spend time getting some of the basics down.
- Join local meetups and real estate groups
- Build a buyers’ list
- Work on marketing skills
- Find local distressed properties
- Learn your local real estate market
One way to get started on both your buyer and seller lists is to buy a list of local contractors. Local contractors often know of off-market deals. Many of them are also investors or know investors so they can be a great source to market to.
Check Your Local Laws
All real estate is local and so are the laws that govern it. Every state and sometimes even counties and towns have their own rules. You may have to be licensed to wholesale. Some state impose their own restrictions, so many sure to research those. You don’t want to be arrested or sued for breaking the law (can’t make much money that way).
Make sure you learn local laws and requirements.
Learning How Real Estate Wholesaling Works
Real estate wholesaling can be a great way to get started in real estate investing. The fact that it doesn’t take much money to start does not mean that it’s always easy. It takes work, networking and strong marketing to make real estate wholesaling work.
A good starting point can be finding a mentor. Find another local real estate investor and find a way that you can contribute to their business. Then, take every opportunity to learn as much as you can from them. Start building your network, resources, and knowledge.
An important point when you are looking for a mentor, it’s very easy to focus on what they can do for you. That part is easy. However, they don’t owe you anything. Why should they mentor you. Find ways you can contribute to them. Even if it’s as simple as helping with clerical duties. More likely, you have some skills that could help their business. Make sure to contribute.