When you’re a real estate investor, you have several options for how to handle your investment properties. Often, people fix and flip houses or turn them into rental properties for continued income. However, wholesale real estate is another profitable option.
Done right, you never have to put down a dime of your own money. Real estate wholesaling is a way to conduct REI deals without ever purchasing a property yourself.
Are you new to the REI community? If so, our wholesaling guide will lay out the basics of what to know and how to start.
What Is Real Estate Wholesaling?
Wholesale real estate is an investment strategy in which an REI has a contract with the seller of a property and sells that contract to another investor. Typically, a wholesaler starts by identifying distressed properties to put under contract.
Much like flipping a house, you need to identify a house priced below its market value. Generally speaking, these homes require repair and renovations, and the property owner has a motivation to sell outside of the traditional real estate market. Often, their goal is either speed or avoiding the cost of repairs.
Next, the REI enters into a wholesaling contract and reassigns the contract to a new buyer at a higher price. The difference is a wholesale fee, and it’s usually about 5-10% of the total property value.
If want to start your career as a real estate investor but don’t have the capital, real estate wholesaling can be a good entry point to build capital for another project.
Wholesaling In Action: A Clear Example of the Process
Now, the process may seem complex, but it’s simpler than it sounds. Let’s look at an example to break it down.
Scott is a homeowner who feels that he can’t sell his property because it needs too much work to make it appealing to buyers. He doesn’t have the funds for the renovation process, so he drags his feet on trying to sell.
Jack approaches Scott with an offer to put the house under contract for $125,000. Then, Jack uses his network and finds James, a potential investor willing to buy the property for $160,000. James takes over the contract with plans to flip the property.
Scott is able to sell his property, and Jack walks away with $35,000 in profit without putting his own capital on the line.
Pros & Cons of Wholesale Real Estate
As with any investment strategy, there are advantages and disadvantages to real estate wholesaling. Here are some of the core benefits and drawbacks to consider.
Advantages
- Wholesaling is a great entry point for those who want to start a career as a real estate investor.
- It opens you up to real estate deals in markets outside of your immediate area.
- You have a chance to build capital quickly.
- The process requires limited capital, which reduces the risk of the investment.
Disadvantages
- Finding the right type of property and buyer requires research and a network.
- Success and profit in wholesale real estate require patience.
- Property owners have to feel comfortable with the strategy, and investors have to be open to buying.
- Other investment strategies have higher risk and higher rewards, while wholesaling provides a lower profit margin.
- Profit depends on availability, making the process unpredictable at times.
Real Estate Wholesaling Vs House Flipping
One important thing to understand about wholesaling is that it’s entirely separate from flipping houses. While both REI strategies involve the purchase of a distressed property, they approach it in different ways.
When you choose to fix and flip a property, you buy it directly from the seller and take the time to renovate it. Once you increase the value of the home, you find a buyer and sell it at a profit.
In wholesaling, you enter into a contract without directly buying the property. Moreover, you are not doing the repairs yourself. Instead, you charge a wholesale fee to another investor or buyer who then fixes the home.
Generally, you see less money in these deals. However, you don’t have to invest your own resources into the deal.
Whole Sale Real Estate Step-By-Step
When you want to get your start in the REI community without the cash, wholesaling is a lucrative opportunity. Below, we look at the eight steps of the real estate wholesaling process.
1. Research
Take some time to familiarize yourself with wholesaling laws. Additionally, look into the markets to find one that is active and has opportunities that apply to this situation.
2. Identify the Right Opportunity
Successful wholesaling requires the right opportunities. Your ideal property is listed below its market value and offers a profitable opportunity to your end buyer.
First, identify a homeowner with the motivation to sell quickly without renovations. For example, a home in foreclosure or with liens is a good starting point.
These tactics can also help you drudge up opportunities.
- Direct mail targeting specific areas
- Social media networking
- Online REI networking groups
- Multiple Listing Services (MLS)
Diverse methods are a good way to cover a broad range of opportunities as you start out. Be sure to pay attention to the method that works best and make changes as you move forward. Over time, you can find the best strategies for you to identify the right opportunities.
3. Work the Numbers
Once you identify the property you want to contract, find the numbers that make sense for you. Does it make financial sense for you to enter into a contract?
To understand the situation, you need to find the fair market value of the property as well as the general estimate for repairs. When you have this information, you can find the highest price you can pay for the property.
4. Contact the Homeowner
Next, you need to reach out to the owner and gauge their interest and motivation. This information isn’t always readily available, but you can find public tax records and search for them online.
When you make an offer to the owner, it’s a good idea to identify yourself as a wholesaler. Explain why working with you is beneficial and how you plan to help them sell the property.
5. Due Diligence
If you invest in property online, it’s more difficult to do your due diligence. However, it is still possible.
First, verify the fair market value of the home. To do this, you can compare similar properties sold in the area. Additionally, you can check occupancy rates, rental income, and other factors.
6. Sign the Contract for the Property
Present your offer to the owner and enter into a contract with them. Be sure that your contract includes an inspection contingency. This contingency provides you with an exit if an inspection reveals unexpected issues.
Include the right to assign the contract to another party as well. This allows you to sell the contract to your REI buyer.
7. Find a Cash Buyer
Once you have the contract in place, your next step is to find a motivated buyer. If you have a network of real estate investors, you can present the opportunity to them.
Alternatively, you can contact a realtor in the area who can identify recent cash purchases. Social media and networking events are also great tools to connect with investors.
8. Reassign the Contract to Your Buyer
With an interested investor, you can assign the contract and close. DocuSign makes this process smooth and simple. Then, you pocket your fee and leave the buyer to do their work.
Final Thoughts on Wholesale Real Estate
If you want to find an entry point for real estate investment that doesn’t require capital, real estate wholesaling might be the right option for you. When you wholesale, you have a unique opportunity to reach new markets and earn a profit.
Typically, real estate investment, even wholesaling, requires some capital to pay for investment properties. At King James Lending, our hard money loans provide the resources investors need to make the most of every opportunity.
