There are many ways people make money in real estate. If you have a lot of contacts interested in investment properties, consider becoming a real estate wholesaler. But what is a wholesaler in real estate? Allow us to describe the real estate wholesaling process and outline the pros and cons of this type of transaction.
What is a Wholesaler in Real Estate?
The following scenario describes how a real estate wholesaler makes money.
You encounter a property owner who doesn’t believe they can sell their property because it’s pretty distressed. The property owner doesn’t have the resources to make repairs, and they feel stuck living in an undesirable home.
As a wholesaler, you approach the homeowner with an offer for the property. The homeowner agrees to put the house under contract for a purchase price of $80,000 (as an example). You both sign a contract, and you give the homeowner earnest money.
Then, you find someone within your network of real estate investors who agrees to buy the property for $90,000 (or more!) You assign the contract to this investor, who is happy to purchase this fixer-upper. You are happy because you made a $10,000 profit without buying the home.
Step-by-Step Process for Wholesaling in Real Estate
If you work in real estate or are interested in the industry, you may encounter properties you could profit from as a wholesaler. Here’s how the process typically works.
Step 1: Learn about wholesale real estate laws in your state.
Some states require wholesalers to have a real estate license. Talk with a real estate attorney to learn about your state’s rules and regulations regarding the practice.
Of course, earning a real estate license is affordable and relatively easy when purchasing a pre-licensing course from Colibri Real Estate. Colibri Real Estate (formerly Real Estate Express) has a “pass or don’t pay guarantee.” You have nothing to lose! During your course, you’ll learn about wholesaling laws in your state and may discover a new, exciting career!
Step 2: Locate a distressed property.
Finding the right property and situation is crucial to the success of your venture.
Look for properties listed on MLS below market value – with owners motivated to sell. You might also find such properties on foreclosure sites, real estate auction sites, or by networking in the area.
Step 3: Do the property analysis and due diligence.
Find the property’s fair market value by looking at comps, occupancy rates, and cash-on-cash returns. Then, determine what required repairs will cost. This data will allow you to calculate the after-repair value or the fair market value after repairs are done.
Once you have that data, you can determine how much an investor might be willing to pay for the property. Add a 5 to 10% wholesale fee, and approach the property owner with your idea.
Step 4: Contact the seller (property owner).
Explain your role as a real estate wholesaler and describe how the wholesale real estate transaction would work. Be upfront with the homeowner. There should be nothing to hide. In fact, this transaction should be a win-win situation for all parties involved.
Step 5: Obtain a contract for the property.
Once the seller agrees to the amount, get the property under contract. Ensure the contract includes the right to assign the contract to another party. Also, include a contingency that allows you, as the wholesaler, to withdraw from the deal if you cannot find a buyer before the contract expires.
Step 6: Find a buyer.
Use your networking skills to connect with potential investors in the area. A cash buy is ideal, so you might also contact local real estate agents in the area to ask about recent cash purchases.
Step 7: Reassign the contract to the buyer.
Close the deal with the real estate investor. At this time, the property owner will receive payment for the property, and the wholesaler will be paid to oversee the deal.
Pros and Cons of Wholesaling in Real Estate
There are pros and cons to this type of real estate investing. Here are some to consider.
Benefits of Wholesaling in Real Estate
- There’s little financial risk when acting as a real estate wholesaler. You may lose your earnest money if you can’t find an investor, but you won’t be stuck with the cost of the entire property.
- Once a wholesaler finds a buyer, they receive their money quickly. Generally, the buyer pays part of the wholesale fee at the assignment of the purchase contract, and the rest is paid at the property’s closing.
- Because a wholesaler does not have to take out a loan for the property, their credit score doesn’t matter.
- The wholesaler isn’t the one to complete renovations or improvements.
- You will be able to sell the property quickly if you have a good network of real estate investors.
Drawbacks of Wholesaling in Real Estate
- You need to know real estate investors in the area who don’t have the time or ability to scout out investment properties on their own.
- Some states require that real estate wholesalers have a real estate license.
- Finding the right property, homeowner, and buyer takes time and skill.
- Although a wholesale contract protects the interests of the wholesaler, there still is some risk. You may lose your earnest money if you can’t find a buyer.
- Property owners may misunderstand or be uncomfortable with the wholesale real estate strategy.
Do the pros outweigh the cons? Then start looking for potential investment properties!
Learn More About Wholesale Real Estate Investment Strategies
Ready to learn more about real estate wholesaling? Visit the Colibri Real Estate website. If you still need to get your real estate license, we can help you complete this process. If you are already a practicing real estate salesperson, we can help you stay licensed or earn your real estate broker license.
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