Real estate wholesaling is when an investor (known as the wholesaler) scouts a potential property for another investor and earns a fee by selling them the purchase contract at a markup. Wholesalers look for distressed properties and homes being sold at a significant discount. They then reach out to the owner to make an offer and get the property under contract. But rather than buying the property themselves, they turn around and sell that contract to another investor who will renovate it for sale or rent it out. Doing so allows the wholesaler to pocket the difference between their offer and the price paid by the investor.
An example of wholesaling would be agreeing to purchase a home that needs some renovation or maintenance done. Fr example, let's say a home would be worth $400,000 if it were in good condition, but the owner can’t afford to make the improvements or doesn't have the time to do so. You could convince them to let you buy it for $290,000, and then you could turn around and sell that contract to an investor for $290,000, then pocket $10,000 just for being a middleman.
No, in most cases, you do not need a license to wholesale real estate. Anyone can buy and sell property regardless if they have a license. So as long as you stick to acting as a middleman, licensure isn’t required. The only exception is if you plan on offering brokerage services as well. For instance, as a wholesaler, you can’t represent the seller or buyer in the subsequent sale by negotiating on their behalf or providing counsel. That requires a real estate license and will likely lead to a conflict of interest. So, it’s best to stay neutral and simply facilitate the deal.
Yes, wholesaling is legal, although you must avoid certain behavior to stay out of trouble. While there’s nothing illegal about the practice of wholesaling itself, you can’t be deceptive or intentionally misleading when dealing with buyers and sellers. For instance, you should make it clear that you are not the end buyer.
Otherwise, they may be confused by the closing process. Also, make sure that you use valid contracts to process the sale. It may help to consult with an attorney to help you draft the documents. You may also want to inquire whether there are any local laws regarding wholesaling you should know.
- Less Risk
- Can Earn Large Fees
- No Credit or Down Payment Required
- No Licensure or Education Requirements
- No Fixed Time Commitments
1. Less Risk
One of the biggest benefits of wholesaling is that you don’t have to purchase a property or take on any of the risks that come with doing so. When you flip a property, there is always a risk that you’ll have to sell for less than what you put into it. Likewise, with a rental property, there’s always a risk that you won’t find any tenants to pay the mortgage. With wholesaling, there is minimal risk if you are unsuccessful other than wasting your time and energy, making an excellent strategy for beginners.
2. Can Earn Large Fees
Wholesaling real estate is one of the few legitimate ways to earn sizeable fees in a short amount of time. The average wholesale fee is between $5,000 - $10,000, although more experienced wholesalers can earn even more. The amount of time it takes to close a deal will vary depending on how long it takes to find a buyer, but it’s possible to close in 30 days or less. It may take you a while to land your first deal. But, once you have a solid system and a pipeline of leads, it gets easier to close quickly.
3. No Credit or Down Payment Required
Wholesaling has a lower barrier to entry than many other investing strategies because you aren’t required to purchase any property. You don’t need to be preapproved by a lender because a mortgage isn’t necessary. So, you won’t need to meet any credit or income requirements. You’ll mostly be dealing with motivated sellers who won’t ask for an earnest money deposit. These homeowners must sell quickly and won’t want to delay the process by asking for a deposit up front. It’s wise to have some money saved to pay for basic marketing materials like signs, business cards, and a website. But beyond that, getting started doesn’t take much upfront investment.
4. No Licensure or Education Requirements
Wholesaling real estate does not require any specific licensure or educational requirements. It may help to have some background in real estate so you know how much to offer and where to find potential buyers. But this is all information you can learn online or in books and doesn’t require you to meet specific educational requirements or pass any exams. All you need is common sense, people skills, and a thorough understanding of the local market to be a good wholesaler.
5. No Fixed Time Commitments
Another benefit of wholesaling is that you can be your own boss and don’t have to make any specific time commitments. So, it’s a great strategy if you have a full-time job or other responsibilities and can’t commit entirely to real estate. Some wholesalers work a few hours a week and do it just to make extra income. Some are full-time investors who want to create an additional revenue stream for their business. Don’t expect to work one hour per week and suddenly make six-figure checks. But you aren’t required to be employed by a brokerage or specific company, so you can work on whatever schedule works for you.
- Unpredictable Income
- Finding Buyers Can Be Difficult
- Building a Network Takes Time
- Dealing With Motivated Sellers is Tricky
1. Unpredictable Income
While wholesaling is a great way to make money in your spare time, it can be tough to tell when and how much you will get paid. So, it isn’t necessarily the best option if you’re looking for something to replace your full-time job. As you gain experience and build your buyers list, it will become easier to land deals consistently. But you may go months or even years without landing a deal. You don’t get paid until you close a sale, so if you decide to quit before you’re successful, you won’t be compensated for any of the work you put in.
2. Finding Buyers Can Be Difficult
One of the most challenging aspects of wholesaling is finding a potential buyer for the property within the allotted time frame. The homeowners you’re dealing with are likely looking to sell right away, so they aren’t going to wait for months for you to look for a buyer – otherwise, they would just put it on the market and wait for a better offer. But it’s also challenging to secure a commitment from a buyer until you have a property under contract. So even if you get the property at a good discount, there’s no guarantee that you’ll find a buyer looking for that type of home in that budget.
3. Building a Buyer List Takes Time
The key to becoming a successful wholesaler is to create a solid network of potential buyers you are actively looking for investment properties. That way, when you get a property under contract, you have a pool of interested candidates you can call. While finding investors in your area isn’t terribly hard, building a solid buyers list takes time and effort. Plus, you won’t be getting paid for any time you spend networking and passing out business cards until you close a sale. So, if you want to start making money immediately, wholesaling may not be the best option.
4. Dealing With Motivated Sellers is Tricky
Another challenging aspect of wholesaling is dealing with motivated sellers. Motivate sellers aren’t regular homebuyers who may be excited to upgrade or move on to the next phase of their lives. No one sells their home for a discount unless they’re in dire straits financially or going through a personal situation. So, they may be emotional or combative during the sales process. It’s best to use a gentle touch when dealing with these sellers because you don’t want to seem like you are taking advantage of their situation. It takes patience and practice to do this effectively, which takes time to master.
Real estate wholesaling can be a quick and relatively low-risk way for investors to make a significant profit in the real estate market. However, it is essential to understand and follow all legal and ethical guidelines when wholesaling properties and thoroughly understand the local real estate market.