Wholesale Real Estate: What Is It And How Does It Work?

There are many ways to make money with real estate. Investors may buy rental properties, fix and flip houses or buy shares in real estate investment trusts (REITs). However, wholesaling is another option that’s commonly overlooked. For motivated individuals, wholesale real estate can be a rewarding way to make money with relatively little capital.

What Is Wholesale Real Estate?

Wholesale real estate—also known as wholesaling—refers to a short-term investment strategy in which someone locates a property, enters into a sales contract with its owner and then transfers that contract to another buyer. The wholesaler will often purchase these properties for less than their market value.

Wholesaling isn’t the same as being a real estate agent though. Wholesalers bypass the traditional sales market to connect sellers with cash buyers. Sellers that turn to wholesaling may have a property that’s difficult to sell through the usual channels, or perhaps they’re in need of money quickly and don’t want to go through a lengthy closing process. Since wholesale real estate properties are typically sold to cash buyers, transactions can be completed much faster than a traditional sale.

Example of a Wholesale Real Estate Transaction

In general, a wholesale real estate transaction looks something like this:

1. A wholesaler finds a distressed or off-market property and offers to buy it for below market value at $200,000.
2. The wholesaler and seller sign a purchase agreement for that price.
3. Afterward, the wholesaler locates a cash buyer willing to purchase the home for a higher price. In this example, the wholesaler finds a buyer willing to pay $215,000 for the property.
4. The wholesaler then transfers the contract for the property to the cash buyer and that individual and the seller complete the sale. The wholesaler earns $15,000 off the deal.

A wholesaler may make an average of $3,000 to $20,000 per sale, according to Nick Legamaro, managing director of USANotePro, an online portal for real estate investors. That said, more lucrative deals are certainly possible.

Related: Is Buying A House A Good Investment?

How Wholesale Real Estate Works

You might be wondering why sellers and buyers use wholesalers to begin with. After all, if a seller and cash buyer worked together directly, each may end up with a better deal. However, the wholesaler does a significant amount of legwork that can speed up the process for each party.

For one, wholesalers typically scout out properties that are either distressed or off market. They’ll often place ads on social media or post signs in neighborhoods offering cash for these types of homes. Another common marketing tactic is to contact property owners directly and ask if they are willing to sell.

Once the wholesaler finds a property, they evaluate it and negotiate a price. After signing a contract, they typically have a specific number of days to find a cash buyer to take over the purchase. For this reason, good wholesalers have a list of potential buyers ready before they sign a sales contract.

Requirements for Wholesaling Real Estate

Unlike other forms of real estate investing, wholesaling real estate doesn’t require a significant amount of money up front. But you should have the following things in place before jumping into a wholesale real estate deal:

• Legal agreements. Most states don’t require wholesalers to be licensed, but check your state’s laws to be sure. Also, consult with an experienced real estate attorney to properly draft a purchase agreement and get your other documentation in order.
• Earnest money. You may be asked to pay earnest money when signing a purchase agreement to show your commitment to the deal. Depending on how the contract is written, you might lose that money if you can’t find another buyer.
• An experienced mentor. Look for real estate investor groups online or locally to find a current wholesaler willing to work on a few deals with you.
• Consistent marketing. Finding profitable homes is key to being successful in wholesale real estate. Whether it’s via online ads, direct mail or cold calling, wholesalers need to be constantly marketing if they want to find homeowners in need of a quick sale.

Pros and Cons of Real Estate Wholesaling

If you’re interested in wholesaling, make sure you understand the advantages and drawbacks.

Pros of Real Estate Wholesaling

• Relatively little cash needed to secure deals
• No credit requirement
• Can be done on a part-time basis
• Minimal risk

Cons of Real Estate Wholesaling

• May lose earnest money if you can’t find a buyer
• Finding properties and investors can require significant time and energy
• Must adhere to stringent state laws and regulations
• May not earn as much as other real estate investment strategies

Wholesale Real Estate vs. House Flipping

Wholesaling and house flipping are two different things. Wholesalers never take possession of a property and simply act as a middleman between the seller and cash buyer.

Many of these cash buyers, though, are flippers—investors who buy distressed homes, make improvements and sell them for a profit. By working with a wholesaler, they eliminate much of the work needed to identify and purchase suitable homes.

Related: BRRRR Method: What Is It And How Does It Work?

How Much Money Is Required To Wholesale Real Estate?

Wholesale real estate doesn’t require a large initial investment, but you will need some money. The following are common expenses:

• Legal documents. Templates are available online, but in many areas, it can cost up to $1,000 to have a real estate attorney create your purchase agreement and other documents.
• Earnest money. If required for a transaction, earnest money could run from several hundred dollars to several thousand dollars.
• Marketing. Word-of-mouth marketing is free, but wholesalers often have a marketing budget of several thousand dollars to pay for online ads, direct mail and similar expenses.
• Software. Accounting software, cloud storage and other tech tools used to track leads and organize contracts may cost between $100 and $200 per month.

Should You Consider Real Estate Wholesaling?

Not everyone will become successful at real estate wholesaling. The process requires a specific type of person—one that’s decisive, persistent and happy speaking with others, among other characteristics. Building relationships with good communication is essential to closing deals as a wholesaler.

Of course, it may be hard to gauge whether wholesaling is right for you until you’ve tried it. If you’re considering this investment strategy, Legamaro suggests that you start off by finding a wholesaler to shadow. From there, you can discuss the intricacies of the process and a potential splitting of profits in future deals.