Real estate wholesaling is not new, but it seems to be increasingly popular. The recent increase in wholesalers may be due to the emergence of some more prominent players in a traditionally fragmented field. Wholesaling involves a person or company acting as a middleman between a seller and a buyer, usually without using their own money. The wholesaler typically starts by identifying a potential seller - often a homeowner that owns a distressed or rundown property. The owner wants to sell but either can't or is reluctant to invest in fixing the property up for the maximum return. In many cases, the owner urgently needs to sell.
For example, a wholesaler may approach a homeowner and offer to buy their house for cash, emphasizing that the owner doesn't have to make any repairs, doesn't have to endure showings, and won't pay a real estate commission. For a troubled homeowner, these words may be very attractive. The wholesaler enters into a contract with the seller, which allows the wholesaler to buy the property. The wholesaler may or may not pay a small deposit.
Next, the wholesaler finds a buyer, often an investor, who flips the property or can upgrade the home for rental. The wholesaler assigns their rights to the property to the buyer for a price higher than what they have agreed to pay the seller. The difference between the two is the wholesaler's profit. The profit is typically less than a flipper can earn but doesn't involve repairing or upgrading the property.
What is the advantage of wholesaling?
For the wholesaler, the tactic is a simple way to earn returns quickly. The wholesaler doesn't usually use any of their own money and keeps the difference between the sales and purchase prices. For example, suppose the wholesaler agrees to "buy" your home for $200,000. If they find a buyer willing to pay $220,000, the $20,000 difference is their fee.
The advantage for the investor is access to property available for purchase. In essence, the buyer is paying the wholesaler for information and access. For the home seller, the advantage is a fast and easy sale of a home they want or need to dispose of. For the home seller, the advantage is a fast and easy sale of a home they want or need to dispose of. However, the homeowners should be aware that they typically accept a lower price than they could obtain through more traditional means.
Who can be a real estate wholesaler?
Almost anyone can jump into this market. In many states, you don't even need a real estate license (but check before you start buying and selling) to conduct this business. On the other hand, you probably need good sales and marketing skills or a network of potential investors. You don't need cash to invest as a flipper does, because you aren't the one who is upgrading the properties. You don't buy the properties, so the risk is minimal. In fact, in most cases, the contract between the wholesalers and the property seller includes an option for the wholesaler to drop the contract if they can't find a buyer.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
