Capital, or lack thereof, is one of the most common deterrents to aspiring real estate investors entering the industry. So much so that only 12% of Americans invested in property in 2022.
But did you know there is a way to make money from real estate without buying or fixing properties?
Wholesale house flipping is one of the most cost-efficient ways to participate in real estate. This article provides a guide on how the business works and how you can get your start.
What Is Real Estate Wholesaling?
Real estate wholesaling is a low-cost real estate investing strategy. Think of it as a way to flip a house with no money that involves three phases:
- Search Phase: The wholesaler looks for properties belonging to motivated sellers, meaning homeowners willing to sell their properties at low prices. Sometimes, the assets in question are distressed properties, so the sellers are more than willing to part with them for less.
- Purchase Contract Phase: When real estate wholesalers find a motivated seller, they enter into a purchase contract. Among other clauses, the contract states how much the wholesaler will sell the property for and the date they’ll need to sell it by (the contract’s term).
- Contract Reassignment Phase: After securing the contract and paying a small earnest money deposit, the real estate wholesaler shops around for real estate investors who will be interested in the property. When they find one, the wholesaler reassigns the contract to the real estate investor at a higher price (their fee).
This business model is an excellent way to generate some extra cash. As a wholesaler, you profit when your buyers pay more than what the property owners agreed to sell their properties for in the wholesale contract.
That said, it isn’t a get-rich-quick scheme. You’ll need to put in plenty of effort to find a distressed property, contract with a motivated seller, and assign the contract to a buyer willing to pay more.
Wholesale Real Estate Contracts Explained
The most integral component of any wholesaling transaction is the contract. Without this document, a wholesaler can’t operate or make a profit.
Wholesaling contracts don’t transfer ownership from the owner to the wholesaler. While the contract is in effect, the property owner retains all their rights. However, the contract grants the wholesaler the right to find a buyer and assign the right to purchase the property to them.
When the wholesaler finds a buyer, the two parties create a separate contract called an Assignment of Real Estate Purchase and Sale Agreement. Through this document, the buyer inherits all responsibilities the wholesaler owes to the seller in the original contract, including the obligation to purchase the property.
Is Wholesale Real Estate Investing the Same as Flipping Houses?
Although both business models involve finding properties you can profit from, the similarity ends there. Wholesale property investing and flipping houses require different degrees of investment (whether time or money).
Here’s where they differ:
Capital Investment Required
The main difference between house flipping and wholesale real estate transactions is the capital needed when starting.
Like other real estate investments, flipping a house involves a substantial amount of capital. You’ll need to pay for the house and do it up before you can sell it and make a profit.
In contrast, you don’t need large sums of money to finance wholesale real estate deals. All you pay for is the sum needed to secure the contract and some smaller overheads (mainly gas and advertising fees to attract prospective buyers).
Level of Involvement
Another distinction you can make between house flipping and wholesale investing is how involved you need to be with the investment property.
When flipping houses, you’ll need to do repairs before selling it. Whether you do them yourself or hire contractors to do them for you, expect to pay frequent visits to the property until it’s sold.
Wholesale properties aren’t as needy. Once you’ve signed a contract with the owner, the only interaction you’ll have with the wholesale property is when you’re showing it to potential buyers. No renovations required.
Presence of Real Estate Agent
When flipping houses, you’re bound to deal with real estate agents and may not interact with the homeowner directly.
The reverse is true with wholesale real estate investment. In most cases, you sign a contract directly with the property owner. Some sellers choose not to hire a real estate agent to handle the sale. Given that foregoing an agent means savings on agency finder’s fees, it’s not hard to see why.
Pros of Real Estate Wholesaling
There are several advantages to real estate wholesaling:
You Can Acquire Lifelong Skills
Wholesaling real estate can be an excellent way to dip your toes into the real estate industry.
You can learn lifelong skills like negotiation and how to market properties and get a deeper understanding of how real estate transactions work. The skills you acquire will serve you when you’re ready to dive deeper into other types of real estate investing.
Little Upfront Capital Required
If you lack the capital needed to participate in the real estate market, you’ll find the wholesale real estate strategy appealing.
You don’t need to put a down payment on the house, nor do you have to worry about loan repayments and interest. Similarly, you don’t have to spend a dime on renovations and fees charged by real estate industry professionals.
Fewer Barriers to Entry
With traditional real estate investing, you have to worry about factors like your credit score and whether or not you need a real estate license. Some of these factors may prevent you from jumping in and seeing a deal through until a buyer pays the final purchase price.
With wholesale investing, you don’t have the barriers mentioned above preventing you from setting up and profiting from a wholesale deal. Unless you live in a state whose wholesaling laws require it, you won’t need a license to wholesale real estate.
Quicker Profits
Compared to other real estate investment strategies, wholesale real estate investing has a shorter path to profit. You can find wholesale properties, enter contracts, and sell to cash buyers in a few days or weeks.
The shorter timeframe has a lot to do with the fact that you’re not putting the property under the DIY hammer before putting it on the market.
Cons of Real Estate Wholesaling
Here are some cons you should be aware of when going into this business:
Knowledge and Connections Required
Real estate wholesaling business requires local market knowledge for the search phase and excellent people skills for the negotiation process of the other phases. You’ll also need a network to find leads and strike deals.
Zero Opportunity for Recurrent Income
This investing strategy doesn’t give you the opportunity to earn recurring income in the way owning properties do. For example, when you own a rental property, you can look forward to rental income every month.
But once you collect your wholesale fee, that’s it. You’ll have to repeat the process of finding a property, contracting with its owner, and finding a new cash buyer or other investor.
The Return on Investment Isn’t Significant
Because you’re buying below a property’s fair market value, you can’t turn around to price the property too high. And when the property has obvious defects, interested buyers can leverage them to get a better deal.
Your profit may not be proportional to the time and effort you put into this business.
How to Start a Wholesale Real Estate Business in 7 Steps
Here’s a seven-step process you can use as a guide to starting your wholesale real estate investing business.
Step 1: Do Your Research
Before wholesaling real estate, you need to do thorough research. The first thing to check would be the wholesaling laws in your state.
States like Illinois and Oklahoma prohibit wholesaling without a real estate license. In Oklahoma’s case, the Predatory Real Estate Wholesaler Prohibition Act came into effect in 2021. That law makes operating in that state as a wholesaler illegal without first getting a license.
If your state requires that you get licensed before wholesaling real estate, look into whether you can meet the requirements. If not, you can move on to the next step.
Step 2: Look for a House
When you’re clear about whether you need a license or not, your next step is to go house hunting.
Good places to look include classified sites like Craigslist and sites specifically dedicated to real estate like HomesbyOwner.
If you have the time, you can also drive around the neighborhood and note any vacant properties whose “For Sale” signs don’t have an agent’s number. Also, attend networking events. They’re excellent for building connections.
You’ll be looking for distressed homes and owners who are amenable to selling below market value. The clues to watch for are houses or homeowners with impending foreclosures or liens. If you can dig deep enough, you should also check for houses that have spent too long on the market (your connections will help you in this case).
Step 3: Determine the Property’s Market Value
Calculate the property’s fair market value and determine whether profit can be made from a wholesaling transaction on it. You can do your calculations by examining the area’s comparable properties and occupancy rates.
Your aim is to determine the property’s after-repair value (ARV). When you know how much the property will be worth following repairs, it’ll be easier to calculate its maximum allowable offer (MAO). Knowing this is important because it’s the highest price you can sell it for in its current state of disrepair while making your profit.
It’s important to understand that a property’s ARV and actual value are different. This distinction is important because the homeowner will likely sell the property for less than the ARV. You can use a house flip calculator during this step.
Step 4: Contact the House Owner
Introduce yourself as a wholesaler to the owners and explain how partnering with you will put money in their pockets. Disclose fully what you stand to gain from the relationship and how you intend to find a third party who will buy the property from the seller. You need to be as trustworthy as possible if you want sellers to work with you.
It’s also a good idea to explain that the wholesaling contract doesn’t give you any ownership rights in a property. Stating this fact upfront may assuage any reservations the homeowner has.
Speaking of which, get used to hearing “no” and pushing on in the face of rejection. Real estate is a precious asset, meaning many people will be apprehensive. When you eventually complete your first transaction, your reputation and track record should make subsequent cold calls easier to close.
Step 5: Negotiate and Enter Contractual Relations
When you find sellers who are willing to work with you, negotiate with them using the calculations you arrived at in step three. Your negotiations will result in a wholesale real estate contract.
Let’s assume that the distressed property’s after-repair value is $150,000. Many house-flipping investors use the 70% rule when deciding whether to invest in a property. Under the rule, the buyer won’t pay more than 70% of the house’s ARV. As such, the house’s actual value is $105,000.
Supposing the seller is willing to part with the house for $85,000, you can enter into a contract that allows you to sell it to a buyer at a maximum allowable offer of $95,000. These contractual terms should net you $10,000 in profit.
Please note that your contract must include a clause that grants you the right to assign it to a third-party buyer. Also, consider adding the option to withdraw before the contract term expires.
Having this clause will limit your risk exposure if you cannot find a buyer within the specified time.
Step 6: Find a Buyer
The buyer should be willing to let you keep the difference between what the seller wants for the property versus your asking price as your assignment fee. After all, they wouldn’t have discovered the deal without your efforts. And if they can pay cash, even better.
There are several ways you can find buyers. One way is to frequent the real estate events held in your area. You can also post advertisements, contact realtors, and message prospects via social media.
If you got your calculations right in step three, you shouldn’t encounter too much pushback on price from interested buyers. Make a buyer list before picking up the phone.
Step 7: Close the Deal
Contact a title company to wrap up the wholesale real estate transaction. You’ll need a title company to do due diligence on the property and ensure it isn’t encumbered. When you get the all-clear, you can put your buyer in touch with the title company and let it coordinate the sale.
The title company will handle everything from the exchange of contracts between the seller and buyer to the collection of funds and the preparation of a settlement statement. It’ll also create the deed, marking the transfer of ownership between the parties. Once that happens, you can receive your payment and move on to the next opportunity.
Wrap Up
Wholesaling real estate is an interesting way to dip your toes into the market without committing funds you may or may not have. If you know what you’re doing, you can profit without buying and fixing a house.
The challenge lies in finding willing sellers and buyers and bringing them together to close a sale. However, if you implement the steps in this article, you can bring yourself a step closer to success.
