Wholesale Real Estate Deals Explained
Wholesale Real Estate Deals Explained
Wholesaling real estate might sound like a physical impossibility to the newcomer; after all, when we think of wholesale deals, we think of warehouses full of stock like toilet paper or candy, or electronic goods. So, how can you also buy huge properties wholesale if they do not all fit in a warehouse too?
Of course, properties are not being sold in shrink wrap and delivered on a forklift truck. So, what is wholesale real estate? Essentially, what wholesale real estate means is that someone—a wholesaler—will make a deal on a property, often at a discounted price, then find a buyer for that property, someone who wants to pay more than the deal between the seller and the wholesaler.
Then the wholesaler pockets the difference from the completed deal or charges a finder’s fee, and everyone is happy. Great, right? Well, yes, but there is a lot to consider if the wholesaler wants to make a great profit. This makes things a little more complicated, but nonetheless, healthy profits are entirely achievable—in one reported instance, a real estate company made more than $1 million from just over 100 wholesale real estate deals.
While the word ‘wholesale’ correctly implies that there is a middle person between one party and another, just like with other kinds of wholesale stock, the difference here is that the wholesaler doesn’t make an actual purchase and they have to do an awful lot of work to make the profit they want. They need to be driven, organized, determined, and able to work against the clock before their hot property goes cold.
In this article, we will explain to you exactly what wholesale real estate deals are, how they work, the pros and cons, and maybe even how they could work for you with our guide to wholesaling real estate step by step.
What Are the Pros and Cons of Wholesale?
Well, before we get to the pros and cons of this way of dealing, let’s address one question we have seen come up time and time again: is wholesale real estate legit?
The answer is yes, it is perfectly legal to deal wholesale in real estate. The wholesale element of a deal itself will not tip you over into illegality, but there are many legal matters you need to consider in order to keep everything above board.
As we initially outlined, making money from a wholesale real estate contract is, in theory, a simple process where one person secures a deal on a property, then finds a buyer who is willing to pay more than the initial deal in order to keep the difference as profit. A wholesaler is not listing a property for a commission like an agent because they are the principal buyer in this transaction who passes the final purchasing contract to another buyer. In order for all of this to be legal—real estate investors must:
- Be the principal buyer
- Carry out a valid agreement
- Use the necessary agreement language
- Include a deposit exchange
- Purchase with express intentions
- Have any credentials ready to show
- Be completely transparent
Different states have different laws around real estate, and wholesale real estate deals are no exception, so the wholesaler should check the laws in the area they plan to deal in and seek advice from a real estate attorney for any clarification.
Sounds good so far? If you are thinking of getting into wholesaling, have a look at our list of pros and cons.
Real Estate Wholesaling: The Pros
Snappy Results
Once you have done your research and made sure you are acting within the laws of your state, you can have a wonderfully rewarding business as a wholesale real estate investor. And if you’re wondering, ‘do you need a real estate license to wholesale?’, no, you don’t need a real estate license to operate—you don’t even need a degree or any knowledge about fixing up houses. There are minimal expenses, especially in comparison to regular real estate deals, and you could even see a turnaround in just a few weeks from purchase to sale to profit.
Minimal Cash or Credit Required
Should you have minimal cash funds or a less-than-great credit score, you can still become a successful wholesaler. This is because you are not actually buying the property, but acting as a conduit between the seller of the property and the buyer that you find.
Access to Priceless Real Estate Investor Education
If you are a beginner in real estate or even an experienced realtor who wants to broaden your horizons, you can quickly pick up so many skills and nuggets of wisdom. Because there is so much to do in the short time between securing the deal and completing the purchase with your chosen buyer, you will learn on the job by thinking on your feet and overcoming myriad unique issues each time. You’ll learn what criteria there are in successful buying and selling, how to negotiate, how to market well, and what documentation you need to close deals, not to mention making amazing contacts.
The Risk is Low
Now, we should point out that no real estate investment is completely risk-free, but as a wholesaler never owns the property and they don’t require any finances behind them, the wholesale realtor can receive more than pleasing rewards out of a relatively low-risk deal.
Real Estate Wholesaling: The Cons
Irregular Earnings
Getting involved in a great real estate wholesale investment can be very rewarding, but it is not a regular or consistent form of income. It is up to you to keep looking for great deals, saving enough of your profits to see you through to the next paycheck and be responsible for your own timekeeping, taxes, and expenses.
Finding Buyers Can be Challenging
A wholesale real estate deal is only a deal if you can find a buyer to close off the transaction. From the word “go”, you need to start building a great buyers list. You could end up having to foot the bill to a seller if you can’t crack the quandary of ‘how to find buyers for wholesale real estate’. And although some of this risk can be written into the contract, not being able to find buyers is not a mark anyone wants on their reputation—it can put off sellers and buyers alike.
Effective Selling Requires Skill
The truly successful wholesale investor will maintain a live and dynamic buyers list—this means grouping, categorizing, and tailoring sales to the buyer who will likely be interested. It also means a more focused approach to the properties you choose and the buyers you contact, saving everyone’s time and making everyone a deal that works for them.
Knowing the Legal Stuff is Very Important
Because one does not have to be a licensed broker to be a real estate investor—after all, the wholesaler owns the contract, not the property—in our eyes, this is even more of a reason to understand the applicable laws to any property investment deal. It is advisable to act as though you are a realtor, even joining an online real estate investor community, so that you can stay up to speed with all the applicable laws and regulations.
How to Find Real Estate Deals to Wholesale
So, we have covered what wholesale real estate is as well as the pros and cons of becoming an investor. But what about the nitty gritty—how to find wholesale real estate deals in the first place?
Overall, you need to look for properties where a discount deal is entirely possible, for example, homes that need to be sold quickly due to unsatisfied landlords, distressed homeowners, or absentee owners. They can be located via the following methods:
1. Direct Mail — while this method requires some monetary investment from you, it is an easy way to contact many people and you should not be afraid of sending follow-up mail several times. You must be willing and able to track your leads and find out the motivations of the owners or sellers. Knowing your targets will mean you can appeal to their reasons to sell and help you get to a deal quicker.
2. Real Estate Meets — did you know that there are real estate investment clubs in almost every state? We encourage you to consider joining your local club to meet new contacts and find those juicy deals—some people you meet may have too many deals on their plate to work on, or you may come face to face with your perfect buyer. You will also pick up on tips, hints, and tricks for closing awesome deals, and you can also market to tens or hundreds of interested club members every time you attend. Invest a little money in a membership fee and you’re away!
3. Local Marketing — don’t be afraid to get your hands dirty. Invest in a bulk of bandit signs (the little signs you see in some yards and on telephone poles) and write a clear message that you are looking for property in the area. Make sure to add your contact details and place them in high-traffic areas. Some property owners are even willing to sell directly to a buyer, rather than through an agent, and you can buy listings showing these people—they are called For Sale by Owner or FSBO listings—or if you’re feeling really plucky, contact the property owner directly to see if they are interested in selling.
4. Social Media — last but by no means least, social media gives us access to the whole world in a single click. But because the whole world is a rather large group of people, focus on those you want to aim your marketing at. Start a blog, and make sure you aim your posts clearly at buyers or sellers only, then promote your blogs to Twitter, LinkedIn, and even Instagram. Show off your attributes and let them know you can get them a great deal in a matter of days or weeks—catching just one deal from a one-week-long campaign will be well worth the time investment.
Tips and Tricks for Successful Wholesale Deal in Real Estate
Whether you’re a sole wholesale real estate investor or thinking of joining one of the many effective wholesale real estate companies, take note of a few insider tricks we’ve compiled to help you on your way.
First and foremost:
1. Build a meaningful buyer network: we recommend you do this before you even approach your first property seller. (If you skipped the last section, go have a look at how to get into wholesale real estate.) It’s very important to note that once you hit ‘go’ on a contract with the seller, the clock is ticking on finding a meaningful buyer so that everyone gets the deal they want and, most crucially, you get the profit you need from the transaction. No buyer, no deal—it’s as simple as that.
2. Discover how to locate ‘distressed properties’: this term simply means properties that will be more likely to come at a discount. As a wholesaler, this is absolutely the portion of the real estate market where you can arrange a contract for the lowest selling price and the highest purchase price, leaving you to enjoy the delicious slice in the middle.
3. Get yourself a title company: we’re back to the legal stuff again, but that’s because it is so important. A title company will help you to make the deals legally and protect yourself with a ‘wholesaler contingency’ or ‘title clause’. In other words, the legal vehicle that helps you actually make the wholesale deal at all.
Then, get down to the detail:
4. Use great photos: for us, this is a no-brainer—if the potential buyers can’t see what they are buying, how can they analyze the deal and hand over their money? And these days, with all the digital technology out there, there are zero reasons not to have good, clear photos to work for you.
5. Always provide an ARV: ARV is After Repair Value and refers to the value of the property once any necessary work has been done and the house can join the market listings. This is particularly useful for people who are interested in ‘wholesale house flipping’ or refurbishing a house in the wholesale process. We have it on good authority that many investors find it frustrating when they don’t see a realistic ARV—if it’s way over the true market value, many potential buyers will not take it seriously and simply walk away.
6. Provide the buyer with comps: ‘comps’ is short for comparable sold listings and they provide a future buyer with a valuable source of information to help them in their investment decision. Be aware they can vary from one area to another, so don’t be tempted to cherry-pick high-value comps from another area that doesn’t reflect your property’s market.
7. Set up a showing window: setting up a time frame to allow viewers to look at the property and make a decision without feeling rushed shows that you are organized, considerate, and understand the game you’re in. Also, by setting up a clear showing window, you create boundaries in which to make as many viewing appointments as possible and have a deadline for everyone to work to.
Final Thoughts
To conclude, wholesale real estate deals are a great way to make a healthy profit with minimal cash and no responsibility of ownership, all within a short space of time. Becoming a wholesale property realtor varies from the traditional meaning of being a wholesaler because apart from the fact you do not ever own the property and are only ever making deals on one at a time, the value of these deals is the time, money, and effort you put into the contract.
While you do not need a degree or real estate license to trade wholesale, there are several elements you need to have in place in order to get started: a meaningful buyers list, a thorough understanding of the law in your state or area, and a keen understanding of the property market.
Not only that, you need to be super organized, driven, determined, and unafraid to make new connections. You should also be willing to invest in anything from stationery for mailouts to bandit boards to advertise to the general passing public, to the membership fee for real estate clubs, and even online real estate investor forums.
If you can rise to the challenge and ride the wave of irregular but healthy paychecks, you can become an effective wholesale real estate investor in a matter of weeks and start making some great deals!