What Is Real Estate Wholesaling?

February 22, 2021 | Sundae Investor Team

What does a real estate wholesaler do, and how is their work different from that of an investor or realtor?

A real estate wholesaler is a professional who procures contracts for distressed or under-market value homes and assigns those contracts to investors at a higher price, keeping the difference as profit. Becoming a real estate wholesaler is one way to make money from real estate transactions without carrying a real estate license or the capital to be able to purchase property. Real estate wholesaling isn’t easy — it requires local market research and networking with sellers and investors — but you can break into wholesaling without investing much time or money.

How does real estate wholesaling work?

Here’s how a real estate wholesale transaction typically plays out:

  1. The real estate wholesaler finds a property for under market value, typically because the home is distressed or the seller is desperate for a quick sale.
  2. The real estate wholesaler makes an offer and then negotiates with the seller. When both parties agree on a price, the home is put under contract.
  3. The real estate wholesaler looks for a cash buyer or investor who may be interested in purchasing the contract rights so they can flip the house and make a profit.
  4. The contract is assigned to the investor at a higher price and the wholesaler keeps the difference. In other words, the investor gets the contract rights in exchange for a wholesale fee.
  5. The buyer closes on the home and the real estate wholesaler receives their cut, which is typically around $5,000 to $10,000 per deal.

Another option is to use a double closing. This means the real estate wholesaler actually purchases the property and assumes closing costs, only to immediately sell that property to an investor. While this requires the wholesaler to secure funding, it can work if assigning the contract to the end buyer isn’t a viable option.

How is a real estate wholesaler different from a real estate agent?

A real estate agent represents buyers and sellers to coordinate real estate transactions. A real estate wholesaler acts as a middleman between sellers and property investors. Realtors are paid commission for each transaction, which is typically about 6% of the home’s sale price. Wholesalers set a flat fee for each deal.

To become a realtor, you need to take pre-licensing education courses and pass a state examination. Wholesalers aren’t required to carry a real estate license. That’s unless they are transacting more than one deal per year in the state of Illinois. Still, wholesalers may choose to get a real estate license if they want certain benefits, like access to the MLS.

How is a real estate wholesaler different from an investor?

A real estate investor buys property under market value with the intention of selling it for a higher price at a later date and/or earning income from rentals. Investors might buy and hold a property they expect to appreciate rapidly. They might also fix up a distressed property and immediately flip it for a profit, rent out the property, or hire a management company to do so, or some combination of those strategies. In order to profit as a real estate investor, you need to have the funds to be able to purchase properties.

A real estate wholesaler, on the other hand, doesn’t need much in the way of capital to earn a profit from a real estate transaction. Wholesalers may be required to submit an earnest money deposit to the seller to get exclusive rights to the contract. But they don’t need to finance buying the property unless they elect to use a double close. Furthermore, real estate wholesalers have a much quicker exit strategy than investors. They can turn a profit in a matter of weeks.

Related: How to Start Flipping Houses

Who can become a real estate wholesaler?

In most states, anyone can become a real estate wholesaler without specific education or training. However, to be successful, you’ll need some knowledge of your local market. You’ll also need the ability to connect with a network of potential buyers.

To find distressed properties, wholesalers might:

  • Search real estate listing sites like Realtor.com
  • Market their business with bandit signs
  • Search the newspaper or public records for legal notices that might indicate motivated sellers
  • Drive around up-and-coming neighborhoods, identify distressed homes, and reach out to owners

Related: How to Price a House with Real Estate Comps

To find buyers, wholesalers might:

  • Visit trade shows and networking events
  • Create a website or email marketing campaign advertising your business
  • Be prepared with business cards
  • Post on social media or create a blog to attract potential buyers
  • Find investors on Craigslist
  • Partner with a local real estate agent

Real estate wholesaling can be a great way to get into real estate investing without spending a lot of money upfront. However, it does require significant research, networking, and planning. Before securing a deal, wholesalers should make sure they have a list of interested buyers and an exit strategy in place.

This article was originally published on the Sundae blog.

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