Wholesaling Real Estate: Is It For You?
Discover the connection between wholesaling real estate and house flipping and whether wholesaling is for you
Although I am a card-carrying member of the house flipping real estate investing club, wholesaling real estate is a great way for people to get started in real estate investing.
I've found that many people want to get into traditional house flipping, but may not have the immediate resources or the desire to do it. Although you can get started flipping houses with no money, for some people it might be too much of a leap for them.
However, there is a middle ground and its called real estate wholesaling.
Real Estate Wholesaling and House Flipping: Long Lost Cousins?
When I started flipping houses, I had some savings, so it helped me to get started for sure. But even if you have no money and want to get started house flipping, always remember that private money lenders, hard money lenders and even the banks are willing to loan you money to buy real estate.
But for some people, it may be better for them to start "flipping" by flipping wholesale contracts instead of traditional house flipping. It all depends on your personality, as well as your personal situation.
Wholesaling real estate provides you with a great opportunity to build some income and create an immediate infusion of cash with little capital or credit. This is why many would-be house flippers, start their careers as real estate wholesalers.
To be successful wholesaling real estate, the most important factor is drive, ambition, as well as some specialized knowledge. It's a simple formula and one that's repeated in many businesses: the more ambition and drive, you have, the more money you'll most likely make!
Although a wholesaler does "flip" a contract from a seller to a real estate investor (like a house flipping professional such as myself), it doesn't require a real estate license, so the barrier to entry is relatively low.
So here's a more detailed explanation of what wholesaling real estate is, so that you can determine whether it's the type of real estate investing you want to pursue instead of the traditional buy, renovate, sell style of house flipping we primarily do here.
What is Wholesaling Real Estate?
A real estate wholesaling professional places property (normally distressed property) under contract and then assigns the property to another investor. This allows quick closings on properties that in many cases need extensive repairs.
And since a wholesaler is a middleman, a broker of real estate of sorts. Here she finds the deals, places them under contract and then hands that deal over to other investors who are more than willing to pay cash to get it.
Wholesaling real estate (which many people call flipping houses by the way) is a means in which to make a profit in real estate investing by signing a contract to buy a property from a seller. The real estate wholesaler then enters into an agreement with a third-party (usually a real estate investor) to resell the same property at a higher price for a profit.
All the rights to the original purchase contract are "assigned" to the new buyer. In exchange, the new buyer pays an "assignment fee" to the wholesaler in order to gain all rights to buy the property at the original purchase price.
Under ideal circumstances, or real estate wholesaler should never "buy" a property in the traditional sense. The wholesaler places properties under contract with a contingency clause, while focusing on quickly selling the property for more money to other investors. If the real estate wholesaler is not able to sell the property prior to the expected close date, then the wholesaler will trigger the contingency clause to walk away from the contract.
Real Estate Wholesaling Example
Let's say you have a property that has an ARV of $200,000 and needs $40,000 in remodeling and rehab work done.
You as a real estate wholesaler, get the house under contract for $95,000.
You could then contact a real estate investor to assign it to that investor for lets say, $100,000. In this scenario, you "bought" the house for $95,000 and made $5,000 on the deal. Not too shabby.
A real estate investor needs to know the basic math of house flipping to be successful, as many real estate investors use simple formulas to determine if a property is worth buying. This includes knowing the tried and true 70% Rule.
A wholesaler knows that price can overcome all objections in real estate investing. If you can find a property for a low enough price, no matter what's wrong with it, there will be a market for it.
So as a result, a real estate wholesaler focuses on two things:
- Developing a network of real estate investors they can work with
- Finding and sourcing deals that are attractive to those real estate investors
If a wholesaler can do these two things extremely well, he or she will make money wholesaling real estate.
Getting Started Wholesaling Real Estate
When you really wrap your head around it, traditional buy, renovate and sell house flipping (like we primarily do here at House Flipping School) and real estate wholesaling are both house flipping.
One flips a house after significantly renovating it, whereas the other flips a real estate contract.
There are definite similarities between the two and both have similar kinds of skills that are required to be successful. So if you are thinking about becoming a wholesaler, here are few things you should keep in mind:
- Ambition: Becoming a wholesaler takes will, skill and most importantly ambition. You need to want to become successful. You need to have the passion to market to your target area. I have a saying: “you can't sit on your butt and slide uphill.” If you sit on your butt, you're only going to go downhill to the bottom! I'm not a big fan of the bottom, but it sure is crowded!
- The Right Mindset: The second most important part about becoming a real estate investor is your mindset. Like the house flipping mindset, when becoming a wholesaler, how you think is vital to your success.
- Have a Plan: You must establish a plan to market and stay consistent with that plan. Finding deals is not a simple task, and if it was easy everyone would be doing it. Anyone can go on the MLS to find a deal. And anyone can hang up bandit signs and get calls. Having a real estate investing plan when you set out to start is vital.
- Solid Work Ethic: Finding a sourcing deals takes hard work, but the payoff is there. Sending out mailings and following up on mailings, hanging bandit signs, door knocking, and networking are all things you'll need to do on a regular basis. Marketing is a big part of wholesaling and much of it is just nose to the grindstone work that needs to be done.
- Networking Skills: When networking you need to let everyone know what you are doing. Let your friends and family know, let your coworkers and acquaintances know that you help solve problems in real estate.
So does real estate wholesaling sound interesting to you? Leave a comment below and let me know what you think.