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February 6, 2020

What Is Wholesaling in Real Estate?

Wholesale is often a term used to describe companies that sell products to retailers. However, this term can apply to the real estate market, too. It is a type of investment strategy in which, instead of outright buying a property, an investor purchases the right to the contract and then assigns the contract to another buyer. That sounds confusing, but it doesn’t have to be as difficult as it sounds. In short, when you purchase a property for wholesaling, you are buying just the right to find a buyer for the property. And, you profit from the transaction without actually having to be listed on the title of ownership.

How Does Wholesaling Real Estate Work?

In the process of wholesaling, an investor seeks out a homeowner who may be having trouble selling their home or, for whatever reason, needs to sell without listing the home (or other real estate types) on the MLS. Instead, the investor turns to the seller of the property and offers a deal. They will put the property under contract. This means the wholesaler agrees to close on the property in some form within a specified timeframe. The contract also lists the sale price – which all parties must agree to.

Then, the wholesaler seeks out a buyer for the property. This end buyer agrees to purchase the property. He or she pays the agreed price to the seller as well as an assignment fee. This fee is paid to the wholesaler. Here’s an example of how one may work.

  • A property owner needs to sell a building fast. The condition isn’t good, and it will not do well on the MLS.
  • The wholesaler agrees to help the seller. An agreement is made on the sale price of the building. Contracts are signed stating the wholesaler has the right to buy the property or sell it through assigning the contract to another buyer. A closing date is set.
  • The wholesaler then finds the end buyer. This may be a rehabber or someone in the industry who is willing to take on a higher risk property. The buyer is interested in the property.
  • The wholesaler signs a purchase and sale agreement with the end buyer. The end buyer agrees to pay the purchase price agreed to with the seller along with the agreed assignment fee.
  • The wholesaler is not listed on the title. Rather, the close occurs between the seller and the end buyer through an escrow company.

What Type of Properties Does Wholesaling Work For?

It can work for any type of real estate, from office space to homes and retail locations. However, if a property is likely to do well on the traditional market, it’s probably not a good option for wholesaling. That’s because the property is likely to fetch a higher price than the wholesaler can afford to agree to. These properties tend to be hard-sells or higher risk properties, such as rehabs. Most commonly, wholesaling involves single family real estate. That’s because this type of real estate is the most liquid form, making it easier to find a buyer for it.

Why Do Some Investors Use Wholesaling?

There are numerous benefits to wholesaling homes instead of buying them outright. For example, the wholesaler does not need to secure lending or use a hard money loan unless they decide to close on the property. For example, if the wholesaler cannot find a buyer, he or she may need to close on the property by the agreed-upon closing date and then sell the property themselves through the traditional method. This second option is a double close.

Aside from this, wholesaling can help an investor profit from real estate without being on the title of multiple properties. They do not have to do the hard work of rehabbing the property. Most of the time, there are clauses and addendums within the contract that limit liability and risk to the wholesaler. For those who want to invest in real estate but don’t want to own multiple properties, this is one option.

Some investors use this method to get a significant amount of cash in hand quickly. They can then use that cash as a way to invest in other real estate transactions, allowing them to build their capital faster.

Who Can Get into Wholesaling?

It is important to know that there’s some risk involved in the process. There are key aspects of the process that must be handled properly to ensure transactions are legal and ethical. For example, some sellers may not be happy with learning later on that the wholesaler secured a significant profit from the transaction. However, when investors spend time educating their sellers and working properly with end buyers throughout the process, it can be a solid opportunity. Individuals should have solid real estate knowledge, capital access to handle closing transactions, and marketing knowledge to do well.

Commercial real estate investors who are looking to raise funds for their investment strategies may find wholesaling to be one opportunity to achieve this. Learning the process and working with a real estate attorney to create applicable contracts is a critical step in the process. Yet, with the right tools and resources, wholesaling can prove to be a viable option for many people looking to profit from real estate.