One of the perks of real estate investing is the fact that real estate investors have a wide range of investment strategies to choose from. Profitable real estate deals can be made in a myriad of ways and savvy investors will always be able to generate a great return on investment regardless of market conditions. One particular strategy that can yield decent returns is real estate wholesaling.
In this article, we will go over the basics of these real estate transactions and outline how to wholesale real estate as a new investor.
Related: How to Wholesale Real Estate Properties as a Beginner: 6 Steps
What is Real Estate Wholesaling?
Before delving into how to wholesale real estate, we must first define what real estate wholesaling actually is. In simple terms, wholesaling in real estate is a strategy that involves identifying distressed properties, locking them in a real estate contract, and selling them to an interested buyer. In order to succeed as a real estate wholesaler, you need to accomplish two things: Find properties below market value, and compile a list of potential buyers.
It is worth noting that the wholesaler doesn’t have to actually own the property. Instead of acquiring and selling the property itself, wholesaling involves selling a purchase contract that grants a prospective buyer the right to acquire the property. Under this arrangement, the property owner retains bare legal title to the property until the deal concludes.
The Pros and Cons of Real Estate Wholesaling
Like every strategy in the real estate industry, there are several advantages and drawbacks to real estate wholesaling. Here are the main ones:
- A great way to learn about real estate: One of the pros of real estate wholesaling is the simple fact that this strategy provides you with a crash course in real estate investing. When you invest in wholesale properties, you’ll learn a wide range of skills that range from finding leads and doing proper due diligence to running comps and building relationships with brokers.
- It requires a low start-up capital: One of the biggest obstacles that investors face when starting out is the capital that is required upfront. Luckily, securing a profitable wholesale deal is not as capital-intensive as most traditional investment strategies. All you need is dedication, patience, and effort in order to generate a profit.
- It is a short-term strategy: Due to the short period of time between the writing of the purchase contract and the closing, wholesale real estate deals can offer short-term profits to investors who are hard-pressed for cash.
- Lack of a buyer: The obvious challenge that wholesalers face is finding an interested buyer. As you can guess, finding one is not always easy, especially if you happen to be a novice real estate investor.
- Income can be inconsistent: Building a real estate business around wholesale deals can be a risky move. After all, you never know when your next deal will materialize, which is not conducive to generating predictable income.
- Negative stigma: There is no way around it, there is a persistent stigma surrounding real estate wholesalers. This is mostly the result of some of the bad practices that unscrupulous wholesalers engage in. If you want to succeed in wholesale real estate, be sure to ignore this perception.
The Basics to Get Started As a Real Estate Wholesaler
While it might seem challenging at first glance, wholesaling real estate is actually quite straightforward. Having said that, there are several moving parts at play and investors need to be extremely vigilant when implementing this real estate investment strategy. Below is a brief overview of what you need in order to get started on the right foot.
Real Estate License
While a license is not required to wholesale investment property, it is highly recommended that you obtain one. Becoming a successful wholesaler is predicated on having access to the top leads and listings at all times, which is something a real estate license will definitely grant you. By obtaining a license, you will be able to access the goldmine of property leads that is the MLS. Moreover, becoming a licensed professional will allow you to network with other real estate professionals, which could help you close profitable wholesaling deals down the line.
Like we mentioned above, wholesale real estate doesn’t have the same capital requirements as some other investment strategies. With that being said, you still need to have enough money to purchase the contract. To make sure the capital is lined up when you are ready to secure a whole deal, consider working with hard money or private lenders.
Related: How to Find Hard Money Lenders for Real Estate
How to Wholesale Real Estate: A Step-by-step Guide
Like any investment strategy, profitable real estate wholesaling requires adhering to a well throughout-out strategy. Here are the steps you should follow if you want to close your first deal as a real estate wholesaler.
Identify a Property
Naturally, the first step of the process is finding a property. Ideally, you should narrow the scope of your search down to properties that are below market value. The best way to do this is to use the Mashvisor Property Marketplace. By using the appropriate filters and focusing your search on distressed properties and foreclosures, you will be able to zero in on the right investment in a matter of minutes.
Pick an Exit Strategy
A critical part of wholesale real estate is having an exit strategy in place. Generally speaking, you have two options to choose from: Simply selling the purchase contract or acquiring the property before selling it to an interested buyer (double closing). The first approach is the most common one as it involves lower risk and requires very little capital commitment. On the other hand, taking possession of the property can be more lucrative if the buyer is able to find a buyer who’s willing to pay a significant amount of money for the property.
Negotiate with the Homeowner
Once you’ve picked a property, it is time to initiate negotiations with the homeowner. This is where you draw up the contract and sign the agreement with the seller. Since your ability to generate a profit will entirely depend on securing a low purchase price, be sure to bring your A-game to the negotiation table.
Find a Buyer
This is one of the most crucial parts of the process. While finding buyers may seem daunting at first glance, it is important to note that there are several avenues you can explore to find an interested party. Here are some simple yet highly effective ways that you can try:
- Work with an experienced real estate agent in your area.
- Place an ad on Craigslist.
- Explore your personal and professional networks.
- Implement a direct mail marketing strategy.
Negotiate with the Buyer and Assign the Contract
After finding an interested buyer, the next step is negotiating a price that will allow you to make a profit while covering the price of the purchase contract. Again, expect your negotiation skills to be tested, especially if the buyer has extensive experience investing in wholesale deals. Once you have agreed on the price, assign the contract to the buyer.
Close the Deal
After assigning the contract, all that is left is closing the deal and collecting your payment. You can expect to receive your deposit after the title company finalizes the transfer.
The Bottom Line
Wholesale real estate can be a lucrative venture if you implement a coherent strategy and avoid cutting corners. As long as you stick to the best practices outlined above, you should be able to close your first wholesaling deal at a profit.
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