Wholesaling houses isn’t a new concept. But the question for real estate investors is whether it is the right strategy for wealth-building?
Table of Contents
- What Is Wholesaling Houses?
- How Does Wholesaling Houses Work?
- What Are the Advantages and Disadvantages of Wholesaling Houses?
- Wholesaling or Rentals: Which Is Better?
- How to Start Wholesaling Houses: 5 Steps to Get in the Game
- Wrapping It Up
In this article, we will talk more about wholesaling houses 101 and how beginner investors can get started.
What Is Wholesaling Houses?
Before we proceed to discuss the basics of wholesaling houses, we need to answer the question, “What is wholesale?“
By definition, the term wholesale means the procurement of goods in large quantities to be retailed by others. If we were to translate that into the real estate industry, wholesaling houses definition is about a wholesaler contracting a house from a seller and offering it to potential buyers at a higher price than the original contract. The wholesaler keeps the difference between the seller’s asking price and his or her selling price as profit.
People who are into wholesaling real estate typically look for distressed properties to sell since most owners of such types of properties are looking to get them off their hands. Wholesalers know enough to take advantage of such situations to turn them into profitable business ventures.
How Does Wholesaling Houses Work?
As we’ve already mentioned above, real estate wholesaling is all about wholesalers buying undervalued properties from motivated sellers and finding equally motivated buyers to sell the investment properties at a higher price point.
The main goal of a real estate wholesaler is to make as much money as they can by acting as the middleman of the transaction. Only, this time, the other parties involved – the seller and prospective buyer – don’t need to be acquainted with each other.
The wholesaler – the middleman – looks for distressed properties that can be bought at a discount from a motivated seller wanting to get rid of a property ASAP. They get the property under contract and then find interested buyers to assign the same contract to.
Generally, the wholesaler does not purchase the property but instead, the owner’s temporary contract gives the wholesaler permission to sell on their behalf. The wholesaler then attaches a wholesaling fee to the contract as their revenue. Typically, the wholesale fee amounts to a certain percentage of the property’s overall cost.
The wholesaler and the seller come to an agreement to sell a property within a certain time frame. In certain circumstances, the wholesaler might need to invest some earnest money to move forward with the transaction. Typically, before a contract for wholesaling houses is drawn, a mutual agreement needs to be arrived upon between the seller and wholesaler.
After all parties agree to the terms, especially the amount and duration of the selling period, the wholesaler then starts looking for interested buyers, usually real estate investors looking for affordable income properties for sale to invest in. If a buyer is serious about the property and wants to proceed with the investment, they take over the contract assigned to the wholesaler once the buyer agrees to the wholesaler’s price.
For instance, if a distressed off-market property is being sold at $125,000 by the owner, a wholesaler comes into the picture to help the seller get rid of the property fast. They enter a contract and the wholesaler looks for buyers willing to pay the price the latter sets. In such a case, the wholesaler might try to sell the property for $150,000. The additional $25,000 is called the “spread” or the difference between the original asking price and the wholesaler’s rate. The spread is considered the wholesaler’s profit.
Is It Legal?
Wholesaling, when done right, is legal and can be a very lucrative business. While it is legal, certain aspects of it can get a wholesaler in trouble if they do not know exactly what to do.
For instance, it is illegal if a wholesaler brings in buyers without entering a contract with a seller. However, countless wholesalers who took the time to understand the inner workings of the business are able to make a good living for themselves. They do so by following the local laws and processes put in place to protect all parties involved.
Some might be wondering can a person enter wholesaling houses contracts without a real estate license? Generally speaking, most states do not require a real estate license for people to start a career in wholesale real estate. As long as they are not actually managing the sale and only serve as a mediator in the transaction, they can operate without a license. We highly recommend consulting with a real estate lawyer or industry professional in your area first to be sure.
What Are the Advantages and Disadvantages of Wholesaling Houses?
Like any business or investment opportunity associated with the real estate industry, wholesaling houses comes with certain benefits and drawbacks.
The Upsides of Wholesaling Houses
Here are some of the reasons why a lot of folks are attracted to real estate wholesaling and get in the business:
Minimal Upfront Investment Needed
Wholesaling doesn’t require the wholesaler to buy the property. At best, it will take up much of a person’s time and energy to find the right properties and buyers to make a sale. Although there will be some cases in which a certain amount of earnest money may be involved, it generally doesn’t cost too much to get into.
Potentially Larger Income in a Shorter Time Frame
Unlike other real estate investment strategies like fix-and-flip or starting a rental property business, wholesaling doesn’t take too long to make the wholesaler a considerable amount of money. While the two said strategies take several months to work on home improvements and updates, wholesaling doesn’t require fixing, helping bring in a large amount of money in as little time as possible.
Great Entry Point Into the World of Real Estate Investing
Since wholesaling does not require a wholesaler to purchase a property, it is a great opportunity for first-time real estate investors to get into the real estate industry. It is especially true for those who want to be involved with real estate but lack the money and resources to invest in real estate. It gives them wonderful opportunities to learn about the industry and connect with seasoned professionals and investors.
The Downsides of Wholesaling Houses
While wholesaling houses may seem like a very attractive business venture, it also comes with certain risks that would-be wholesalers and investors should be aware of, like the following:
Income Is Not as Stable as One Would Expect
Unfortunately for would-be real estate wholesalers, income in wholesaling isn’t as stable as some would think. If you fail to make a sale within the agreed-upon time frame, you will end up losing the contract with the seller. One is also likely to find that wholesaling can be a seasonal thing. Sometimes there’s plenty of inventory to choose from while at certain times of the year, there’s barely enough to go around.
Lower Profit Margin
While real estate wholesaling can be a lucrative business, it does not always guarantee that those who decide to get involved in it will generate a steady stream of large income. A wholesaler’s profit will depend on several factors, including the type of property being sold, its overall condition, time of year, and the local real estate market condition. Since the properties involved in wholesaling are mostly distressed and fixer-uppers, a wholesaler’s profit isn’t as large compared to house flipping where the properties are rehabilitated for maximum profit.
Highly Dependent on Other Buyers and Sellers
One reality about wholesaling real estate is that it is a business that depends largely on sellers and buyers. A wholesaler’s lifeline is hinged on the availability of properties being sold and investors willing to buy distressed properties.
Wholesaling or Rentals: Which Is Better?
Now that we’ve talked about the basics of wholesaling houses, let’s talk about another investment alternative that’s equally – if not more – rewarding: rental properties.
Investing in Rental Properties
For many real estate investors, investing in rental income properties is an excellent way to earn a good return on investment and create a passive income source. They are also a great way to diversify one’s investment portfolio and serve as a good inflation hedge compared to other asset types.
Depending on a property owner’s rental strategy, he or she can make rental properties a side gig or a primary income source. The level of involvement also depends on the strategy. Traditional rental property is considered a more passive type of rental strategy compared to a more hands-on approach needed for a vacation rental property.
Additionally, a lot of real estate investors prefer to go with rental properties because when done right, they make for profitable cash flow properties. On top of that, rental property investors benefit from real estate appreciation. They can make as much money as they want to as rental property owners. After several years, if they decide to sell their rental properties, there is good money to be made because of how high real estate prices go up over the years.
Take for instance an Airbnb San Diego property. According to real estate website Mashvisor, the median price of a San Diego property in January 2022 was $1,212,089. Just three months after, in April 2022, the median property price in San Diego went up to $1,300,412. That’s nearly an 80-grand jump in property value in just three months. While the Airbnb rentals are doing very well in San Diego, owners can opt to sell their properties at a much higher price than the amount that the properties were bought for.
Like real estate wholesaling, rental property investments also come with disadvantages. One is the amount of cash needed to purchase the property. Some investors are able to pay for a property in hard cash. On the other hand, a greater number of investors face limited cash resources and depend on financing options to make the purchase. In some cases, would-be investors do not qualify for loans, making them miss out on excellent investment opportunities.
Another downside to rental property investing is its income stability. Rental property owners aren’t always guaranteed a regular income, especially individuals who choose to invest in short-term rental properties listed on Airbnb, VRBO, HomeAway, Vacasa, and other similar platforms.
Landlords of long-term rental properties, on the other hand, are also at risk of ending up with bad tenants. Such an undesirable situation can lead to lower monthly rental income, which can also mean investment losses if it keeps up in the long term.
How to Start Wholesaling Houses: 5 Steps to Get in the Game
If you really think wholesaling houses is a perfect fit for you, here are five steps to help you get started:
1. Do Your Homework
Performing your due diligence will almost always pay off regardless of your choice of investment. When it comes to real estate investing, it is especially important because we’re generally talking about large sums of money being invested in real estate properties. But even if you choose to go with a low cash output investment strategy like wholesaling, doing your research and analysis will help increase your chances of success.
Fortunately, a website like Mashvisor exists to help investors of all types find the right investment properties for them. It specializes in helping users conduct real estate market analysis to give investors a more accurate picture of what they’re getting into.
Mashvisor helps tens of thousands of investors find the best deals online based on their investment goals, criteria, and circumstances. To give you a better idea of what Mashvisor can offer its users, let’s take a look at a few of its most valuable real estate investment tools:
Property Finder
The website’s property finder is perhaps one of the most useful tools any Mashvisor subscriber will use. Users can find properties by simply entering an address, city, neighborhood, or zip code in the search field. It will then take you to a page where a map of the location is shown along with a list of available properties listed on the MLS. The properties are categorized as investment properties, traditional rentals, and Airbnb rentals.
Users can also narrow down their searches using different filters such as number of bedrooms, number of bathrooms, year built, area by the square foot, property type, and rental income among others. The feature makes finding income properties a lot more specific and tailor-fit for different investors’ needs, therefore, making it a lot more efficient.
Real Estate Heat Map
The next tool we will talk about is Mashvisor’s real estate heat map. The heat map functions similarly to a weather forecast map in that it is color-coded to show how certain areas are performing based on different categories.
The heat map’s filter can be edited by clicking on the drop-down menu at the left-hand corner of the map labeled “Heat Map Data Set.” Users can choose which categories they want to use for their searches such as traditional/Airbnb cash on cash return, traditional/Airbnb rental income, listing price, and Airbnb occupancy rate.
The color green represents areas with high numbers in a given category while areas that are in red indicate the opposite. Generally, investors select properties in green areas under almost all categories except the listing price. For listing prices, properties located in red areas are more affordable.
Mashvisor’s Real Estate Heat Map shows a color-coded representation of a particular neighborhood or location based on several metrics, including traditional/Airbnb cash on cash return, traditional/Airbnb rental income, listing price, and Airbnb occupancy rate.
Investment Property Calculator
What would market and investment property analysis be without a proper calculator to crunch numbers? Mashvisor’s investment property calculator is known to be one of the best in the market and online today because it uses the most up-to-date data and real estate comps. The tool also allows users to factor in one-time startup costs, recurring expenses, and even taxes to determine a potential investment’s profitability.
Based on the computation, a user can find properties that align with their projections using Mashvisor’s property calculator. It also gives users a side-by-side comparison between the numbers if a property were to be used as a traditional or vacation rental.
Rental Comps
People who are seriously considering investing in rental properties need to know how other similar properties are performing as rentals in a given area. Mashvisor gives users access to rental comps to see how their properties stack up against other similar rental properties. It allows landlords or Airbnb hosts to set prices accordingly to stay competitive and use it to get the edge on the others.
Performing your due diligence by gathering significant market information and neighborhood data is an excellent way to build a strong foundation for your wholesaling business.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo now.
2. Build a Strong Buyers List
Even before setting out to look for the perfect property to jumpstart your wholesaling business, it is highly recommended that investors curate a buyers list first. Wholesaling is largely dependent on sellers for inventory and buyers for sales. Even if you’re in a market chock full of great inventory, if you don’t have enough buyers to assign contracts to, you won’t be as successful as you expect to be in this line of business.
Wholesalers can build a good buyers list by attending real estate events and gatherings, email and social media marketing, as well as networking and connecting with as many people as they can.
3. Secure Your Financing
Before you even go out looking for property to wholesale, you must ensure that you have enough resources to back up your investment. Finding the right property won’t mean a thing if you don’t have the means to purchase the contract. Look for a private or hard money seller to align your services to before you get started. Doing this will help ensure financing quickly even before your first deal comes.
4. Spot the Best Possible Real Estate Deals
Once you have everything in place, now you can start looking for deals in your chosen location. This is where Mashvisor is especially helpful since it allows users to find the best possible deals on the MLS and off-market. You may also do it the conventional way by driving around town and talking to people to get leads. You can also try looking for them using public records.
5. Formulate a Well-Thought Exit Strategy
There are two main ways wholesalers make a profit from this type of business. The first one is by selling a contract by matching up sellers with buyers. This way, the wholesaler doesn’t need to buy the property but can still make a good profit on the transaction.
Wholesalers may also opt to do a double-closing where they buy the property and covers all closing costs. It will only work if the wholesaler finds a buyer who is willing to pay a whole lot more for the property.
Ultimately, the type of wholesaling deal will help point investors to the right exit strategy.
Wrapping It Up
To sum it up, wholesaling houses is a great way to get into the real estate business even if with very little to no resources to buy an investment property. It is especially helpful for first-time investors and those who are strapped for cash. However, as easy as it seems, it is not for everyone.
In our opinion, investing in rental properties provides investors with a more stable income source that offers excellent potential for creating a positive cash flow. Either way, an investor should always do the necessary research and analysis to ensure a greater chance of investment success.
To access Mashvisor’s real estate investment tools, click here to sign up for a 7-day free trial, followed by 15% off for life.