Real Estate Investing 101: Wholesaling Real Estate

What is it? Wholesaling real estate is often touted as an easy, low-cost method to get started in real estate. The theory is that if you can successfully wholesale a few properties, you can make enough money to buy your own properties to rent out or flip.

The goal of wholesaling is to find motivated sellers and distressed properties that can be bought below market value. You put an offer on the home as “Jane Smith and/or assignee” and then, before closing, you find another investor and assign the contract to them for more than you offered. The seller still gets the amount you offered them for their property, and the buyer (assignee) pays you an extra amount in the form of an assignment fee when they close on the property.

What do you need to know?

· How to build a network. Expect to spend a lot of time developing leads. Firstly, you need to find motivated sellers willing to part with their properties at prices below market value. Depending on the real estate market, this can be a piece of cake or really difficult. Secondly, while you're out there looking for unicorn properties, you need to get to know all the investors, landlords, and house flippers in town to have a ready list of prospective buyers when the time comes. As a wholesaler, you are a middleman between sellers and buyers.

· Property values. To make it as a wholesaler, you need to accurately determine how much a home is worth and how much you can assign the contract for. The prospective buyer will be considering the financing, repair, and holding costs they’ll have when flipping the property or if the potential rental income gives an acceptable return. Considering that you want to be paid an assignment fee as well, you can’t afford to offer too much for the property.

· Things can go wrong. If you put a home under contract and fail to find a buyer to assign the contract to, you will have to find the cash or financing to close or consider walking away and losing your earnest money deposit.

Is wholesaling real estate right for you?

Wholesaling can be a good fit for you if you are an excellent networker, a natural communicator, and a born problem-solver. Having prior experience in real estate is a good idea. You can get your fingers burned if you don’t know what you’re doing. In some places, you may also need a real estate license.

As a final word of caution, wholesaling sometimes gets a bad rap. This comes from wholesalers not disclosing what they do. The buyer might be unaware that they are not really selling their property to the person making them an offer and can become understandably frustrated when the wholesaler can’t find a buyer and the sale falls through wasting their time. Since wholesalers are typically working with distressed sellers or vulnerable people, this is downright unethical. If you are going to be a wholesaler, you should properly disclose what you are doing to all parties in the transaction, and you should generally try to be a good person.