Real Estate Wholesaling: Pros and Cons
Real estate wholesaling is a way to buy and sell real estate. It’s a specialized form of investing that requires you to do more than just find good deals on homes and then flip them for profit. Instead, it’s about finding sellers who are motivated to sell and making them with an offer they can’t refuse. In this post, we’ll explore what exactly wholesaling real estate entails, how it works, its pros and cons, and whether or not it’s right for you.
What is Real Estate Wholesaling
Real estate wholesaling is a method for flipping houses that involves finding and buying houses at a discounted price, then selling them to other investors at a profit. This can be done on your own or with the help of an investment group. Wholesalers will often use cash offers to buy properties to get them at a lower cost than the home’s actual value. Then, once they’ve purchased the home from you, they’ll market it to other investors who may wish to purchase it as well and make money by reselling it for more than what was originally paid for it.
Wholesaling can be tricky because you’re not taking title or possession of any property until after all negotiations are completed, and funds have exchanged hands between buyer and seller—and sometimes even then!
How do wholesalers make money on real estate? Real estate wholesalers buy homes at a discount from motivated sellers who are willing to sell at a deep discount. A real estate wholesaler is different from a real estate broker because the former does not take title to the property; they simply contract to purchase it for their own account and then sell it again.
There’s a lot of brokerages that will not allow you to wholesale and they don’t promote it, and that’s all right. They have different goals and different structures on how they operate their business, but it’s important to note that there’s nothing that makes wholesaling illegal.
A lot of brokerages will say that, unfortunately, they don’t understand. Maybe they’ve never done it, but there’s a way to do it correctly. I want to talk about the pros and cons of wholesaling. So the cons let’s start out with, there’s not many, in my opinion, it’s a tool that you have. Some property owners don’t want to list their property.
This is just an option if they don’t want to list. Maybe you wholesale it, or maybe you just buy it. There can be some things in there that can get you in trouble. That would be the biggest con, but to alleviate that disclosure, lay out everything about what you’re doing and about who you are.
You have the ability to assign the contract per the agreement. Directly after that you have the ability to assign the contract. Then what happens is you have a new contract with the end buyer that you have them sign.
The tricky thing is you have to match up all the timelines. Let’s say you have a 10 day due diligence period on your first contract. On the second one, you’ve got to have zero days or less than 10, because if it was more than 10 and they didn’t back out, then you’d be stuck on this first deal. So those are the biggest cons: not knowing what to do or doing it the correct way and getting stuck into a deal.
There can be some negativity on the way people view it. Unfortunately, I feel like that’s a lot of cases because they don’t understand it. We’ve wholesaled plenty of deals where sellers are happy. They knew what we were doing and everything worked out great. We got them exactly what they agreed to.
The other con I would say is sometimes you’re going to regret wholesaling the deal and wish you would’ve bought it. That’s about it. We’ve wholesale deals and we’ve made really good fees on them and looking back, we wish we still owned those properties. Ultimately, you’re making a quick fee, but you’re not getting all the benefits of real estate, such as the monthly income and the appreciation over the long run pros.
I would say there’s so many, you’re adding a new tool to be able to get deals done. You’re adding an option. Like I said earlier, to get a deal done. If somebody doesn’t want to list with you, you get to build a database of investors where you’re sending them off market deal. You can potentially partner with those guys.
Even if you wholesale it, you can wrap your wholesale fee into equity and you guys are buying that together. I say, don’t fall into the trap of not learning about wholesaling and thinking that it’s illegal. Even if you’re not going to wholesale yourself, you should get to know who the wholesalers are because they’re finding a lot of opportunities that most agents aren’t, because they’re doing things that most agents don’t want to do.
Which is ultimately in a lot of cases, the hard work. They’re door knocking, they’re cold calling, and they’re sending mailers. They’re drumming up off market opportunities. It’s extremely valuable to have it as a tool, to have connections, to find these off market deals and to be able to utilize it, to make money in the real estate business.
I would say if you are thinking about wholesaling, dive in and learn as much as you possibly can, talk to as many people as you can. There’s tons of education out there. There’s a lot of people doing it and any way we can help we’re here, we’re here to be a resource. But just understand the cons can be risky if you don’t play the deal, but that’s about it. So understand how to operate it, what the contracts are that you need to get in place. The second contract that I talked about sometimes people have their own attorney draw those contracts up. We have our own versions of these that we’re happy to share. Reach out anytime and go dig up some opportunities.
Pros of Wholesaling Real Estate
If you’re looking to make a lot of money with real estate but don’t have much cash on hand, wholesaling is a great way to do it. There are several reasons for this:
You don’t need a large amount of cash to get started
You don’t have to have a lot of money to start wholesaling. In fact, you can get started with just $2,000 or so in cash.
You can make money even if you don’t take title to the homes yourself. That means no more waiting on repairs or inspections—you’ll just be getting paid for finding great deals that others will fix up and sell on their own!
If you’ve got the grit, you can make smart deals and make big profits
When you’re looking to make a profit, the most important factor is finding motivated sellers willing to sell for a price that allows you to make a profit. The more motivated they are to sell their property, the more money they can earn from that deal. If a seller has already done all of their homework and determined a fair price for their home, then it might not take much effort at all for them to accept your offer.
However, things get trickier if the seller isn’t ready to move on from their current property or doesn’t know how much it’s worth in today’s market! You’ll likely have a lot more work ahead of you if this is the case—but don’t worry—if you’re willing enough (and willing to put in some legwork), there’s no reason why big profits can’t be had when selling real estate through wholesaling!
Real estate wholesalers don’t take title to homes. Instead, they contract to buy homes at a discount
Wholesalers typically buy homes at a discount, which means they don’t take title to the property. As a wholesaler, you’ll contract with the homeowner or the bank to purchase their home for a small percentage of its market value. You won’t be a home builder, nor will you be in any way responsible for building or remodeling the property.
Additionally, wholesalers are not real estate agents or property managers—they do not represent either party in the transaction and do not manage homes after investors purchase them. Wholesaling is also distinct from development because it does not involve purchasing raw land and building new houses on that land. All the extra difficult parts of flipping real estate, from repairs to upgrades? They are not your problem. The wholesalers are just there to facilitate the transfer.
Cons of Wholesaling Real Estate
Wholesaling is a risky business. It’s not uncommon for wholesalers to lose money on deals or have to wait months, even years before they see an acceptable profit on the investment. However, it is possible to make money with this strategy if you are successful—the key is being disciplined and patient enough to wait for the right deal.
You need motivated sellers
For wholesaling real estate to be profitable, you need motivated sellers who will accept low offers or have a high enough cash flow to take advantage of reduced interest rates by paying off their existing mortgage early.
Motivated sellers typically fall into two groups:
- Those who want to sell quickly and can’t wait for the traditional real estate process to play out, such as job changes, divorces, etc.
- Those that have been working at house flipping for a while and want out. These sellers may have a portfolio of real estate that they purchased at a discount themselves. Then, due to unexpected expenses or lack of capital, they find themselves in over their heads and need to liquidate some of their overhead.
You need motivated buyers
You also need buyers who are willing and able to purchase properties at discounted prices without financing them first (or having another form of credit available). Additionally, as a wholesaler, you’ll want to understand how financing works so that when you find a buyer with good credit but little cash on hand, you can help them obtain funding from lenders who aren’t as strict about asking questions!
How To Wholesale Real Estate
To get started wholesaling real estate, just follow these five simple steps:
Know your numbers
Even motivated sellers have an understanding of the value of their property. Therefore, when you contact a motivated seller to attempt a deal, you must go into the negotiations with a keen understanding of the neighborhood, market conditions, and comparative market value of the property in question.
Start building a buyer’s list
Who are the cash buyers in your area? Are they house flippers? What about companies that specialize in distressed homes or tear-downs? Networking with local real estate professionals can help you start building a robust list of cash buyers.
Explore financing options and choose the best one for you
You don’t need much money to begin a career in wholesaling real estate, but it helps to have some operational cash to start with. Establish a relationship with a local hard money lender to ensure that you have access to the liquid capital that you need to make the next deal.
Start building a seller list
Get to know local house flippers and real estate investors. Sometimes these businesses over-extend, and it’s necessary to off-load a property or two to free up some cash.
Begin searching for potential wholesale opportunities
Before purchasing your first property, take the time to evaluate what makes a good opportunity and what type of property you would like to specialize in if any. Then, sign up for any auction notification lists available and keep an eye on social media for mentions of good deals.
Building your Cash Buyers List
You will find that you are devoting a lot of time to building your buyer and seller lists in the first year of your wholesaling business. Since wholesaling relies on an entirely different business model based on quick cash sales, it won’t be enough to merely put out a few ads and wait for people to contact you. Instead, you will build your lists through hard work and marketing directly to the cash buyers and motivated sellers in your area.
Once you have a list, things will get much easier for you, and you can quickly scale and grow your business. Here are some ways for you to build your list:
Get out there and meet people
Networking is one of the best ways to make the kind of relationships that generate leads. As a new entrepreneur, you want to get out there and get to know local business leaders, realtors, investors, and lenders.
Local auctions
Distressed and foreclosed properties can often get picked up for much less at auction. Check out local auctions at courthouses and online to see what is available in your area. Introduce yourself to the companies that handle these auctions, so they know to reach out when suitable properties are coming on the market.
Cash lenders
Hard money lenders play an important role in wholesaling real estate since these are the businesses that focus on higher-risk investments with quick pay-offs. Having a connection in hard money lending can also help you sell your investments since you can direct buyers to an established lender.
Social media
Property owners sometimes try to sell their own properties by listing them for sale on social media and online marketplaces. Craigslist, Facebook Marketplace, and even Instagram can be good places to look for properties for sale with motivated sellers.
Conclusion
Real estate wholesaling has its benefits and downsides. While it can be a profitable way of investing in real estate if done correctly, it is also one of the riskier strategies out there. If you decide to go with this option, then make sure that you have a solid plan before starting any deals because getting into them blindly will only lead to trouble down the road.
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