This guide will take you through the basics of wholesale real estate investing – wholesale real estate 101.
When you wholesale properties, you’ll make money quickly, with very little money to get started, and you can typically get your first check within a few weeks.
And if you get good at locating wholesale real estate properties, you can wholesale several houses every month and make a healthy income.
Make no mistake – no single article can cover all aspects of wholesaling houses.
This is a huge topic, so in this article we’ll cover the basics of wholesaling. And if you have any questions or comments, leave them at the bottom of this article.
I chose to write about wholesale real estate investing because it is my favorite way of making money in real estate investing.
It’s pretty easy, and it can work for anyone even if you are a brand new real estate investor.
So let’s get started.
What Is Wholesale Real Estate Investing?
Wholesale real estate investing is when you acquire a property well below market value, then sell it to another real estate investor at a higher price without rehabbing it even if it needs repairs. You must sell it at a wholesale price so your buyer can also make a profit after rehabbing the property. As a wholesale real estate investor, you can assign a contract for a fee or do a simultaneous closing where you buy and sell the property on the same closing table.
Some people confuse wholesale real estate investing with fixing and flipping houses. You don’t do repairs in wholesaling. Instead, your real estate investor buyer will fix it.
You are simply passing a great deal from a motivated seller to another real estate investor, and you make money doing so.
How Does Wholesale Real Estate Investing Work?
As a real estate wholesaler, you sign a contract with the home seller, usually a motivated seller. You then then find a buyer who is a real estate investor and sign another contract to sell. Your selling price is higher than the buying price and the difference is your profit. The contract can be a simple contract assignment and you collect an assignment fee at closing.
Your buyer will fix the house, and probably sell or hold it. To be successful in wholesale real estate investing, you need to be a go-getter who can negotiate low prices with motivated sellers.
Types Of Wholesale Real Estate Investing
There are two types of wholesale real estate investing:
1: Simultaneous Closing Or Double Closing
In simultaneous closing, you put a house under contract, identify a wholesale buyer, buy it, and then sell the house to your buyer.
So there are two transactions.
One where you buy the property and one where you sell the property. Both transactions usually take place at the same closing table.
So you actually own the house for a few minutes before you sell it.
Similarly, there are two sets of closing costs, one when you, and one when you sell.
You walk home with the difference between your buying price and the selling price less your costs in the transactions.
If you do a simultaneous closing, one of 2 things will happen.
First, you can use your buyer’s cash to close the first transaction when you buy the property. The same cash is used to close the 2nd transaction. You walk away with the difference.
In this transaction you spend no money.
Sometimes, you can’t use a lender’s cash to close the first transaction.
In this case you might need transactional funding to close the transaction where you buy the property.
If you use hard money lenders, they won’t need any money from you to fund such a transaction, or they’ll charge you points for transactional funding.
- When you wholesale a property through simultaneous closing, your buyer will not know how much money you make in the deal.
- If you live in a state that does not allow contract assignments, you can still wholesale properties legally.
- If your buyer is borrowing money from a bank, some lenders require a seasoning period before they can finance a property. For this reason, always specifically ask for the source of cash from your buyer before you sign a contract with them.
- Since there are two sets of closing costs, you’ll typically have to cater for one of the closing costs – typically when you are buying.
2: Wholesale Contract Assignment
Contract assignment means you identify a house below market value, put it under contract, and then assign that contract for a fee to a wholesale real estate investor or buyer.
In this case you do not actually sell the house, but you simply sell your right to buy the house to the wholesale buyer.
You collect an assignment fee at closing.
Contract assignment is the simplest form of wholesaling properties.
Note that you do not own the property at any time during the transaction.
You simply put the house under contract, and then you sell your right to buy the property for an assignment fee to another real estate investor.
The final closing statement also includes the assignment fee, meaning that all parties know what you make in the deal – your seller and your buyer.
Be careful not to lose the deal because some seller or buyers could develop cold feet when they see how much you are making.
To eliminate this risk, I only do assignment of contract when I stand to make little money. I use simultaneous closing when I stand to make $5000 or more in the deal.
The biggest advantage is that even with little to no money, you can make a deal happen and walk away with a profit.
- Contract assignment eliminates the need for two transactions with two closing costs
- You must show the assignment fee in the contract, so your buyer knows exactly what you’re making.
- Some deals cannot be assigned, such as those involving a Realtor or REOs. Such contracts usually specifically disallow contract assignment.
How Do Real Estate Wholesalers Get Paid?
As a wholesale real estate investor, you make money when your buying price is lower than your selling price. In contract assignment, your profit is the assignment fee. In simultaneous closing, your profit is the difference between your buying price and the selling price less your closing costs in the transactions.
Note that in both cases, you get paid because by locating properties well below market value, your real estate investor buyer also makes a profit. You must wholesale properties at wholesale prices.
This means you must be good at locating properties that are well below market value. Typically, the cheaper you buy the property, the more money you make.
You’ll find it easier to wholesale properties if you leave enough profit for your buyers.
Is Wholesaling Real Estate Profitable?
Real estate wholesaling can be very profitable source of cash flow. If you are good at locating properties below market value, you can wholesale several properties every month. With most wholesale deals fetching $5000 and up, it’s possible to make a healthy income as a wholesale real estate investor.
Wholesaling properties is the easiest form of real estate investing because you don’t need to rehab properties. It also requires little to no personal finances or experience to get started.
How Much Money Can You Make Wholesaling Real Estate?
In most metro areas, it’s possible to wholesale 3 to 5 deals every month. With each deal typically fetching $5000 to $10,000 in profit, you can make a lucrative income every month. Even though the profits for wholesale real estate investing are lower than other real estate investing business models, this can be a great source of cash flow for your business.
You can get your check in 2 to 3 weeks when you close your deal. This is the quickest way to make money in real estate investing.
Do You Need Money To Wholesale Houses?
You need very little money to wholesale houses. When you put a house under contract with your buyer, you need some earnest money, typically $500 or less ($100 will do). Since you’re buying and selling houses quickly without making any repairs, you don’t need a lot of money.
This is what makes wholesale real estate investing really easy to get into for beginners and seasoned real estate investors alike.
Can I Invest In Wholesale Real Estate With No Money?
The simple answer to this is “no”. At the very least, you do need earnest money for each deal. This means you can start wholesaling houses with $500 or less. You might also need to spend some money locating houses to buy – typically sending post cards to potential sellers. You also need a real estate investing website to attract motivated sellers.
For example, if you spend $300 to send your post cards, and $360 for a website, and you spend $300 for earnest money, you can get started in wholesale real estate investing for under $1000.
I have closed deals with only $10 earnest money, but you need to show some bigger commitment for some sellers to trust you.
Do You Need A Real Estate License To Wholesale?
You don’t need to be a licensed real estate agent to wholesale properties. You just need to hold the right to sell the property in simultaneous closing, or to assign the contract. However, some states such as Illinois now require a real estate license to assign contracts if you assign more than a given number of wholesale deals. You can still wholesale though simultaneous closings without a license.
Can you wholesale as a realtor?
If you are a realtor, you can wholesale real estate deals without breaking any laws. Even though there are no real estate commission splits when you assign a contract, or close a simultaneous closing in a wholesale deal, it’s legal to wholesale as a realtor. You do have to disclose that you are a realtor in your real estate contracts.
Let’s look at some details.
First of all, I am not a lawyer, and you should not take this advice as legal advice. Consult a lawyer in your state to make sure you do not break any laws.
Is Wholesale Real Estate Investing Illegal?
Wholesaling properties is perfectly legal. Depending on your state, you’ll find it easier to get a real estate license to be a wholesaler, whether you do contract assignments, or simultaneous closings. In most states you can wholesale comfortably without a license.
The question about whether wholesaling is legal or not is one of the most hotly debated questions in real estate investing. Some will tell you it’s legal, others will tell you it’s not.
So who do you listen to?
Both points of view have merit.
Some wholesale real estate investors have ended up in trouble because they did not follow the law.
A few cases in Ohio come to mind.
I could quote other cases but this is the best compilation of many cases involving real estate investors while wholesaling houses.
The most common reason seems to be acting as a broker or agent without a license.
So how can you wholesale real estate without acting as a broker or real estate agent?
For our purposes, we’ll use broker or real estate agent interchangeably to mean the same thing.
Who is a real estate agent / Broker?
A real estate agent is a trained, licensed professional who represents buyers and sellers in real estate transactions.
This of course, is a general definition.
Each state also has its own refined definition.
Texas has a long definition, so I’ll not quote it here.
“‘Broker’ means a person who, for another, and for a compensation or valuable consideration directly or indirectly paid or promised, expressly or impliedly, or with an intent to collect or receive a compensation or valuable consideration therefore, appraises, auctions, sells, exchanges, buys, rents, or offers, attempts or agrees to appraise, auction, or negotiate the sale, exchange, purchase, or rental of business enterprises or business opportunities or any real property or any interest in or concerning the same.”
“listing, selling, purchasing, exchanging, optioning, leasing, renting of real estate, or any real property interest therein…” and “Negotiating or offering to negotiate, either directly or indirectly, the purchase, sale, exchange, lease, or rental of real estate, or any real property interest therein.”
Any person other than a real estate salesperson, who, directly or indirectly, while acting for another, for compensation or a promise or an expectation thereof, en- gages in any of the following: sells, lists, buys, or negotiates, or offers to sell, list, buy or negotiate the purchase, sale, option or exchange of real estate or any interest therein or business opportunity or interest therein for others;”
There are many more, but it seems all the definitions point to representing someone in a real estate transaction.
When can you break the law when wholesaling?
You do not need a license in simultaneous closing because you sell a property that you actually own – even if for just a few minutes.
In contract assignment, some states argue that you should not market real estate property that you do not own. They include a marketing clause in their definition of a broker.
So you could easily get into trouble for locating a property, putting it under contract, promoting it all over Craigslist and other places, then assigning the contract to another investor.
You could probably successfully argue this out and win, but how comfortable would you be defending this to your state’s real estate commission or a judge?
If it makes you uncomfortable, then there are a few ways you can protect yourself.
How Can You Wholesale Real Estate Without Breaking The Law?
There a few ways you make sure you don’t get into trouble wholesaling properties.
i) Talk to a real estate lawyer in your state
Make sure you are not break any laws.
You can still get away with assigning real estate contracts, but make sure you are not breaking your local laws.
ii) Get a real estate agent’s license
This would just cost you some hours of training and around $2000 when all is said and done.
Then no one can accuse you of practicing real estate without a license.
And you’ll never have to worry about not breaking the law.
You can then wholesale properties all day long.
iii) Do simultaneous closings
As we have seen, when you do simultaneous closings, you actually own the property, then sell it, so you are perfectly safe without a license.
However this will limit the type of properties you can wholesale because you need more equity to wholesale your houses this way.
You also have to pay some closing costs in simultaneous closings.
If you were assigning real estate contracts, you can get away with an assignment fee of as little as $1000 with a marginal deal.
Is Wholesaling Real Estate A Good Idea?
Wholesale real estate investing provides a good supply of cash for your business. Since wholesaling does not require a lot of money to get started, and it’s a short-term investment strategy with low risk of making losses, it’s a great way get into real estate investing. If you are a seasoned real estate investor, it’s a great way to maintain a good cash flow.
Of course, we wholesale real estate to make profits – this business model offers the fastest way to make money in real estate investing.
Is Wholesaling Real Estate Ethical?
Wholesaling properties is totally ethical. You are simply finding great deals at very low prices for other real estate investors. Since you sell them at wholesale prices, you provide a very crucial service to investors who can’t find deals from motivated sellers. Secondly, you might find it impossible to fix all your properties. Wholesaling them to other real estate investors who can do rehab is the best way to go.
Third, most of these properties can’t be sold on the MLS because they need repair, and in most cases the seller has very little time to sell before they go into foreclosure. As a real estate investor you therefore provide a great service both for the seller and your buyer.
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There you have it.
Hopefully the information in this article will get you started in your journey in wholesale real estate investing.
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