What is Real Estate Wholesaling?
What Do I Need to Wholesale Real Estate?
Do I Need a Real Estate License to Wholesale?
What Are The Risks of Real Estate Wholesaling?
Wholesaling real estate is a great way for anyone to get started in real estate with little capital or experience. Wholesaling has low barriers to entry, but has the potential to create large amounts of capital without ever taking ownership of an asset. While it has gained popularity as of late, wholesaling as an exit strategy has been around for decades. If you’re looking to get started in real estate but don’t know where to start this blog is for you!
Are you looking to get started in real estate ASAP? Read this blog and learn the other best ways to get your foot in the door!
What is Real Estate Wholesaling?
Real estate wholesaling is when an investor puts a property under contract, and in turn sells the rights to the contract to another investor for a higher price, collecting the difference as profit. Wholesalers act as a middle man, connecting buyers and sellers, and taking a profit on top of the sale price of a property. In order to wholesale real estate, you must first get a property under contract. This is done by finding a homeowner looking to sell their property for a price you both agree upon.
For example, if you find a seller that is asking for $80,000 for their home you would sign an offer to purchase agreement for that property at $80,000. Then you’d reach out to investors and tell them they can buy the rights to purchasing that home for $90,000. Next, you’d assign the contract to that investor, giving them the rights to buy the property for $90,000. When the property closes a few weeks later, you’d receive an assignment check for the difference in purchase prices and profit $10,000!
The ability to profit on a property you never own, without a real estate license makes wholesaling one of the easiest and most profitable, legal exit strategies in real estate.
What Do I Need to Wholesale Real Estate?
There are SIX key components you need in order to be able to successfully wholesale real estate:
- A Motivated Seller
- An Assignable Offer to Purchase Agreement
- An Interested Investor
- An Assignment of Contract Agreement
- A Professional Real Estate Attorney
- Adequate Due Diligence
A motivated seller is a homeowner who is ready to or needs to sell their home for whatever reason. Whether it be inheritance, divorce, a new job, or any other reason. Offer to purchase agreements are fairly easy to find, ask a realtor, attorney, or wholesaler for the one they prefer! Investors are also easy to find, join some Facebook groups and check the comments for investors in your area. Your best bet with an assignment of contract agreement is to ask a real estate attorney, who can be found with a quick google search and a phone call.
If you’re already active in the real estate industry, odds are you already have these tools at your disposal. Wholesaling is just another exit strategy for investors to utilize when they have a deal in their pipeline.
Do I Need a Real Estate License to Wholesale?
To complete a wholesale transaction, a real estate license is often not required. Laws and regulations vary state-by-state, so make sure to do research on your area and speak to an attorney before you enter any purchase agreements.
Most times, as long as you don’t breach any contracts or break any rules you’ll be in the clear. The crucial part of getting a property under contract that you’re wholesaling is the assignability of the contract.
An assignable contract will have some language like the section depicted above. Once you have determined your contract is assignable, you are all set to wholesale real estate!
What Are The Risks of Real Estate Wholesaling?
When wholesaling real estate, you never actually take ownership of the asset you are trying to source. This means that a lot of the liability and risk that comes with property ownership is absent in this strategy. Although, there still are great risks you take on when entering into an agreement with a homeowner.
For example, if you tell a seller they will receive $50,000 for their property but you can’t find any investors to purchase it for even $51,000 you’ll probably have to cancel the contract. In North Carolina, our contracts have inspection periods that allow for the cancellation of a contract and the reimbursement of any earnest money deposits (EMD) put down on the property. This mitigates risk, but in the event you cancel a contract after an inspection period ends, you’ll lose your EMD.
Another known risk in wholesaling real estate is the chance for your investor, or assignee, to back out. In the event this happens, you’ll most likely be left with little time to find a new investor to buy the property. Therefore, in most cases the best path is to cancel the contract and move on. Even if that means taking a loss of your EMD or due diligence money.
This emphasizes the importance of never entering into a contract you won’t be able to fulfill. It is important to do your own due diligence on every property you are looking to source or acquire.
Before you enter any purchase agreement with the intention of wholesaling, it is a best practice to inform sellers of your intentions in order for no surprises to come up. Communication is crucial within wholesale real estate deals; bad communication can cause these deals to fall apart.
What’s the difference between earnest money deposits and due diligence fees?
Bottom Line
Wholesaling real estate is the quickest and easiest way for someone with little experience to get started in real estate. It has been done for years and will continue to be a great exit strategy for any investor. Follow the steps listed above and you’ll be on your way to building generational wealth. If you have any questions, or if we missed something, leave your thoughts in the comments!
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