Wholesaling is one of the best ways to get into real estate investing, especially if you don’t have a lot of money to invest.
Unfortunately, there tends to be a lot of confusion around wholesaling houses.
So to help eliminate some of the confusion, we thought we would answer some of the most common questions around wholesaling houses.
How Does Wholesaling Houses Work?
Wholesaling houses is when a real estate investor either buys a property or puts a property under contract with a seller and then immediately sells the property or assigns the contract for purchase to another buyer for a small profit.
Making wholesaling houses very attractive to real estate investors that don’t want to tie their capital up for extended periods of time and looking for fast profits.
Because while traditional house-flipping can often take 6 months or more and investing in rental properties can span years or even decades, wholesaling real estate is typically accomplished in less than a month and often within just a few weeks.
So now that we have a basic understanding of how wholesaling houses works, let’s take a closer look at the two main ways to wholesale a house.
Contract Wholesaling
When most people think of wholesaling, they typically think of contract wholesaling.
Which involves assigning a contract for the purchase of a property to another buyer.
As contract wholesalers only place properties under contract, so they can then find a buyer willing to pay slightly more for the property than they have it under contract for.
In order to assign the contract for purchase to the new buyer and make a small profit or fee for their efforts.
Which greatly reducing the risk to the wholesaler, as this form of wholesaling does not require the wholesaler to actually buy or take possession of the property.
Property Wholesaling
The other way to wholesale houses is property wholesaling, which differs from contract wholesaling, in that you actually purchase and take possession of the property.
Instead of just assigning the contract for purchase to another buyer.
Which does increase the risk to the wholesaler but also increases their potential for profit.
As property wholesalers can work with a larger pool of buyers including both cash investors as well as traditional homeowners.
And can take their time to find the right buyer for the property, willing to pay top dollar for the house.
How Much Can You Make Wholesaling Houses?
Wholesaling houses is a form of real estate investing and because of this, there can be a wide range in the amount of money you can make.
But, in general, a real estate wholesaler will usually make between $5,000 and $10,000 per deal with most full-time wholesalers completing about one deal a month.
Meaning on average you can expect to make anywhere from $60,000 to $100,000 a year as a full-time real estate wholesaler.
It’s important to keep in mind though that these are just averages, as real estate wholesaling is a form of investing, and as with any form of investing there are no guarantees.
Because while you could potentially make even more at wholesaling houses.
You could also make much less and potentially even lose money when wholesaling houses.
Is Wholesaling Houses Illegal?
Real estate investors often wonder whether wholesaling houses is illegal.
As some perceive real estate wholesaling to be somehow unethical or dishonest to the seller, especially when contract wholesaling.
Due to the fact that contract wholesalers never have any intention of actually buying the property they put under contract with the seller.
And instead always plan to assign the contract to another buyer before closing.
However, as long as everything is fully disclosed and the seller understands your intentions, in my opinion, there is nothing unethical or dishonest about it.
But whether something is ethical and whether something is legal are two very different things.
So is wholesaling houses illegal?
If you purchase and fully take possession of a property you plan to wholesale, this form of real estate wholesaling is completely legal.
However, if your contract wholesaling a property, where you’re assigning your interest in a contract to purchase a piece of property and never actually buying the property, this can be considered illegal in some states.
As some states consider this to be practicing real estate agency without a license, which is illegal.
Due to the fact that you don’t actually own the property, you are marketing and advertising for sale, when trying to find a buyer for your interest in the property.
So if you plan to contract wholesale property, you need to check your local and states laws around wholesaling real estate before doing so, in order to avoid legal issues.
For more information on the legality of wholesaling houses, make sure you check out our article “Is Wholesaling Real Estate Legal?“.
How to Start Wholesaling Houses
With real estate investing, often one of the hardest parts is trying to figure out how to get started and what you need to focus on first.
So to help you get started in wholesaling houses, we’ve created the below list of the most important things you need to focus on when first getting started.
1. Figure Out What Type of Wholesaling You Want to Do
The first thing you need to decide before you start wholesaling real estate is whether you want to contract wholesale or property wholesale.
As the type of wholesaling you plan on doing will have a big impact on the actual wholesaling process.
2. Acquire the Needed Funds for Wholesaling
The next most important thing to focus on when getting started in real estate wholesaling is coming up with the funds needed for wholesaling.
Keeping in mind that property wholesaling will have much higher capital requirements compared to contract wholesaling, due to the fact, that you are actually buying the property.
But even if you plan to only focus on contract wholesaling, it’s still important to have some working capital.
To not only handle the earnest money requirements to put the property under contract but also to market and advertise the home.
3, Become an Expert on Your Local Real Estate Market
The success of a real estate wholesaler hinges largely on their level of knowledge about their local real estate market and property values.
As real estate wholesalers are usually working with tight profit margins.
So it’s important to learn everything you can about your local real estate market and become an expert on property values before ever putting your first wholesale deal together.
In order to learn what you can comfortably offer the seller and still leave enough profit for yourself once you assign the contract or sell the property to the end buyer.
4. Focus on Buyers and Sellers Before Focusing on Properties
Beginner wholesalers will often make the mistake of focussing too much on the property side of real estate wholesaling and not enough on the people side of the business.
Because while finding properties is a vital part of wholesaling.
Cultivating relationships with sellers and especially potential buyers is just as important in ensuring success when wholesaling houses.
As wholesaling houses is very much a people business.
As a real estate wholesaler acts in essence as the middlemen between the original seller and the final end buyer of the property.
So if you’re not cultivating potential seller leads as well as cultivating relationships with potential buyers, you won’t be wholesaling houses for very long.
How to Wholesale a House: Step-By-Step Process
There is no better way to learn how to wholesale a house than by looking at the actual step-by-step process of a typical real estate wholesale deal.
Step 1 – Prospect For Deals on Real Estate
Most of a wholesaler’s day will be spent looking for deals on houses by scouring their local market for properties they can buy below market value.
And while there are endless ways of doing this the most popular ways include:
- Driving through neighborhoods looking for distressed or vacant properties.
- Searching courthouse records or using websites like foreclosure.com to find properties in pre-foreclosure.
- Sending out targeted postcards and flyers to specific areas in order to find motivated sellers.
- Using bandit or yard signs to advertise you buy distressed properties.
Step 2 – Narrow the List
A good analogy for real estate wholesaling is looking for a needle in a haystack.
Because you will more than likely, have to talk with many potential sellers, before finding a handful of properties that have potential.
So this step involves taking all the potential leads from the above prospecting and narrowing down the list to a handful of properties, where you might be able to do a deal.
Step 3 – Run the Numbers
Once you have a manageable list of potential properties and motivated sellers, you then want to run the numbers and begin determining the values for the properties.
By determining how much you can offer on the property and still leave enough profit for you to turn around and immediately sell the property for more to another buyer by assigning the contract.
Step 4 – Put the Property Under Contract
Once you and the seller have come to an agreed-upon amount that makes sense for both parties, you then want to put the property under contract, in order to protect and secure your interest in the property.
Step 5 – Find the Buyer
Now that you have the property under contract, you want to immediately turn your attention to finding a buyer for the property.
As all contracts for purchase will have a specific deadline for closing, which will typically be between 30 and 60 days.
Meaning you have a specific amount of time to either purchase the property or assign the purchase to another buyer before being in breach of contract, where you could potentially lose your earnest money deposit.
Step 6 – Assign the Contract
Once you have found a buyer willing to purchase your interest in the property for an agreed-upon amount, you will then assign the contract to the new buyer.
And they will move forward in the transaction to purchase the property.
Step 7 – Close the Property
Then the seller and the new buyer you found will head to closing, where the seller will get the amount agreed upon between you and the seller, the new buyer will get the property, and you will get the agreed-upon fee.
Do You Need Money to Wholesale Real Estate?
One of the best things about wholesaling real estate as opposed to other forms of real estate investing is that it requires very little money to get started.
Because unlike flipping houses or rental properties, which often require large sums of money or at least access to large sums of money, wholesaling houses does not.
As just a small amount of money, often less than $5,000, is enough to get started in wholesaling houses and to put your first few deals together.
The two main items you need money for when wholesaling houses are money for the earnest money deposit and money for marketing and advertising the property.
Earnest Money Deposit
Earnest money is a deposit you put down when you place a property under contract that shows your willingness to purchase the property, provides recourse to the seller if you don’t, and shows the seller you’re serious.
While it’s possible to put properties under contract to wholesale with no earnest money, most sellers are going to want to see some amount of earnest money, so they know you’re serious.
And while everything is negotiable when putting a property under contract including earnest money, typically an earnest money deposit is 1% to 3% of the agreed-upon purchase price.
So if you agree to buy the property for $100,000, a typical earnest money deposit for this deal would be between $1,000 and $3,000.
Marketing and Advertising
The other expense involved in wholesaling real estate is marketing the property you have under contract in order to find a buyer.
And while you could technically try to market and advertise the property with no money.
Having a small advertising budget of say $1,000 to $2,000 is going to make things a lot easier and require much less leg work on your part.
Can You Wholesale With No Money?
While it is possible to wholesale real estate with no money. Having a small amount of money to invest when wholesaling real estate will greatly increase your chances for success and make things a lot easier.
As it will provide the capital needed for an earnest money deposit as well as provide funds to market and advertise the property.
How Long Does it Take to Wholesale a House?
One of the biggest advantages of wholesaling houses is the quick turnaround time.
As professional wholesalers can typically wholesale a house in as little as a few weeks from start to finish.
Allowing them to quickly make a profit and move on to the next deal, which is why wholesaling houses is so attractive to real estate investors.
Can You Wholesale a House that Doesn’t Need Repairs?
When wholesaling houses, you will typically be wholesaling properties that are in poor condition in need of repairs.
As distressed properties usually provide a larger profit gap for you to work with.
However, there is a new type of property wholesaling called micro flipping, which uses big data and online research to find motivated sellers willing to sell their homes for slightly below market value that don’t need repairs.
Allowing you to buy the property as a wholesaler and then immediately sell it without doing any repairs.
The major drawback to this way of wholesaling though is that because these homes are usually in good condition, you will typically be selling these properties to retail buyers who are using some form of financing.
And because of this, contract wholesaling will typically not be possible.
As standard home lenders will not participate in contract wholesaling.
This means if you want to micro-flip property, you will have to have the necessary capital to actually buy the property, so you can then sell the property to the future retail buyer as the owner.
For more information on micro flipping, be sure to check out our article “Micro Flipping vs Wholesaling: What’s the Difference?“.
How Do Wholesalers Find Properties?
While real estate wholesalers use a variety of techniques to find properties, below is a list of the most popular ways.
- Pre-Foreclosures – The key to finding properties to wholesale is finding motivated sellers, and there is perhaps no seller more motivated than one facing foreclosure. For this technique wholesalers use a site like foreclosure.com to identify properties that are in pre-foreclosure status to find motivated sellers.
- Driving for Dollars – This technique involves driving through neighborhoods looking for houses that are in poor condition, vacant, or not being cared for and then reaching out to those owners to see if they would be interested in selling.
- Bandit Signs – Bandit signs are those signs you see along the side of the road that says “We Buy Houses – Any Condition”. Wholesalers will place bandit signs around areas they want to wholesale in, in order to find properties to wholesale.
- Direct Mail – Direct mail is another popular technique to find wholesale properties, which involves mailing flyers or postcards to houses in a particular area or neighborhood to let them know you buy houses.
- Zillow and Craigslist – Real estate wholesalers will also use sites like zillow.com and craigslist to find for sale by owners that might be open to wholesaling.
- Expired Listing – When a property doesn’t sell in the local MLS and becomes an expired listing. Real estate wholesalers will often reach out to the owners of those expired listings to see if they would be open to wholesaling their property.
- Rental Properties – Rental properties can be another great source for potential properties to wholesale.
How Do Wholesalers Find Buyers?
Once you’ve found a property to wholesale and placed it under contract, you’ve reached the halfway point in a wholesale deal.
But without a ready, willing, and able buyer to assign the contract to, there’s no way to complete the transaction.
Which is why it’s so important to start cultivating and developing a pool of buyers for your wholesale properties long before you put your first wholesale property under contract.
But how do wholesalers find buyers for their properties?
Below is a list of the most popular ways to find buyers for wholesale properties.
- Networking – One of the best ways to find buyers for wholesale properties is to build relationships with other real estate investors interested in buying distressed property.
- Business Website – A great way to find buyers, as well as sellers, is to create a website where you can build an online presence for your business, establish credibility for your services, and market your properties.
- For Rent Signs – For rent signs is another way to find potential buyers for your wholesale deals as most landlords are always looking for their next property to add to their rental portfolio.
- Real Estate Agents – There is no person more in tune and connected with the local real estate market than a successful real estate agent. Making Realtors a great source for investor buyers looking for off-market deals.
- Bandit Signs – While bandit signs are a great way to find sellers willing to wholesale their properties, they are also very effective at finding buyers as well.
Do You Need an LLC to Wholesale Real Estate?
You do not need, nor is there any legal requirement to have or use an LLC (Limited Liability Corporation) to wholesale real estate.
As many wholesalers when first getting started just use their personal names to wholesale their first few houses.
However, having an LLC is a good idea and a best practice, if you plan to wholesale lots of real estate or run a wholesaling business.
As an LLC will provide an extra layer of protection for your wholesaling business.
And allow you to run your wholesaling business more professionally by separating your personnel and business expenses.
Also, using an LLC for wholesaling, can provide many unique tax benefits come tax time.
For more information on the advantages of an LLC, check out this article on LLCs by LegalZoom.
Do Wholesalers Pay Closing Costs?
Real estate wholesalers do not pay closing costs, as it’s customary for the buyer to pay the closing costs in a real estate transaction, which includes wholesale transactions.
But in order to avoid any confusion at closing or an upset buyer, it’s important that this is clearly stated in the contract.
So there are no unpleasant surprises when everyone sits down at the closing table.
Remember though when dealing in real estate, everything is negotiable including who pays the closing costs.
So it’s always important to keep the end goal in mind when putting a wholesale deal together, which is to make a quick profit and move on to the next deal.
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