Wholesaling: How Does It Work?
As a real estate investor, there are many ways to acquire properties. You might purchase potential investment properties through conventional means using realtors, you may purchase houses at auction or through bank foreclosure, or you might use a wholesaler.
What exactly is wholesaling though? Join us as we dive into the answer.
What is wholesaling?
Wholesaling is when an individual (the wholesaler) assigns a purchase contract for a property on behalf of the seller to a buyer. As opposed to real estate agents, wholesalers don’t buy and sell properties themselves. Instead, they simply act as the middleman in a transaction between the seller and buyer.
Typically, wholesalers will deal with distressed homes and owners. These owners may not have enough funds to make repairs and want to dispose of their properties, often at a discounted price. Alternatively, they may have to sell their homes due to other circumstances but fear they won’t receive a fair price due to the state of the home. There are many scenarios where sellers may not be comfortable trying to sell their home. In these instances, a wholesaler will step in to produce the legwork necessary to sell these distressed homes.
What is the process for wholesaling?
Wholesalers generally follow a similar process to acquire properties suitable for a wholesale transaction. They’ll start by searching communities for houses that look distressed or abandoned. Once they find one that falls into this category, wholesalers will look up the current owner using tax records. If they successfully contact the owner, they’ll then ask if the owner is interested in selling their house. If they’re interested, the wholesaler will enter into a contract with them. This contract will allow the wholesaler to assign the sale of the property to a buyer on their behalf.
What are things wholesalers should bear in mind?
While the process may sound simple and straightforward, there are several things that people misunderstand about wholesaling.
Wholesalers should disclose their plan to profit off of the sale from the beginning
While it may be an uncomfortable conversation, wholesalers should inform the homeowner that they will be making a profit on top of the assignment of the home. While some homeowners may become disgruntled by this information, it saves wholesalers from encountering even more strained scenarios during the actual assignment of the property. In fact, in certain states like Texas, there are disclosure laws which mandate that wholesalers inform the homeowner that they are assigning a contract for a set fee. Wholesalers easily justify profits by how much work they will put into finding a suitable buyer.
There are no licenses required to Wholesale
Laws regarding wholesaling vary from state to state. It might be true that your state does not require licensing, but there are certainly exceptions to the rule. As Million Acres outlines, Philadelphia passed a bill in 2020 requiring wholesalers to pay a $200.00 fee for licensure. Additionally, these wholesalers are required to disclose all companies in which they hold ownership interests. In other instances, assignment of contract may not even be allowed in your state. It’s always best to double check before beginning your wholesaling career.
You don’t need any working capital to start wholesaling
Unlike real estate investors, wholesalers aren’t in the business of purchasing properties—they merely assign the contract of sale to potential buyers. However, this doesn’t mean that wholesalers don’t’ have any expenses. Marketing materials, whether digital or physical, will require some form of investment on the part of wholesalers. Also, it is wise to budget for gas mileage and working capital to cover any months without any successful assignments.
Wholesaling doesn’t take a lot of time investment
Wholesaling might sound a lot less involved than the standard real estate transaction: you merely assign a contract of sale between two parties and don’t have to deal with all of the other paperwork and processing. However, this couldn’t be further than the truth. Wholesalers put forth their fair share of sweat and footwork into the business. They’re constantly on the search for distressed homes, perform extensive research into finding owners of properties, and look tirelessly for potential buyers for their properties.
Wholesalers Are a Vital Part of the Investing Ecosystem
Wholesalers tend to get a bad reputation. People misunderstand the hard work and dedication it takes to be successful in the line of work due to a few disreputable individuals that may take advantage of others. Overall, they fill a niche that supports both real estate investors and homeowners through the facilitation of sales. Especially in markets like today where it’s tough to locate homes for sale due to low inventory, wholesalers can relieve the pressure of demand through their investigative work.