Real estate wholesaling is a kind of arbitrage in which a party known as a wholesaler negotiates a contract for the right, but not the obligation, to purchase a property for a particular price. Rather than completing the purchase, however, the wholesaler finds a buyer who will pay a higher price. The wholesaler then assigns that buyer the right to purchase the property for the higher amount and pockets the difference.
The wholesaler acts as a middleman between motivated real estate sellers and buyers, usually cash buyers who plan to renovate the property. Wholesaling may also be called contract assignment because the wholesaler assigns the contracted right to buy a property to another party.
How Real Estate Wholesaling Works
A real estate wholesaler begins by identifying motivated sellers who, in exchange for a fast and hassle-free transaction, are willing to sell their property for below its market value. Wholesalers typically find motivated buyers through online and newspaper ads, outdoor advertising and direct mail marketing.
Buyers may be motivated to work with a wholesaler for personal reasons, such as a job transfer or health issue, that require a quick sale. Often the property needs repairs the owner can’t afford or doesn’t want to make.
Once a suitable seller has been identified, the wholesaler negotiates a contract giving him or her the right to buy the property. A wholesaling contract specifies the price and sets a mutually agreed-upon time limit that may be days or weeks. Crucially, it contains an assignment clause granting the wholesaler the right to transfer the right to purchase the property to another party.
Negotiating a wholesale contract requires making it clear that the wholesaler is not buying the property but will find another buyer. The wholesaler often needs to explain carefully to the seller how he or she is making money on the transaction.
After negotiating the contract, the wholesaler may a do a title search to ensure there are no other claims on the property. Then the wholesaler will present the deal to cash buyers. These are typically house flippers and rehabbers.
Having a list of cash buyers is vital to successful wholesaling. Wholesalers develop buyer contacts using advertising and networking. When the wholesaler finds a buyer who wants to acquire the property for a suitably higher price, he or she assigns the contract to the buyer. Then when the deal closes, the wholesaler pockets the difference.
A Case in Point
For example, a wholesaler’s Cragislist ad may draw an inquiry from someone who quickly needs to sell an older home in need of repairs. The wholesaler determines the home’s market value after repairs is $200,000.
The wholesaler negotiates an assignable contract to purchase the property for $160,000 and then finds a cash buyer who will pay $170,000.
The difference, called an assignment fee, is $10,000 and that is the wholesaler’s profit.
Real Estate Wholesaling Pros
Wholesaling requires little or no capital, which distinguishes it from other types of real estate investing. Wholesalers don’t need good credit either, since they aren’t borrowing any money.
With no cash in the deal or commitment to buy the property, wholesalers have little risk. They lose nothing but their time if the contract expires before they find another buyer. And they don’t face having to make expensive and possibly unexpected repairs.
Wholesaling deals can be completed relatively quickly as well. While a house rehabber may need several months to acquire, rehab and sell a property, a wholesaler can be paid within four to six weeks of finding a buyer.
Real Estate Wholesaling Cons
Wholesale deals generate less profit per contract than house flipping or other approaches that require more commitment and risk. Around $5,000 is a typical wholesaler’s profit on a deal.
Wholesalers also have to find buyers fast, because the wholesaling contract is only good for a limited time. And they need cash buyers, because lenders tend to avoid deals involving assignments.
Be sure to ask all the questions you need to to get a complete picture of the possibilities and potential perils of real estate wholesale.
The Bottom Line
Real estate wholesaling requires finding properties available at below-market prices and having access to cash buyers. Although wholesaling calls for neither cash nor good credit, a wholesaler may have to do a sizable volume of deals because the profits per transaction are modest.
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Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/ridvan_celik, ©iStock.com/irabassi
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