In this uncertain economy, many people are searching for an alternative to stocks as an investment strategy. Fears of inflation and a bear market may make you afraid to invest at all. However, real estate is still a solid way to grow your money.
As a real estate professional or enthusiast, you know that you can pursue several profitable investment paths. You can purchase real estate as a long-term investment and watch as it appreciates. Perhaps commercial real estate appeals to you. You may decide to flip properties to make quick profits. Or you may choose another path: wholesaling real estate. Unlike flipping real estate, this method involves no renovations or high carrying costs. When done correctly, wholesaling is a great way to make a hefty profit in a short period of time.
What is Wholesaling?
Wholesaling in real estate is quite different than wholesaling in the retail businesses. Wholesaling in retail means buying a large number of certain goods and then selling them to retailers. These retailers will then repackage smaller quantities of these goods and sell them to consumers for a much higher price. When you wholesale real estate, you find a seller, usually the owner of a distressed property, and contract with them for the right to buy their property for an attractive price. Then, you find a buyer and contract with them to buy the house for a higher price than your deal with the seller. The difference in these prices is your profit, which is often an excellent one.
Some people think that wholesaling is the same as flipping, but they bear little resemblance to each other. When you flip a distressed property, you have to actually buy the property, pay for extensive renovations, and then often end up with high carrying costs. Every day that your property goes unsold, the less profit you stand to make. When you wholesale a property, you are purchasing the right to sell a home and then finding a buyer for the property as-is.
Wholesaling is meant to be a short-term real estate strategy that offers investors quick and significant profits. When you find a suitable discounted property, you will generally use a purchase and sale agreement, which is a contract stating you will find a buyer for the property. You will then sell your buyer the right to buy the property at a profit for you. You never actually own the property.
How to Wholesale Real Estate
How to wholesale real estate is not particularly complicated. Like all good real estate investments, a successful wholesale deal begins with intensive research. You will need to understand your local market in order to find potentially profitable distressed and/or discounted properties. Once you have a handle on local prices, desirable neighborhoods, buyer demand, etc., you will need to complete the following steps:
Create a Potential Buyers’ List
Your role in a wholesale real estate deal is as a matchmaker between the property owner and ultimate buyer. Before you enter into a contract with a seller, you need to establish connections with potential buyers. In that way, you are more likely to quickly close a smooth deal. You can create this list by tapping into your professional network of real estate professionals, insurance brokers, and mortgage lenders. You should also use other resources, including advertising your services on social media and even through yard signs. Cultivating these buyers will help ensure that you can sell your contract to buy when the time comes.
Arrange Financing
If you do not have much money to invest, wholesaling real estate can be a perfect fit. For many, this real estate transaction means investing little if any money. You are signing a contract to find a buyer for the property and not assuming remodeling costs or long-term financing. This type of deal is attractive largely because you can make money without assuming much financial risk.
Some deals may require some capital for marketing efforts and necessary deposits. While you won’t complete financing until you’ve found your deal, you should have it lined up before you seek a contract. For this type of real estate transaction, you may need to turn to private financing or hard money – financing based more on the potential value of the property after repairs are completed than on your personal credit history or income. You will be pursuing a short-term loan, usually at higher interest rates than traditional financing but with much less red tape. You may also be able to secure financing from your friends and family for this type of contract purchase.
Find Distressed Properties
As with any real estate investment, you will need to use multiple resources to locate the right property. You can turn to your connections in the local real estate market to find distressed or discounted properties that are suitable for wholesaling. You may also search local tax rolls to find properties with delinquent taxes or search court records for properties in foreclosure. They do need to be desirable properties in some way, such as location, design, purpose, etc.
Of course, one of your best resources is ProspectNow, the online property database with millions of real estate listings. With some dedicated research, you should be able to find multiple properties that are a good fit for your wholesale deal. Once you have located possibilities, you can choose one and then contact the owner to assess their interest.
Negotiate the Contract
Once you find the right property and a willing seller, the next step is negotiating the contract. This step is crucial to your wholesaling profit. You must negotiate a low enough price with the seller to allow you to make a reasonable profit. Of course, the property seller will understand this process as well, meaning you can expect a lively negotiation.
You should seek the help of a lawyer to draw up the contract, particularly if you are new to this process. Legal advice will help you limit your risk and close any loopholes that could negatively affect the deal.
Once you have this contract signed and sealed, you will need to find your buyer and enter into another contract negotiation that works for both parties.
Assigning the Contract
When you assign the contract, you are participating in the doctrine of equitable conversion. Signing the contract means that you have the right to purchase the property in return for an equitable interest in the home. When you sell the contract, you are merely selling your rights specified in the contract to the buyer. Again, you never actually own the property.
Once you and the buyer are in agreement, you will need to assign the purchase contract to them. Completing this process includes agreeing to the assignment fees and deposit amount. This stage ensures that you will collect the difference between the original contract amount and the buyer’s price.
Completing the Closing
As always, no deal is complete until the closing is finished. Even though you do not actually own the property, you should attend just to ensure that everything goes smoothly and you are able to collect your money. If all goes well, you should see a solid return on a short-term investment.
Pros and Cons of Wholesale Deals
The advantages of wholesaling real estate include low risk, high-profit potential, and fast turnaround. The process does come with some disadvantages, however. You should be able to make good supplemental income from wholesaling, but the profits do not always come regularly. Most wholesalers, at least at first, need to have other sources of income.
Remember, once you sign the contract, you have the responsibility to find a buyer. If you cannot, you risk losing your deposit money and facing any other penalties written into your contract with the seller. Low-risk does not mean no-risk – you can still lose money. Also, your reputation as a budding wholesaler will be damaged.
Finally, be aware of potential legal issues. The law can be a little murky in some states when it comes to wholesaling. Most people in the industry believe it is completely legal, but since you are not actually purchasing the property, you are acting as a broker. You could run into some complications if you are not a licensed professional. This situation is generally rare and is often a product of an unhappy property seller.
The ProspectNow Advantage
Wholesaling real estate can be an excellent way to begin investing in properties or to expand your current operations. With wholesaling, you will not actually be acquiring property, but you will be acting as the middleman between the property owner and the property buyer. Consider yourself a matchmaker who deserves a fee for their services. This process involves low risk and potentially high profits. As a bonus, you can earn enough from wholesaling real estate to finance other potential investments.
Of course, locating the right property to wholesale is the key to your success. In-depth research will be required. You can find some distressed properties on state government sites and local realtor listings. You can save time and effort by using ProspectNow, a database that offers you a more efficient way to find wholesaling opportunities.
Since 2008, ProspectNow has been helping real estate professionals, and other interested parties get fast and accurate information on properties all over the US. We offer a vast database – approximately 100 million residential and 42 million commercial real estate listings. If you have been wondering how to wholesale real estate, be sure to include ProspectNow in the process. Do not delay incorporating this investment strategy. Act now to get a free trial on ProspectNow.
Final Thoughts
Although there are no completely safe investments, wholesaling real estate is pretty close to one. You never need to invest too much money in this type of real estate transaction, so you do not have to borrow much if any money. You will have to work hard to find the right properties and market them to buyers, but you can easily earn thousands from one relatively small and quick transaction. Obviously, larger property deals offer higher returns. If you like the idea of investing without endangering your financial health, consider wholesaling real estate.