What Is a Wholesaler in Real Estate Investing?
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People talk about real estate wholesaling almost as if it’s cheating. Too good to be true. But what is a real estate wholesaler, anyway?
Real estate wholesalers never actually own the properties they put under contract. Instead, they simply flip the contract to an end buyer — and earn a markup for their trouble.
It’s the closest thing there is to a quick buck in real estate.
Is real estate wholesaling legal? What skills do you need as you learn how to wholesale real estate? What kinds of profits can you earn as a real estate wholesaler?
Strap in and hold onto your britches.
What Is a Wholesaler in Real Estate?
Real estate wholesalers find properties at a bargain price and put them under contract. Then, they find real estate investors who want to buy each as an investment property.
In practice, a wholesaler of real estate typically finds motivated sellers willing to accept a low sales price. In the period between signing the sales contract and closing, the wholesaler finds an end buyer who agrees to pay a higher price for the property than the wholesaler’s contract with the seller.
Operating as a middleman, real estate wholesalers mark up the price for the assignment of contract. They get paid at settlement, where the actual real estate transaction takes place.
For example, if the wholesaler puts a property under contract for $95,000 and finds an investor willing to pay $100,000, the wholesaler walks away with $5,000 in cash as their margin.
Because they never actually buy or own the property, they don’t need much cash to get started. It’s one of the few ways to get started in real estate with $1,000.
Is Real Estate Wholesaling Legal?
In most states, individuals do not need a real estate (or any official state-issued) license to wholesale real estate, merely an unofficial right to make money from his effort and negotiating prowess. However, some states have challenged the use of assignment or finder’s fees as illegal schemes to avoid having a real estate agent license.
In fact, being a licensed real estate salesperson could even hinder your efforts to score great deals. Licensed agents need to reveal their status as such when they make offers to put houses under contract.
Other regulatory bodies may limit the language and methods to be followed when soliciting distressed property for purchase. According to attorney Brian Pendergraft, Maryland’s Protection for Homeowners in Foreclosure Act (PHIFA) prevents anyone acting as a potential buyer from claiming they are “assisting the homeowner in preventing foreclosure.”
Rather than blunder into a lawsuit or an unpleasant experience with regulators, potential real estate wholesalers should consult a real estate attorney to understand their state’s regulations.
How to Wholesale Real Estate
If you want to wholesale properties, you need to master two unique skills: (1) finding great real estate deals, and (2) finding buyers for them.
Wholesaling is a business, like buying and managing rental properties or any other real estate business. Don’t confuse a quick sale with free or easy money, despite what critics outside the real estate industry might say.
Find Spectacular Off-Market Deals
Don’t expect to find wholesale deals on the MLS, being publicly marketed by a real estate broker. By definition, these are properties selling for market pricing.
Instead, wholesalers look for motivated sellers, from distressed homeowners in foreclosure to frustrated landlords to driving for dollars. Even in hot markets, wholesalers and investors can find good deals on real estate using tools like Propstream, Foreclosure.com, and Deal Machine. These tools can not only identify motivated sellers, but also help with your marketing strategy such as direct mail, emailing, or calling prospective sellers.
Note that distressed sales include more than just foreclosures. It can also mean properties in tax sale, or with divorcing owners. Tools like Foreclosure.com can show you all the local distressed properties in your market, such as:
