How Real Estate Wholesaling Works
The Wholesaler Identifies a Property Owner Who Does Not Know the Current Market Value of the Property.
Wholesalers look for “motivated” sellers, such as those facing foreclosure, divorce, or financial difficulties. These properties are typically sold below market value.
The Wholesale Process
Negotiate and Secure a Contract
The wholesaler negotiates a purchase agreement with the seller, often including contingencies that allow them to exit the deal if necessary.Market the Contract
The wholesaler markets the contract to potential buyers, such as real estate investors, landlords, or flippers. The goal is to sell the contract at a price higher than what has been agreed upon with the seller.Assign the Contract
Once a buyer is found, the wholesaler assigns the purchase agreement to them. The difference between the seller’s agreed-upon price and the buyer’s purchase price is the wholesaler’s profit, commonly referred to as the assignment fee.
How Wholesalers Make a Profit
Low Initial Investment: Wholesalers don’t need to secure financing or purchase properties outright, minimizing upfront costs.
Quick Turnaround: Wholesaling deals can often be completed in weeks, providing rapid returns.
Limited Risk: Since the wholesaler doesn’t purchase the property, financial risks are relatively low.
How Wholesalers Succeed
Underbidding: Wholesalers secure contracts for significantly less than market value, so they can make a profit by selling the contract to another buyer at a higher price.
Networking: A large network of motivated sellers, investors and cash buyers is crucial for consistent success.
Legal and Ethical Concerns: Wholesaling is regulated differently across states. Misrepresentation or lack of transparency can lead to legal issues, so wholesalers will often write clauses into the additional terms of their contracts such as:
“Buyer is using cash or cash equivalent to purchase this property. The funds being used to purchase this property may come from an entity other than the entity taking title of the property.”
“Buyers agent solely represents the buyer as the buyers broker. Buyers agent does not represent the seller in any capacity. Seller is not a client of the buyers agent.”
“Buyers intent with the property is to resell it before or after close of Escrow.”
“Seller will not sue for specific performance. If buyer breaches this contract, the sole remedy of the seller is to keep the buyers earnest money as liquidated damages.”
“Buyer is a wholesale buyer and investor.”
“Seller acknowledges that Buyer is an investor and is purchasing the Property with the intent to make a profit by either renting, re-selling Or fixing and flipping.”
Is Wholesaling Real Estate Profitable?
Real estate wholesaling can be lucrative, especially in markets with high demand and significant inventory of distressed properties. If a wholesaler contacts you or someone you know, please consider contacting a licensed REALTOR® before signing a contact to find out the market value of your property. REALTORS® are bound by the ethical standards of the National Association of REALTORS®, and they must act in their clients’ best interests as fiduciaries with legal obligations of honesty, obedience, disclosure, confidentiality and accounting.
Conclusion
Real estate wholesaling is an entry point into real estate investing, offering the potential for significant returns with minimal upfront capital. Property owners should be aware of the market value of their home before entering into a contract with a wholesaler.
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