Wholesaling is an investment strategy that garners the interest of many investors due to its potential to generate wealth over a short period. However, just because there’s almost no barrier to entry, it still necessitates careful consideration to ensure it aligns with your objectives. Discover what it is, how it works, and whether or not it’s for you.
What is real estate wholesaling?
Wholesaling is an investment strategy where a wholesaler acts as a mediator between sellers and buyers, who are usually real estate investors. Unlike typical property transactions, it centers around contracts and ownership transfers.
In wholesaling, the wholesaler enters into a purchase contract with a seller. This contract spells out the property’s price and the timeframe for its sale. The wholesaler will then search for a suitable buyer, and transfer the contract to them at a steeper price.
Because of wholesaling no-money-down model, it’s particularly appealing to first-time investors who do not have the funds for the traditional buy-and-hold or fix-and-flip approach.
How does real estate wholesaling work?
People who are engaged in wholesaling actively scout for distressed properties whose owners want to sell them ASAP. They convince the seller to opt for the wholesaling route as it tends to be easier, particularly for properties that need a lot of work.
Once the owner consents, they craft a contract that includes the right to reassign it to another individual. Furthermore, it stipulates that the wholesaler must find a buyer within a pre-established timeframe. For example, the contract may state that the property must be sold for $180,000 within six months.
The wholesaler will then search for an investor interested in wholesale real estate, with the aim of selling it for a price that surpasses the contract’s valuation. To illustrate, if the initial contract cites a value of $180,000, the wholesaler may sell it at $190,000, where the difference of $10,000 goes to them.
Real estate wholesaling vs. flipping
While real estate wholesaling involves properties that aren’t in their best condition, it’s not the same as flipping. When you flip a home, you purchase a property in its existing state and use your own funds to fix it. Once it’s repaired, the intention is then to sell it at a profit.
Conversely, when you wholesale real estate, you aren’t purchasing the property for yourself. Basically, you’re acting as a “placeholder” for the future buyer. You do not need to pour your resources into repairing it—rather, this responsibility shifts to the buyer once the contract has been transferred.
Why wholesale real estate?
These are a few of the reasons why investors get into real estate wholesaling:
Fast profit generation
When done right, wholesaling can make you a lot of money over a relatively short timeframe. It can be a lucrative business if you can consistently connect motivated sellers with buyers who are willing to go through the wholesaling route.
Launchpad for first-time investors
For those wanting to venture into real estate investing, wholesaling is an excellent starting point. Not only does it accommodate those with limited capital, but it also doubles as a chance to learn about the world of real estate. While the insights may not be on par with the ones gained from direct property management, it is a great way to dip your toes into the industry’s waters.
No barrier to entry
Wholesaling does not come with the traditional barriers to entry that are often associated with real estate investing. Instead of purchasing the property for you to use, you merely facilitate its sale between the seller and the homebuyer. You no longer need to go through the complexities such as financing (and with it, credit score checks), which makes the entry process less complicated.
What are the drawbacks of real estate wholesaling?
While wholesaling may be a great way to begin investing, it also presents a few challenges, such as:
Demand for exhaustive research
One of the greatest challenges of wholesaling real estate is locating properties with willing sellers. Therefore, access to platforms such as the Multiple Listing Service (MLS), a tool often used by property management firms, as well as other foreclosure sites becomes critical. If you fail to secure these resources, you will struggle to get hold of properties, and in turn, delay your progress.
Requires strong people skills
Unlike the realm of rental real estate, where all of the people-facing responsibilities can be entrusted to a property manager, wholesaling is a solo pursuit. Convincing sellers to choose the wholesale route, negotiating contracts, enticing buyers, etc. all rest on your shoulders. If effective communication isn’t your forte, this investment strategy might not be suitable for you.
Inconsistent source of income
Central to wholesaling is the swift sale of properties. It’s important to note that wholesaling contracts set a defined period in which you must secure a buyer. Unless you maintain a list of real estate investors who are keen on wholesale properties, you may not be able to transfer your contracts in time. The lack of buyers may stall your deal closures, leading to inconsistent income.
Investing in rental properties could be a better venture
Given wholesaling’s unpredictable nature, it may be better to invest in rental real estate. Not only does it provide a steady stream of income, but it’s also less tedious than constantly searching for properties, sellers, and buyers.
Furthermore, all of the tasks associated with it can be delegated to a property manager who will oversee all of your operations. With their expertise, you can yield revenue every month in the form of rent derived from tenants. Unlike wholesaling where you actively have to work for profit, running a rental property can be a source of passive income.
Additionally, rental properties offer a distinct advantage that wholesaling lacks: the potential for appreciation. Over time, your property’s value will likely appreciate, positioning you to capitalize on this in the form of increased rent or a higher sale price.
Consult the pros to make well-informed choices
If you’re torn between wholesaling and rental real estate investing, consulting a property management company can give you clarity. Get in touch with the real estate specialists at Luxury Property Care for comprehensive advice on your options. We’ll run through your options in detail, empowering you to make an informed choice that aligns with your investment goals.