What is real estate wholesaling?
Real estate wholesaling is a business strategy where an investor or wholesaler contracts a home with a buyer. After making the initial contract, the wholesaler then contracts the home with a new buyer at a higher price than with the seller. The wholesaler then keeps the difference as profit.
Real estate wholesaling is sometimes confused with house flipping. However, the two are not the same. In house flipping, an investor buys a property, renovates it, and then tries to sell the property for a profit. Unlike house flipping, real estate wholesaling does not involve any type of renovation. Overall, real estate wholesaling is a very hands-off real estate investment strategy because the wholesaler simply contracts a house with a seller and then looks for potential buyers to quickly sell the initial contract to one of them for a profit.
Wholesaling case study
An important distinction of real estate wholesaling is that a wholesaler does not purchase and sell a house. Instead, a wholesaler contracts a house with a seller and then finds an additional party interested in buying the property.
The following examples serve as case studies for real estate wholesaling in action.
A wholesaler enters into a contract with a seller. The wholesaler agrees in the contract to sell the property for a minimum amount by a certain date.
- Scenario 1: A wholesaler signs a contract with a seller to sell a property for $150K within 90 days. The wholesaler then finds a buyer, often another real estate investor, to buy the house for $175K. The difference between the contract price and the sale price is called the spread. In this scenario, the spread is $25K, which is also the wholesaler’s profit.
- Scenario 2: A wholesaler signs a contract with a seller to sell a property for $300K within 60 days. The wholesaler finds a buyer to purchase the property for $350K. The spread and wholesaler’s profit on this project would be $50K.
In addition, individuals should look for the following elements in order to better identify wholesaling opportunities:
- Research real estate markets and search for potential properties on popular listing sites like Zillow, Redfin, or Trulia.
- Scout out locations where there are distressed properties and motivated sellers. For example, homeowners facing foreclosure or individuals that have inherited real estate may be more motivated to sell a home below its market value.
- Look for wholesaling opportunities in locations where the practice of wholesaling is more common, like in the states of Texas, Michigan, Florida, Tennessee, and Pennsylvania.
- Identify areas where the property prices are rising, the population is growing, the employment situation is good, the economy is steady, and the rental occupancy is high, as these are all indicators that a wholesaling deal has a good chance of succeeding.
An important note is that real estate wholesaling requires significant marketing and networking on the wholesaler’s part to find sellers and buyers to enter into contracts. While a great deal of marketing goes into successful real estate wholesaling, the strategy is good for individuals looking to get into the real estate market with lower upfront capital requirements and minimal risks.
The bottom line
In a nutshell, real estate wholesaling is a strategy in which a wholesaler enters into a contract with a seller to sell a property to another buyer for a minimum amount by a certain date. Overall, real estate wholesaling is a great strategy for anyone looking to get started with real estate investment because it often requires lower capital upfront and has lower risks compared to other forms of real estate investing.