What is wholesaling real estate?
First, let's discuss what wholesaling is. Real estate wholesaling is a business strategy where one party, the wholesaler, enters into a contract on a home before selling that contract to a new buyer. The wholesaler is essentially the middleman or intermediary, acting on behalf of a property owner and retaining the profit from the eventual sale. One problem new investors often run into is that investing in real estate often requires a large amount of capital. By focusing on wholesale real estate, you can gain experience and build your portfolio without needing to invest a significant amount of your personal liquid assets.
Wholesale transactions begin when a wholesaler and a seller enter a contract, which stipulates a minimum price for which the home must be sold by a certain date. These contracts can also contain other terms, like a requirement that the wholesaler invest earnest money in the wholesale property. Once this wholesale contract has been negotiated and agreed upon, the wholesaler must then find a buyer within the agreed-upon parameters. The buyer will typically be an investor who is interested in taking over the real estate contract. The wholesaler's goal is to sell the wholesale contract for more than they paid in the purchase agreement. The difference between the contract price and sale price is referred to as the “spread” and represents the profit for the real estate wholesaler.
There are pros and cons to wholesaling as a real estate investment strategy that you should consider before you proceed. Wholesaling does involve being more dependent on buyers and sellers than other forms of investment, and your profit margin may not be as substantial as those found in other real estate transactions. However, there are also some significant benefits. Wholesale real estate is a great way to get your foot in the door in the real estate world, even if you don't have the cash for a major upfront investment. If you're successful, you can make a lot of money in a short amount of time, but you need to take the time to learn how to wholesale houses properly and in accordance with your state's laws.
Is wholesaling real estate legal?
The short answer is that no, wholesale real estate is not illegal. The longer answer is that it can be complicated, and you need to follow your state's laws regarding wholesale properties. There are rules and regulations involved that are designed to protect both the seller and the buyer, which must be followed at every step of the process. The legality of wholesale real estate and the rules surrounding the practice vary from state to state, which is why it's essential for real estate investors to take the time to get familiar with state law before making wholesale deals.
An example of a practice that is considered illegal would be bringing in buyers without having entered into a wholesale contract with the seller. One question that is often asked about wholesale real estate transactions is whether or not you have to be a licensed real estate agent to sell wholesale properties. You don't necessarily need a real estate license, as long as you are the buyer or the seller in the transaction. Licensed real estate agents who are also wholesalers should keep in mind that they need to make a disclosure about their status as such throughout the process. Whenever purchasing a property to resell through a wholesale agreement, you must disclose to the buyer that you've purchased an agreement to sell the house and will close escrow in the immediate future.
How can you become a wholesaler?
Now that you understand a little more about wholesale real estate, you may be wondering how to begin working in the wholesaling business. Real estate has become a desirable industry to work in, even more so in recent years. You might hear people say you need a buyer's list to be successful, but you can actually make plenty of money by becoming a wholesaler of real estate property. Over time, creating one will benefit you greatly, but you shouldn't be afraid to jump in without a full Rolodex. Networking is a big part of creating business opportunities and running a profitable wholesale operation, so make sure you get to know the major players in your local real estate market.
As previously discussed, you'll also need to become extremely familiar with the laws in your state surrounding wholesaling activities. In order to avoid violating licensing laws, you should always make offers in your own name, then assign the contract you purchased to the buyer for a fee by using your contractual right to assignment in the relevant agreement language. It's important to keep in mind that assignments are usually not enforceable, meaning you will be responsible for the original terms of your purchase contract, even if your cash buyer doesn't follow through. Understanding the specific differences between wholesale real estate and commissioned sales is necessary for anyone considering the life of a wholesaler.
As you can see, there's a lot to learn about the process of real estate wholesaling before you begin employing the practice in your real estate investment journey. If you want to stay within the bounds of the legal guidelines that surround wholesale real estate contracts, you'll need to be careful about following your state's laws. You can reach out to an experienced real estate attorney if you have any questions or need help sorting through the verbiage of your contracts. However, if you're willing to put in a little effort to educate yourself on the details of wholesale investment strategies, wholesaling can provide you with a fantastic opportunity to break into the real estate business.