Investing in real estate provides many obvious avenues of potential revenue, from monthly rent to selling a renovated house at a higher price point. But the concept of buying and selling wholesale real estate can be a little murkier.
What is Wholesale Real Estate?
A real estate wholesaler seeks properties priced below their fair market value. Often, these properties are in danger of foreclosure, require significant repairs, or must be sold quickly. Once a wholesaler locates a suitable property, they negotiate with the seller and enter into a purchase agreement. But instead of purchasing and taking possession of the property, the wholesaler finds an investor willing to buy the property for a marginally higher price than the wholesaler paid. The difference between the purchase agreement price and the new investor’s price is the profit the wholesaler earns, often five to ten percent of the overall purchase price.
Benefits of Wholesaling
In essence, a wholesaler is a middleman between sellers and investors. But how do various parties in a transaction benefit from wholesaling?
Wholesalers can profit from real estate deals without securing a mortgage or spending large amounts. Aside from a modest earnest fee, the wholesaler’s only outlay is the time and effort to find the right property and connect with interested buyers.
Sellers benefit from wholesaling when requiring a quick sale since the purchasers are typically cash buyers. A shorter closing process can help the seller get the money they need faster or avoid foreclosure.
Investors who purchase wholesale properties can secure a good deal without the labor-intensive process of finding distressed properties independently. Some homes may already have rent-paying tenants, hopefully making for an easy transition and ongoing cash flow.
Cautions of Wholesaling
States’ legal treatment of wholesale properties varies, so wholesalers and investors must understand local law before entering a transaction. For example, the state might require the wholesaler to be a registered agent, have specific regulations regarding distressed properties, or specify how to treat tenants when rental property changes hands. In addition, since wholesaling is a less traditional route for real estate transactions, everyone involved in the deal must understand the terms. Purchase agreements for a wholesale arrangement must be assignable and often include a provision that lets the wholesaler back out of the purchase if they can’t find a suitable investor.
The flow of available properties and interested investors can make wholesaling unpredictable, but under the right circumstances, it can be an efficient, profitable way to transfer property ownership. Whether you enter such a transaction as a wholesaler, seller, or investor, open communication and taking the time to understand the ins and outs of wholesaling and the specific contract you’re entering will give you the best chance for a successful deal.
About Rentals America
Rentals America provides full-service property management for residential rental properties. Our team is completely dedicated to property management, and we’re here to help landlords navigate the rental market.
