What is Wholesaling Real Estate?
Wholesaling can be thought of as a legal alternative to brokering real estate. Most wholesalers profit by cutting out real estate agents. They need to connect with distressed home owners directly before they go to the traditional market where the wholesaler does not have access.
A wholesaler works harder than a real estate agent for each deal. However, they make more money when the deal is completed because they don’t have to split the profit. Even better, wholesaling does not require much money. No down payments, no rehabbing, no carrying costs, no insurance, no taxes, no almost anything! Wholesalers just have to figure out what buyers will pay and find them deals.
Fortunately, we offer our House Flipping Calculator Spreadsheet in the Project Estimation product. We give it for free when you subscribe to our newsletter. Every disciplined investor will have a calculator. They may even have ours. Let us fast-track your understanding of what investors can pay!
How Wholesaling Real Estate Works
Real estate wholesaling occurs when a “wholesaler” contracts with a home seller to purchase a property. He or she then markets the property to potential cash buyers (usually real estate investors. a.k.a. flippers), and swaps one of them in as the real buyer for a profit. The goal in real estate wholesaling is to connect the real buyer before the contract with the seller closes.
No Commission Split
Real estate agents are expensive (roughly 6%). They require licenses and must pay dues to large organizations for 2 main reasons. The first is to pay for access to the marketing system known as the Multiple Listing System (MLS). The second is for constant education about changing laws and protecting the public. This includes training real estate professionals to protect their clients and providing recourse otherwise. This expense must be passed down to the SELLER. Remember, the seller pays the commissions.
The real estate agent must split the commission four ways. The buyer has an agent and a broker. They take half. Then the agent has to split the remainder with their own broker. In the end, the real estate agent will net roughly 2% of the 6% commission. That is only about one-third (33%) of the commission pot for doing the lion’s share of the work. Then they have to pay to maintain the real estate license.
The wholesaler takes home the full commission! Some wholesalers do very well. Most quit before they find success because it is hard work. The personality that will succeed in this business has a STRONG work ethic. They don’t make excuses. They just work at it tirelessly, day in, day out.
No License Requirement
You can think of hiring a real estate agent like hiring a licensed and insured contractor in writing. If the agent acts inappropriately, then you can attack his/her license. The license also requires training that makes the agent versatile. An agent is able to assist in many types of real estate deals. They can help with commercial, residential, raw land, leasing, the list is long.
Wholesalers do only one type of deal. They seek properties that sell under market value. The parties in these transactions are almost always highly motivated.
Brokering real estate deals legally requires a license. However, wholesalers generally are NOT licensed. They avoid the requirement by inserting themselves into the deal itself. This loophole is open because anyone can buy or sell real estate for themselves without an agent.
The wholesaler uses either a double close or an assignment of contract. A double close has two closing on the same day. The title company will use the money from the real buyer to pay the seller. An assignment is a simple sale of the the purchase contract from one buyer to another for compensation. The wholesaler assigns the contract to the real buyer for payment.
No Access To The MLS
Getting around the MLS is not easy. The MLS is the largest marketplace for residential real estate. Every buyer knows about the MLS! This is the way to have a property seen by everyone. To compete, a wholesaler needs a large network of real estate investors (flippers) and a steady stream of property leads. This is why wholesaling is referred to by some as “hustling”.
Wholesalers use several channels to connect with home owners such as bandit signs, social media campaigns, and direct mail after driving neighborhoods to create a mailing list (“driving for dollars”). There are many other clever methods as well. The most successful wholesalers use multiple channels at the same time. This is time consuming and always requires active involvement (“hustle”).
Have you seen the “WE BUY HOUSES CASH” signs on telephone poles and highway exit ramps? Those are called “bandit signs” because they are illegal in most areas. They are a very common channel for wholesalers. Wholesalers put them everywhere without paying for the right to advertise, the city collects them, and the cycle repeats itself. We see wholesalers ads EVERYWHERE. Surely you do too. That’s because they work!
In a typical real estate deal, the buyer needs protection. They are buying an expensive property that may have material defects. This is the reason for seller’s disclosures, lengthy purchase agreements, and real estate agents to negotiate on their behalf.
The wholesaler’s buyers are much more sophisticated than the general public. Real estate investors (flippers) are professional buyers. They are very knowledgeable about the market and capable of diagnosing material defects with the property. Real estate investors are usually at least as good at this as real estate agents. These buyers just want the deal. They don’t require the protection afforded by the real estate license.
The seller needs to sell the house immediately. They are in a distressed situation and waited until the very last minute. The hope was that they would find another solution. Unfortunately, they didn’t and are now out of time. The buyer can’t use financing because there is no time for the approval process. The house is not prepared for sale. The seller wants as few people to know their bad situation as possible.
The Problem With The MLS
The MLS is not discrete. In fact, it was designed to be the opposite of discrete. A limited item (property) commands the highest price when many potential buyers compete (wide market). The potential buyers all know that there can only be one winner. That drives up the price by creating a bidding war (scarcity).
There are many cash buyers on the MLS. In fact, almost every buyer that the wholesaler has is probably on the MLS too. Often, the MLS can provide a qualified cash buyer in the same amount of time. However, many more unqualified buyers will also become aware of the sale. The MLS tells everybody! That means people knowing the situation and knocking on the seller’s door.
Why Wholesaling Works
Wholesaling intentionally obscures the sale from a wider market by keeping it off the MLS (off-market). The only buyers that see the house have liquid available cash and are familiar with these situations. That creates a deal that real estate investors need to be profitable. Flippers want this deal. They like to find properties that are not mass marketed. This cuts down on competition.
This practice gives the wholesale industry a bad reputation. This stems from the public perception that wholesalers take advantage of unsophisticated home owners who are in a bad situation. Pleases remember, the wholesaler did not create the situation. The market for wholesaling real estate exists for a reason. The sellers choose wholesalers because they provide a service that is both fast and discrete.