What Is Real Estate Wholesaling?
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Real Estate Wholesaling in a Nutshell
A real estate wholesaler’s objective is to find deeply discounted properties from motivated sellers, get them under contract, and assign the contracts to other cash buyers while collecting an assignment fee. Alternatively, a wholesaler can close on the purchase themselves and re-sell the property to another cash buyer at a higher price through a double closing.
A wholesaler doesn’t typically alter or improve the property. Their primary role is to find opportunities and act as the middleman who connects each deal with another cash buyer while being compensated for their work with a fee or markup along the way.
Wholesalers negotiate a low purchase price with a homeowner and then work to find a buyer for the property. The wholesaler does not intend to keep the property but instead will use one of the following methods to complete the transaction.
Assigning the Contract
With an assignment, a wholesaler will write up a purchase agreement that has a special clause in it, which allows them to assign the contract to a third party.
The wholesaler then tries to find an end buyer (usually another investor) to buy the property. The wholesaler then attempts to sell the contract and collect an assignment fee. The assignment fee is how the wholesaler makes their profit in the deal, and then the new end buyer is free to close on the transaction in place of the original buyer, following the term of the or original purchase agreement.
With a double closing, there are two separate closings involved. The real estate wholesaler actually takes title to the property from the original seller (the A-to-B transaction) and then immediately sells it to the end buyer (the B-to-C transaction). The two closings typically happen back-to-back, on the same day.
There are three ways double closings can be financed:
- Through short-term transactional funding, also known as flash cash
- Through the funds of the end buyer, where the B-to-C transaction actually pays for the A-to-B transaction between the seller and the wholesaler (see the above video for further explanation)
- If the wholesaler has access to their own reserve of cash, they can use it to find the A-to-B transaction.
In a traditional closing, the wholesaler closes on the property with the seller, takes title to it, and then puts the property back on the market for sale.
Some people also refer to this method of wholesaling as wholetailing which denotes a combination of wholesale and retail real estate.
Though the traditional close requires significantly more working capital to execute (and the cash is tied up for a longer time), it also gives the wholesaler the most amount of control.
Benefits of Wholesaling
Wholesaling through assignments or through a double closing allows potential real estate investors to do deals without having to use any of their own capital. Because they can get a third party to finance the deal, wholesalers don’t need to use much (or any) of their own money to profit from a real estate transaction.
For further information on how to wholesale real estate, check out The Ultimate Beginner’s Guide to Wholesaling Real Estate.
The Legality of Real Estate Wholesaling
Wholesaling can cross into a gray area of legality in some states if the wholesaler does not have a real estate license.
Wholesalers need to be careful that their activities are not perceived as brokering a deal, as this would most likely violate the law. In most jurisdictions, a real estate wholesaler must have a real estate license to earn a commission from doing real estate deals.
This is the reason wholesalers can only assign a contract to a seller or buy the property themselves. They cannot take a commission or a referral fee for putting together a buyer and a seller.
Some states will view the activity of assigning contracts very similar to the activity of taking a commission, which is why these states require wholesalers to have a real estate license.