What Is Wholesaling Real Estate?
If you or anyone you know has been involved in the real estate boom, then you most likely have came across the concept of "wholesaling". This is a term that is thrown around by many people wanting to get into the real estate industry. There is also a grey area on doing this legally v.s. illegally. Wholesaling has become very popular over the past few years because it requires barely any startup capital, there are no barriers to entry, and it can be very profitable in a short period of time.
I started out my career wholesaling as I fit the mold of not having enough liquid cash to purchase a property, and I didn't have any knowledge at all on construction or the real estate business. This was a great way for me to get my feet wet with little to no liabilities, as well as learn how the business works.
This is how it works if done correctly. You as the wholesaler will spend money on marketing campaigns. This can include everything from direct mail, bandit signs, social media ads, referral campaigns, and anything else you'd do to market to your ideal customer. The goal is to find people who want to sell their property, and are motivated to sell quickly. These generally are people who inherit a property, have back taxes, had troublesome tenants, or just want to liquidate an outdated home.
These people have a problem that needs solved. They want to sell their property that is causing them distress, and they want to do it quickly and efficiently. This is where there is a ton of value from a wholesaler or investor. They can then come in with an all cash offer, no contingencies, and save the seller thousands of dollars on commissions by keeping it off market.
The wholesaler should then place an "Option Agreement" on the property giving them the right, but not the obligation to buy the property at a specific price. This agreement is where the value is at. The wholesaler can then contact their list of real estate investors who are desperately looking for more property to purchase and expand their business. They can then put a premium on the offering and make a spread on the deal. This spread is the wholesaler's profit. The investor will then sign a purchase agreement directly with the seller for the price of the option agreement. And they will sign a "Release Fee Agreement" with the wholesaler for their profit.
The goal is that everyone leaves the closing table happy. Seller gets rid of their problem and hopefully some cash in hand. Investor gets a new property at a discount to expand their business, and the wholesaler gets a nice profit for coordinating everything.
Wholesaling can be a great way to learn and make a few bucks in real estate, but it is important that all expectations are managed properly in the deal. Also, making sure you use the proper agreements is crucial, as it's a very grey area and can cause some legal issues.
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