Most people know that real estate investing is a great way to build wealth.
But the cost of getting started often scares people off. If you’re going to use your own money, then you’ll need to save up tens of thousands of dollars to get started.
Real estate investing doesn’t have to be wickedly expensive, though.
Wholesaling is one such example. It’s a low-cost real estate investing method with very little risk.
In this guide, we’ll show you how it works and how to get started (even if you’re a total beginner).
What is wholesaling in real estate?
Wholesaling is a real estate investing strategy that involves finding properties that are being sold below market value and then “flipping” them to cash buyers (i.e. other investors) for a profit.
It’s not flipping in the traditional sense, though (where you purchase, rehab, and list on the MLS).
In fact, when you wholesale real estate, you don’t own or rehab the property at all.
The seller signs a purchase agreement that gives you XX amount of days (30 days, for instance) to purchase their property for the agreed-upon price.
You then find a cash buyer who’s willing to purchase the property.
Both of you sign an assignment contract (for an additional assignment fee, which is the money you’ll make) to pass the previous purchase agreement to the new cash buyer.
In other words…
You find the deals. Other real estate investors pay you an assignment fee (you can think of this as your commission) to “buy” those deals from you.
Virtually wholesaling (wholesaling in places where you don’t live) is also possible.
Let’s look at an example.
Example of a Real Estate Wholesale Deal
Here’s what a typical real estate wholesaling deal might look like.
It starts with marketing. You drive around the neighborhood where you’re wanting to wholesale real estate and you look for distressed properties (this is called “driving for dollars”). Typical signs of distress include…
- Boarded up windows
- Overgrown lawns
- Homes appearing to be vacant
- Faded paint
- Roof damage
- Outdated appearance
Even just one of those qualities is a sign that the owner of the property might be motivated to sell — perhaps the property has proven to be more work than it’s worth… or maybe they don’t have the time or energy to repair or update the property.
As you’re driving around, you place door hangers that look like this on all of the distressed properties you find.
Some of those people call you and tell you that they are interested in selling and they’d be curious to hear what you could offer them.
You do some basic online research on the property, then you schedule a time to go take a look at it. Later, you estimate rehab costs on the property and determine its ARV (After Repair Value).
After doing some math, you figure that once repaired the property will be worth approximately $200,000 (you determine this by looking at other similar properties that have recently sold nearby). You also estimate that the house will require $30,000 worth of repairs to get up to its ARV.
The 70% rule (a common investing rule of thumb) says that an investor should spend no more than 70% of the ARV of a property minus the cost of repairs. Following this rule is a good way to make safe and profitable investments.
So…
($200,000 – $30,000) x .70 = $119,000
This means that a smart investor won’t pay more than $119,000 for this property if they want to make a healthy profit.
But you’re wholesaling… you’re not the end buyer.
So if you want to make money in the middle, we need to deduct your assignment fee to calculate the max offer you’d make to the seller.
Let’s say you want to make $5,000 on this deal.
That means your max cash offer is $114,000.
Assuming you and the seller are able to come to an agreement that’s at or below your max cash offer, you can then find a cash buyer and assign the purchase agreement to them for $119,000.
You make the difference between what the cash buyer paid and what the seller received.
The profit on a wholesale deal like this can range from $5,000 to $20,000.
It just depends on the buyer, the seller, and the property itself.
Is Real Estate Wholesaling Legal?
This is a common question that new real estate investors ask.
Yes, wholesaling is completely legal in the United States.
However, you should always check your state’s real estate commission website to make sure that there aren’t any special regulations or laws in your state that would prohibit you from wholesaling real estate.
For instance, some states require a real estate license to engage in any kind of real estate activity, regardless of whether or not you’re making a profit.
Other states have different definitions of what constitutes “real estate activity.” Some states might consider wholesaling to be the same thing as flipping, while others might consider it to be more similar to property management.
It’s always best to err on the side of caution and consult your state’s real estate commission website before beginning any type of real estate activity.
Wholesaling Vs. Other Types of Investing Strategies
How does wholesaling compare to other real estate investing strategies?
What are the pros and cons of real estate wholesaling?
Let’s take a look.
Some other common real estate investing methods include…
Wholetailing — a combination of wholesaling and retailing, where the investor finds a distressed property, makes minor repairs, then sells it at a slight markup.
Fix & Flip — an investor buys a property, makes repairs, then sells it for a profit.
BRRRR — an acronym for “buy, rehab, rent, refinance, repeat,” this investing strategy involves buying a property, making repairs, then refinancing the loan and taking out cash to buy another property.
All of those methods are effective.
But it really depends on what you’re trying to do.
Wholesaling is great if you’re looking to make a quick profit with little upfront investment. Or if you’re just getting started with real estate investing and have very little capital.
But if you’re looking for more long-term wealth, then it’s usually a good idea to transition to either buy-and-hold investing or fix & flips.
Wholesaling, though, is a great starting point to get your feet wet.
Here are the pros and cons.
Pros & Cons of Real Estate Wholesaling
Pros of Wholesaling Real Estate
1. Low upfront investment — all you need is a little bit of cash to get started, and you don’t have to actually buy the property.
2. Quick turnaround — you can make a profit in as little as a few weeks.
3. Low risk — if you do it right, there’s very little risk involved.
4. You don’t need a real estate license — in most states, you don’t need a real estate license to wholesale properties.
5. Easy to learn — wholesaling is a relatively simple concept, and it’s easy to get started.
Cons of Wholesaling Real Estate
1. Short-term profits — you’re not going to get rich quick flipping contracts, at least not in most markets.
2. You need to find a buyer — in order to make a profit, you need to find a cash buyer who’s willing to pay more than the contract price.
3. You’re not building long-term wealth — with wholesaling, you’re not going to build long-term wealth or passive income.
4. You might need a real estate license — in some states, you might need a real estate license to wholesale properties.
5. It’s not always easy to find deals — in order to be successful, you need to be good at finding deeply discounted properties.
9-Step Process to Wholesale Your First Deal
Now that you have a general idea of how wholesaling works in real estate, let’s look at how you could do your first deal!
Here are the 9 steps.
Start by getting our free gift below, where you’ll learn exactly how real estate investors (including wholesalers!) find deals consistently every month.
Step 1. Choose Your Market
The first step is to choose your market.
This is the city or region where you’re going to look for properties.
You want to choose a market that…
- Has a lot of motivated sellers
- Has a lot of cash buyers
- Is close enough to you that you can easily drive around and look at properties
And ideally, you want to find a market that has all three of those things.
If you’re not sure what market to choose, the best thing to do is just pick one and get started.
You can always change markets later if you need to. And it’s possible to wholesale properties in just about any market.
Step 2. Create The Contract
What would you do if you got a call from a seller right now who was ready to sell their home?
Not sure?
That’s okay.
Before you start really trying to find deals, it’s important to get a grip on what exactly your process is going to look like.
Part of that is putting together the contracts you’ll use.
You need two types of contracts for wholesaling properties: a purchase agreement and an assignment contract.
Purchase Agreement
This is the contract you and the homeowner will sign once you’ve agreed upon a selling price. It gives you a certain number of days to purchase the property (this can be whatever you want… but at least 30 days for your first few deals) and indicates the earnest money you’ll lose if you don’t buy the property within that time period. This can be whatever you want… but $500 is usually a reasonable amount.
(This means that your only penalty, if you’re not able to close on the property, is $500)
Assignment Contract
The assignment contract is what you and your cash buyer will sign. This contract “assigns” the original purchase agreement to the cash buyer for the cost of your assignment fee.
Once the deal is closed, the title company will pay you your assignment fee.
You can download purchase agreement and assignment contract templates for free over here.
Step 3. Learn to Calculate Rehab Costs & Max Offer
Before you start looking for deals, you also need to know how to calculate your max cash offer and basic rehab costs.
We have an entire guide that will help you estimate rehab costs on a property (<- click that link) close enough that you’re able to wholesale effectively. Go check it out.
You’ll also need to know the ARV (After Repair Value) of the property.
Here’s a quick video that’ll show you how to run comps on Propstream…
Once you know rehab costs and you’ve run comps, then you can determine your max cash offer on a given property.
Remember…
((ARV – Repair Costs) x .70) – Your Assignment Fee = Max Cash Offer
With this knowledge, you’re prepared to make close-able cash offers that will make you and your cash buyers a profit.
Speaking of cash buyers… that’s the next step.
Step 4. Build Your Buyer’s List
We highly recommend finding a few high-quality cash buyers before finding deals.
These can be family members, friends, or just other real estate investors.
The important thing is that they have the funds and desire to purchase lots of investment properties. The deeper their pockets, the better.
Set a goal of finding at least 10 people who are interested in buying the properties you find.
How?
Here are three easy ways to find cash buyers…
Property Auctions — Check online or in your local paper for real estate auctions. These are great places to find cash buyers since they typically don’t need bank financing to buy the property. Bring some business cards and network like crazy!
Local Real Estate Investment Groups — There’s probably a REIA (Real Estate Investors Association) in your area. You can go to their meetings and introduce yourself as a wholesaler.
Real Estate Agents — Tell every real estate agent you come across that you’re a wholesaler and you’re looking for deals. You’ll be surprised how many agents are also real estate investors (or at least, know real estate investors).
When you’re building this list, make sure to get their name, phone number, and email address.
Also, ask them what types of properties they’re interested in purchasing. This will help give you a better idea of what to look for when you’re finding deals for them.
Step 5. Set a Realistic Budget
Wholesaling real estate might be low-cost compared to most other real estate investing strategies… but it’s not free.
Realistically, you’ll need to spend about $1,000 to $2,000 to find your first deal.
Why?
Because the best way we know of to find your first wholesaling deal is to drive for dollars and put hand-written door hangers on as many properties as possible — aim to put out 2,000 over a couple of weeks or a month (they’re $0.50 a piece).
Get your handwritten door hangers here!
These get a super high response rate and give you your best chance of success.
Step 6. Drive For Dollars
Now take those door hangers and set aside a few hours every day over the next month to drive around neighborhoods looking for distressed properties and putting out your door hangers.
Be consistent and ruthless.
After a bit of time, your phone will start ringing and you’ll start hearing from homeowners who are interested in hearing what you could offer them.
Take the knowledge you’ve learned in this article to estimate rehab costs, determine ARV, and calculate your max cash offer.
Step 7. Close The Deal
Then it’s just about closing the deal.
Once you’ve got a purchase agreement signed, send the deal (and all its details) over to your list of cash buyers. See if they’re interested in purchasing the property.
If they are, then you’ve got a deal.
Use an assignment contract to pass the deal onto them and take your assignment fee paycheck to the bank.
The most important thing to remember about this entire process is to be ruthless with your calculations and to always estimate lower rather than higher.
It’s better to lose a few deals because you went too low with your offer than it is to get stuck having to pay an earnest money deposit because you got a property under contract but were unable to pass it off to a cash buyer.
Still nervous about doing your first wholesale deal?
Then this next section is for you.
Consider Reverse Wholesaling (Great for Beginners)
For those of you who are still a bit wary about diving headfirst into wholesaling, we’ve got good news…
Reverse wholesaling makes the process even safer and easier.
In fact, that’s how Ryan Dossey did his first ever real estate deal. Check it out…
This process is similar to wholesaling… but with a few key differences.
You still go out and find sellers who are willing to sell their property for a below-market cash offer. But once you find a potential deal, instead of doing your own math and making them a cash offer, you bring all of those details to a cash buyer whom you trust.
Then you ask your cash buyer what they’d be willing to pay for the property.
Once you’ve got that number, you deduct your assignment fee and you’ve got your max cash offer. You can then approach the seller and start negotiations.
This process is much more involved in terms of how much you work with your cash buyer and, in some ways, they are acting as your expert and mentor. Not only will you have much more confidence in your rehab estimates and max offer calculations, but you’ll be learning a ton just watching your cash buyer make those estimates.
If you’re able to get them a good deal, it’s a win-win.
The key is to find an investor who is willing to go through this process with you.
Final Thoughts
Wholesaling real estate is a great way to get started in the business without having to put down a ton of your own money.
It also allows you to learn the business without being fully responsible for all of the risks involved in owning an investment property.
This guide has given you a good foundation to start wholesaling real estate.
Just remember… this business is all about building relationships with both sellers and buyers. The more people you know, the more deals you’ll do.
Oh — and don’t forget to nab your free gift below!