What Is Real Estate Wholesaling?
A real estate wholesaler procures contracts for distressed or under-market value houses and assigns those contracts to investors at a higher price, making a steep profit at the expense of the homeowner.
Real estate wholesaling has become a popular method for entry-level investors to make a huge chunk of change in a short period of time. But they do so at the expense of vulnerable homeowners, using aggressive sales tactics to persuade homeowners to sell for far less than market value, so they can resell for a higher price.
In 2019, an estimated 544,911 properties were sold off-market with an average wholesale fee of approximately $17,200. That adds up to as much as $10 billion in lost equity that wholesalers pocketed in assignment fees, or about $18,000 per minute, every day in our country.
In the past, homeowners living in a distressed home had few options for a cash sale if they weren’t able to make repairs. Profit-driven wholesalers are quick to take advantage of people experiencing financial hardship, and it’s difficult to sell a home that isn’t in turnkey condition through the MLS. But Sundae has introduced a marketplace that connects sellers with investors directly, so homeowners can get competitive cash offers. We’ve eliminated the predatory middle man, allowing homeowners to get the best price possible for their home.
How does real estate wholesaling work?
Here’s how a real estate wholesale transaction typically plays out:
- The real estate wholesaler finds a property for under market value, typically because the home is distressed or the seller is desperate for a quick sale.
- The real estate wholesaler makes an offer and then negotiates with the seller. When both parties agree on a price, the home is put under contract.
- The real estate wholesaler looks for a cash buyer or investor who may be interested in purchasing the contract rights so they can flip the house and make a profit.
- The contract is assigned to the investor at a higher price and the wholesaler keeps the difference. In other words, the investor gets the contract rights in exchange for a wholesale fee.
- The buyer closes on the home and the real estate wholesaler receives their cut, which is typically around $5,000 to $10,000 per deal.
Another option they use is double closing. This means the real estate wholesaler actually purchases the property and assumes closing costs, only to immediately sell that property to an investor. While this requires the wholesaler to secure funding, it can work if assigning the contract to the end buyer isn’t a viable option.
How is a real estate wholesaler different from a real estate agent?
A real estate agent represents buyers and sellers to coordinate real estate transactions. A real estate wholesaler acts as a middleman between sellers and property investors. Real estate agents are paid commission for each transaction, which is typically about 6% of the home’s sale price. Wholesalers set a flat fee for each deal.
To become a real estate agent, you need to take pre-licensing education courses and pass a state examination. Wholesalers aren’t required to carry a real estate license. That’s unless they are transacting more than one deal per year in the state of Illinois. Still, wholesalers may choose to get a real estate license if they want certain benefits, like access to the MLS.
How is a real estate wholesaler different from an investor?
A real estate investor buys property under market value with the intention of selling it for a higher price at a later date and/or earning income from rentals. Investors might buy and hold a property they expect to appreciate rapidly. They might also fix up a distressed property and immediately flip it for a profit, rent out the property, or hire a management company to do so, or some combination of those strategies. In order to profit as a real estate investor, you need to have the funds to be able to purchase properties.
A real estate wholesaler, on the other hand, doesn’t need much in the way of capital to earn a profit from a real estate transaction. Wholesalers may be required to submit an earnest money deposit to the seller to get exclusive rights to the contract. But they don’t need to finance buying the property unless they elect to use a double close. Furthermore, real estate wholesalers have a much quicker exit strategy than investors. They can turn a profit in a matter of weeks.
Who can become a real estate wholesaler?
In most states, anyone can become a real estate wholesaler without specific education or training.
To find distressed properties, wholesalers might:
- Search real estate listing sites like Realtor.com
- Market their business with bandit signs
- Search the newspaper or public records for legal notices that might indicate motivated sellers
- Drive around up-and-coming neighborhoods, identify distressed homes, and reach out to owners
To find buyers, wholesalers might:
- Visit trade shows and networking events
- Create a website or email marketing campaign advertising your business
- Be prepared with business cards
- Post on social media or create a blog to attract potential buyers
- Find investors on Craigslist
- Partner with a local real estate agent
Who is most likely to get scammed by wholesalers?
While anyone with a distressed home in a popular neighborhood can be a target, an Atlanta investigation uncovered that elderly, low-income and inexperienced homeowners are most harmed by the practice of wholesaling. They’re often unaware of how much their house has appreciated if they’ve lived there for many years, and are surprised when they can’t afford a new home with the cash from the sale.
Not only are wholesalers trained in persuasion, but they’ll use even more aggressive tactics, like reporting code violations to authorities. That puts financial pressure on the homeowner to sell when they can’t afford the repairs.
While wholesalers are earning hundreds of thousands of dollars per year on deals, low-income families are losing their largest asset and their best means of passing down wealth to future generations. By skimming equity from these families, wholesalers contribute to widening racial disparities in wealth-holding.
Is wholesaling regulated?
As long as a real estate wholesaler acts as the principal buyer and avoids marketing the property, they can operate legally without a license in most states and can misrepresent what a home is worth without repercussions.
However, because predatory wholesale deals are popping up across the nation, complaints in several states and cities have led to newly proposed regulations for the industry. For example, while real-estate wholesalers aren’t required to hold real-estate licenses in most states, the city of Philadelphia in 2020 created a license that wholesalers need to apply for. And in Illinois, wholesalers are required to carry a broker’s license. Arkansas and Oklahoma have also enacted new regulations. And though Colorado has not passed any laws, the state has issued a consumer advisory.
It’s likely that other states and cities will follow suit as wholesaling becomes more popular and hurts vulnerable homeowners. Cities and counties that are ripe for wholesaling are already responding to complaints from residents. For example, Allegheny County recently passed a resolution asking the state of Pennsylvania to either regulate real estate wholesaling or allow county authorities to require and enforce licensing and transparency on the part of wholesalers.
But in the meantime, consumers in neighborhoods inundated with “We Buy Houses” advertisements need to be aware of how to protect themselves. In most states, laws are written to regulate real estate brokers, and wholesalers don’t fit that definition.
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