Wholesaling Basics
Step #1 - Real Estate Wholesaling Basics Explained
What is Real Estate Wholesaling?
Simply put real estate wholesaling is the process of finding real estate you can buy at a discount, placing the property under contract by signing a purchase agreement with the seller, then selling your interest in the property to another buyer. Here's the reason why wholesaling works...
When you sign a contract with someone and give them consideration usually in form of a Earnest Money Deposit (EMD) they're legally bound to sell you that property. (There has to be some type of consideration to make the contract binding even if it's just one dollar $1.00) In other words it gives you "equitable rights" to the property and its perfectly legal to sell those rights to another buyer.
Typically in the real estate wholesaling world the buyer will be an investor that is going to fix up and either rent or resell the house. The best type of buyers you can have is a cash investor because they can move quickly and make the real estate transaction go smoothly, and quite often they have experience working with other wholesalers.
When you sign a contract with someone and give them consideration usually in form of a Earnest Money Deposit (EMD) they're legally bound to sell you that property. (There has to be some type of consideration to make the contract binding even if it's just one dollar $1.00) In other words it gives you "equitable rights" to the property and its perfectly legal to sell those rights to another buyer.
Typically in the real estate wholesaling world the buyer will be an investor that is going to fix up and either rent or resell the house. The best type of buyers you can have is a cash investor because they can move quickly and make the real estate transaction go smoothly, and quite often they have experience working with other wholesalers.
Let's take a look at what a typical wholesaling transaction looks like:
Now obviously the example above is over simplified but it's meant to be so you get a very basic understanding of how the wholesaling process works. Don't worry I'm going to lay out each and every step of the wholesaling process for you.
- The wholesaler (you) locates a house owned by someone motivated to sell below market value because the home needs repair or for numerous other reasons we'll discuss later.
- The house's ARV (After Repair Value) is $110,000 but the savvy wholesaler (you) negotiates a price of $60,000 because of the condition of the property and you estimate the needed repairs to be in the neighborhood of $10,000
- The wholesaler (you) and property owner (Mr. Seller) agree to the price and you place the property under contract with a real estate purchase agreement.
- The wholesaler (you) then sends the property information to his list of house hungry cash investors and quickly find one eager to buy it at the price of $70,000 ($60,000 sales price + $10,000 assignment fee)
- The Wholesaler (you) and the cash investor (Mr Cash) sign a one page assignment agreement that transfers your equitable rights to purchase the property to him for an assignment fee of $10,000 dollars.
- Lastly the real estate closing takes place and you walk away with a check for $10,000 dollars and move onto your next deal.
Now obviously the example above is over simplified but it's meant to be so you get a very basic understanding of how the wholesaling process works. Don't worry I'm going to lay out each and every step of the wholesaling process for you.
No Cash, Credit or hammers needed
Many people want to get into real estate investing because we've all been told its one of the best ways to build wealth, but there is a common misconception you need cash and good credit to jump into the game... This is just Not True!
As you'll learn wholesaling doesn't require cash or credit because you're not personally going to buy the property. Your role is really to be the the middle man in the transaction that brings the seller and buyer (investor) together. The funds needed to buy the property will come from the buyer you assign the contract to so again you'll never need cash, credit, line of credit or mortgage approval to be a real estate wholesaler.
In addition to eliminate any risk all the real estate contracts you'll use in wholesaling contain "exit clauses" that allow you to get out of the contract should you have problems finding a buyer to assign the contract to. We'll speak more about contracts and exit clauses in the wholesaling contracts section later in the course.
Another great aspect of wholesaling houses is that unlike flipping houses you'll never lift a hammer or touch a paint brush. Wholesaling is a quick transaction which is usually completed in 30 days and often much less. So while flippers sometimes make more money on a deal they have a lot more time, money and risk invested as well. (YAY WHOLESALING!)
As you'll learn wholesaling doesn't require cash or credit because you're not personally going to buy the property. Your role is really to be the the middle man in the transaction that brings the seller and buyer (investor) together. The funds needed to buy the property will come from the buyer you assign the contract to so again you'll never need cash, credit, line of credit or mortgage approval to be a real estate wholesaler.
In addition to eliminate any risk all the real estate contracts you'll use in wholesaling contain "exit clauses" that allow you to get out of the contract should you have problems finding a buyer to assign the contract to. We'll speak more about contracts and exit clauses in the wholesaling contracts section later in the course.
Another great aspect of wholesaling houses is that unlike flipping houses you'll never lift a hammer or touch a paint brush. Wholesaling is a quick transaction which is usually completed in 30 days and often much less. So while flippers sometimes make more money on a deal they have a lot more time, money and risk invested as well. (YAY WHOLESALING!)
Important Wholesaling Facts you MUST understand!!!
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Real Estate Agents (Realtors) and Brokers are licensed to sell real estate (you're not) - Your state's laws require Realtors and Brokers to meet certain education requirements and pay licensing fees to legally negotiate and arrange the buying and selling in real estate transactions.
Real Estate Wholesalers on the other hand DO NOT sell property, they sell their equitable rights to a purchase contract. I'll say it again... Real Estate Wholesalers sell the rights to the purchase agreement they have negotiated with the property seller, not the property itself. |
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As you might of noticed I've repeated myself several times on this page and it's because I want to beat the basic concept of wholesaling into your head. Almost always I see wholesalers advertising a "house for sale" instead of a "contract assignment" This is completely wrong and could get them into hot water. Later will discuss how to market the properties you get under contract the correct way so you don't get yourself into trouble.
Wholesaling Basics Recap
- Wholesalers make their money on the assignment of the purchase contract.
- You do not need a real estate license to wholesale real estate.
- It's 100% legal because your assigning your rights to a contract not selling real estate.
- Wholesaling is a fast cash now strategy unlike flipping or owning rental properties.
- You don't need cash or good credit to be a real estate wholesaler
Before you move on be sure you have a thorough understating of the wholesaling basics on this page.
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