Real estate wholesaling is a widespread practice that allows anyone to potentially earn large commissions without a license or risking any of their own money. Wholesaling can be a great way to earn extra income in your spare time or learn more about real estate investing before you dive into more complex strategies. But, like any investment technique, wholesaling does have its downsides. Here is a look at some of the pros and cons of wholesaling real estate to help you decide whether it’s a viable strategy for you.
Table of Contents
What is Wholesaling Real Estate?
Wholesaling real estate is when an individual, known as the wholesaler, locates an undervalued property, gets it under contract, and then sells that contract to another investor who will renovate it to sell or lease to tenants.
Typically, it will be a distressed property. That means the home is either in foreclosure or has already been repossessed by the bank, so it’s being offered at a lower price than its actual market value.
A wholesaler’s job is to agree to purchase the property at a reduced price, then turn around and sell that contract for a higher price to an investor. The wholesaler can then pocket the difference between the original price and the resale price for finding the deal.
It takes a bit of finesse to pull off, but as long as the new price is low enough for the buyers to profit from the renovation, many investors are open to this arrangement because it saves them the trouble of finding deals on their own. So, the wholesaler can walk away with a sizeable commission without risking any of their own money or credit.
Advantages of Wholesaling Real Estate
1. Less Risk Than Other Real Estate Investing Methods:
One of the main perks of wholesaling is earning large commissions without investing any of your own money or leveraging your credit. While no investment strategy is entirely risk-free, wholesaling doesn’t require as much long-term commitment or risk to your personal funds as fix and flips or buying rentals.
2. Ability to Earn Large Commission in a Short Amount of Time:
Another benefit of wholesaling is that it’s possibly the most legitimate way to earn a large amount of money quickly. There is no limit to how much you can make, although you have to get the homeowner and investor to agree to your prices. Most wholesalers make an average of $5,000 to $10,000 per deal, but some make as much as $20,000 to $30,000 in certain areas. You may have to make many phone calls or knock on a lot of doors before you get lucky. But once you get a property under contract, you can typically close and collect a check in 30 days or less.
3. Do it In Your Spare Time:
Wholesaling doesn’t have to be your full-time career; you can do it after work or on the weekend to make some extra cash. It may take you longer to close a deal than if you were doing it full time, but your livelihood also won’t be dependent on your success. So, if you do close a deal, you can use the money to pay down your own mortgage faster or treat yourself to a nice vacation.
4. Learn More About Real Estate Investing:
Real estate wholesaling is a great way to learn more about investing without purchasing a property. It will teach you the skills you need to locate deals and negotiate with sellers. It will also help you build a strong network of other investors you can work with and learn from if you want to expand into other investing strategies.
5. Easy to Find Properties:
Finding distressed properties is easier than you might think. You can start by driving through your neighborhood and looking for abandoned homes or posting a “We Buy Houses” sign and waiting for leads to call you. You can also post ads on craigslist, view county records, and just use word of mouth to let people know you’re searching for distressed properties. Finding a seller to agree to a price low enough to wholesale is a bit harder, but there are a variety of different strategies for finding potential leads.
Disadvantages of Wholesaling Real Estate
1. Success Not Guaranteed:
One major downside of wholesaling is that success is never guaranteed. So, you could find your first deal within a week, or you could go months without coming close. The more experience you get, the easier it will be to develop winning strategies. But ultimately, it’s all about being at the right place at the right time, and no matter how much you do it, you can’t always predict when the right deal will come around. So be patient and don’t quit your day job just to wholesale real estate.
2. May Have to Face a Lot of Rejection:
Another disadvantage is you will likely face plenty of rejection before you find a deal, which may be discouraging for some. No one wants to sell their home for a rock bottom price, so you will have to be patient to find a truly motivated seller. Although you may get some beginner’s luck, most wholesalers make dozens or even hundreds of phone calls before they find a potential lead, and even then, the deal could still fall through. So be ready to hear a hundred nos before you hear a yes.
3. Can Be Difficult To Find a Buyer:
Finding a seller is only half the battle. Once you find a potential lead, you’ll also have to find a buyer willing to purchase the contract for a larger amount. So, it’s best to have a pool of potential buyers lined up before you start looking for properties. There’s often a clause in wholesaling contracts that allows you to back out if you can’t find a buyer, so you’re not on the hook to purchase the property if you can’t sell it in time. But it’s better to have a few potential buyers lined up so you don’t waste your time or get into any legal trouble. This can be challenging, depending on where you work.
4. Dealing with Motivated Sellers:
Motivated sellers are typically in a bad financial situation or have recently gone through a difficult life situation such as a divorce or recent death. So, they can often be emotional or under a lot of stress. You have to be gentle when dealing with motivated sellers because you don’t want to take advantage of someone’s misfortune. So, you have to be patient and sympathetic to their situation, or the deal could fall apart.
5. Not as Much Earning Potential as Other Real Estate Investing Methods:
Wholesaling carries less risk than other types of investing, but you won’t make as much as you would if you flipped the property yourself. You also won’t have the long-term cash flow from buying a rental property. So, while it’s a great way to earn extra commissions, many wholesalers eventually branch out into other methods.
Alternatives to Wholesaling Real Estate
Wholesaling isn’t the only real estate investing method you might consider. Here are a few alternatives that might make more sense for you.
Bird Dogging:
Bird dogging is similar to wholesaling but doesn’t involve getting the property under contract. Instead, the bird dog works for an investor to scout the deal and earns a commission if they decide to buy the property. Bird dogs typically earn smaller commissions, but they also don’t have to worry about getting the property under contract and finding a buyer. The investor they work for will handle that while the bird dog looks for more leads.
House Flipping:
House flipping is when you purchase an under-market property, renovate it and sell it to a homeowner or lease it to tenants. Wholesalers typically sell their properties to other investors who will flip the property themselves. Flippers can make a much larger profit, but they also have to purchase the property, risking their own money or credit. If you’re willing to take the additional risk, this is another way to make good money in real estate.
Rental Property Investing:
The most common type of real estate investing is purchasing a property and then renting it to tenants for a profit. You can either buy a property in good condition or buy a distressed property and fix it up. It’s a longer commitment than wholesaling but will provide you with steady cash flow, not just a one-time fee.
Is Wholesaling Real Estate Right for You?
Wholesaling is a low-risk way to earn commission while learning more about the real estate investment business. It’s not always easy, but it also doesn’t require years of schooling or an advanced license. But it requires plenty of patience and determination, and results are not guaranteed, so it isn’t necessarily a practical replacement for a full-time job.
So, if you are looking for a way to earn some extra income in your spare time and want an introduction to real estate investing, wholesaling is the way to go. But if you have a low threshold for failure and rejection and expect immediate results from your work, wholesaling may not be for you.