Wholesale Real Estate: What Is It and How to Get Started

When most people think about real estate investing, they imagine buying rental properties or flipping a home for profit like they're the star of a reality TV show. But those methods usually take considerable amounts of capital that many people don't just have.

For people who have more time than money, there is a better way to learn how to invest money. Wholesale real estate is the process of finding real estate deals and pairing them with investors who have the skills and money necessary to make a profit.

In this article, we'll take a deep dive into wholesale real estate and discuss the pros and cons of this type of real estate investment. We’ll help you decide whether this type of investing is for you, and outline the first steps you can take to get started as a new investor.

What is wholesale real estate?

Wholesale real estate consists of undervalued properties that a wholesaler buys below the value of similar homes in the same neighborhood. These homes are usually outdated, damaged or defective, which is why the seller cannot sell them for a normal price. The wholesale real estate investors enters into a contract to buy the property from the seller, then sells that contract to another investor for a fee. Those investors typically fix up the property to resell it or turn it into a rental property.

A wholesaler is generally not a licensed real estate agent. In addition, wholesalers tend to focus on properties that are in distressed conditions and usually not suitable for the Multiple Listing Service. These properties may be in disrepair, have suffered fire or storm damage, or be left incomplete after a previous rehabber ran out of money.

Wholesale real estate is a good choice for beginners looking to learn how to invest in real estate. You can start searching for wholesale properties without a lot of money or experience. As you build experience and capital, you may decide you want to start flipping houses or switch to buying rental properties — or you may decide the wholesale market is what you enjoy. 

How does wholesale real estate work?

Wholesale real estate starts with the wholesaler finding a property owner who wants to sell their home or building. The wholesaler negotiates the price of the home as well as the length of the purchase contract, and then enters into a contract with the owner to buy the home. The longer the term of the contract the better, because this gives the wholesaler more time to find an investor who will buy the contract from them.

The wholesaler then spreads the word to their network about the deal. When wholesalers share deals with their network, they provide key information that enables the potential buyer to decide whether they're interested.

Information a wholesale real estate investor would share about a property includes:

• Sales price
• Estimated after-repair value
• Projected rehab budget
• List of key items needing repair
• Photographs of the property

Some wholesalers include the property's address in the first communication, but others do not. The wholesaler may keep the address a secret because it wants the investor to communicate through them, rather than going directly to the owner. If an investor speaks with the original property owner directly, they may choose to cut the wholesaler out of the transaction to avoid paying the wholesaler’s fee. Or the investor may find out how much the seller is selling the home for and negotiate a lower fee for the wholesaler.

The 3 types of wholesale real estate investing

There are three distinct types of real estate a wholesaler may choose to focus on: land wholesaling, residential wholesaling, or commercial wholesaling. Let’s take a look at each of these investment strategies so you can understand the difference and start to consider which may be most interesting to you.

Land wholesaling

Land wholesaling is when a wholesaler gets a piece of land under contract. This land is usually vacant but may have a structure on it. Any existing structures will most likely be torn down and removed as the focus of this transaction is the land itself and its potential for development.

There are three types of land that a land wholesaler will target:

• Undeveloped land does not have utilities and no buildings have ever been built there.
• Developed land generally has utilities in place and may or may not have been built on in the past. It has been recognized by the city as somewhat ready to be built on.
• Teardowns are properties with existing structures on the land. The structure(s) may need to be torn down due to condition, to build something else with specific features, or to erect a different type of building entirely.

This type of real estate is best for wholesalers who have numerous developers in their buyers list. Developers are real estate investors who turn raw land into homes, commercial buildings, or other real estate investments. If you get involved in land wholesaling, you should understand local ordinances and what types of properties can be built according to the zoning of the land.

Residential wholesaling

Residential wholesalers focus on single-family residences and multi-family properties up to four units. These could include duplex, triplex, and fourplex properties.

In residential wholesaling, wholesalers are focused on finding properties that are likely to sell significantly below the average price per square foot of the surrounding homes. These properties are usually distressed or the sellers are experiencing financial difficulties. This makes the sellers more willing to get rid of the property quickly and for less than market value. These situations may include job loss, divorce, medical problems, or the death of the owner.

To be an effective residential wholesaler, you should understand the local real estate market conditions to spot homes that are neglected and available at a discount compared to surrounding homes.

Commercial wholesaling

Commercial properties are primarily valued based on their tenant occupancy and how much rent they collect against their operating expenses. To succeed in commercial wholesaling, you will need to find properties that are undervalued because they are collecting lower-than-market rent from the occupants and/or there are too many unoccupied units.

If you're able to increase rental income while keeping expenses low, the value of the property will increase. You can achieve this by increasing rents on existing tenants, getting occupancy closer to 100%, finding ways to reduce expenses, or a combination of the three.

Commercial wholesaling property types include apartments, office buildings, storage facilities, and other similar real estate. In most cases, residential buildings of five units or more are considered commercial buildings.

To do well as a commercial wholesaler you must be able to identify buildings that are underperforming compared to similar properties. When sharing these deals with your commercial real estate investors, you must know enough about the market to be able to show the potential of the property.

Wholesaling vs. house flipping vs. BRRRR method

The three most common forms of real estate investing are wholesaling, house flipping, and the BRRRR method. Here’s what you need to know to understand the differences between them:

Wholesaling

Wholesaling is when a wholesaler gets a property under contract with the seller at an agreed upon price. The wholesaler makes money by selling the contract to an investor at a higher price or by taking a flat fee upon sale of the contract.

Many real estate investors start out as wholesalers because the barriers to entry are low. You do not need experience, nor do you need a lot of money. However, the ability to negotiate with sellers, be persistent in your search for deals, and build a network of potential buyers are critical skills for wholesale real estate investors.

House flipping

House flippers find a distressed property (a "fixer-upper") that is undervalued for the market, fix it up, and sell it for a profit. Once the deal is closed, they move on to the next one and never look back.

Being a house flipper requires an astute understanding of the home resale market and what current buyers are looking for in a home. You may be lucky enough to live in a good state for house flipping, but you’ll want to be aware that some states are not good for house flipping.

You’ll also need to have a keen sense of design trends that will wow a prospective end buyer and set your home apart from the competition. Purchasing the wrong tile, painting the wrong color, or picking a home with an awkward layout can cause your property to sit on the market for months.

The ideal house flipper views real estate as transactional. Whether you hit a home run, lose money, or barely break even, once the sale is done, you have to clear your mind, examine what there was to learn, and move on.

BRRRR Method

The BRRRR method is short for buy, rehab, rent, refinance, and repeat. These are the steps these types of real estate investors take throughout their investing process.

BRRRR method investors purchase distressed properties that can increase in value after repairs are made. These investors spend money to increase the property's value. These repairs can be minor or major, depending on the property and the local market.

Examples of minor repairs include replacing the carpet, applying a fresh coat of paint, or adding a tile backsplash and other accents. Extensive repairs might include replacing a roof, upgrading a half bath into a full bath, or converting the garage into an extra bedroom.

Once the rehab is complete, the BRRRR method investor finds a tenant and starts collecting monthly rent. This income is used to get approved to refinance the mortgage on the home. Because the home is now valued higher due to the repairs, the investor can also get extra cash out of the refinance. That cash is then used to buy their next investment property.

The ideal BRRRR method investor is someone who wants to build equity and a stream of income from rents over time. They either want to manage the properties themselves or hire a property manager to care for them. Their stream of income may start slowly with one property, but builds as they add more properties to their portfolio. Eventually this can provide a steady and diversified source of income.

How do you start wholesaling real estate?

How to find wholesale real estate deals

Building your supply of deals takes effort and the knowledge of where to find opportunities. In most cases, you will not find wholesale deals on the MLS because it costs money to list a property. Additionally, posting an MLS listing requires a real estate agent license in some areas.

Instead, you need to learn your market and be able to identify potential opportunities on your own. Start by driving around and looking for homes that don't fit in. Are there any properties showing neglected repairs, an unkempt lawn, or severely outdated curb appeal? These might be signs of financial distress.

You can also search for homes that are paid off or have a lot of equity. You can do this through a search of public mortgage records. Some services, such as PropertyShark, will perform the search for you for a fee. Once you have your list of properties, you can contact the owners to see if they'd like to sell.

Don't forget about free and low-cost services as well. Facebook and online classified sites (such as Craigslist) are great options to connect with people for little-to-no money:

• On Facebook, you can join groups of like-minded people. There are groups dedicated to investors who may be willing to buy your deals; wholesalers who share strategies and answer questions; and property owners who need to sell their properties.
• Online classified sites have sections dedicated to real estate. You can search for people who need to sell their homes and place ads for your properties to try to find a buyer.

How to run the numbers for wholesale real estate

For a deal to make sense, the seller, buyer, and you all have to be satisfied. For that to happen, you need to run the numbers to determine whether a deal is possible.

First, talk with the seller to understand their needs (e.g. paying off their mortgage) and what they would be willing to sell the property for. Then, you’ll compare that to an estimated value of the renovated home using the average price per square foot for the neighborhood.

Here’s how you run the numbers:

1. Use an online real estate website such as Zillow or Realtor.com to look for recently completed sales in the neighborhood.
2. Divide the sales price by the square footage to get the price per square foot. A 1,500 square foot home selling for $60,000 is $40 per square foot.
3. Look up several properties, at least three to five, and average the price per square foot.
4. Multiply that number by your property's size to arrive at a reasonable estimate of the future value of the property. For example, if the average price per square foot in your area is $76 and you have a 1,500 square foot home, the estimated future value would be $114,000. This future value is also known as the after-repair value.
5. Estimate the cost of the needed repairs to your potential property. This skill will get better with time. Before you develop this knowledge, talk with local real estate investors and contractors to ask for their projections. You'll want to have estimates for carpeting, tile, interior and exterior painting, roofs, and other common repairs.
6. Subtract the purchase price and repair cost from the ARV of the property. This is the potential profit on the property. Assume that a home’s ARV is $114,000 and you are purchasing it for $60,000. You want to be paid $5,000 in wholesale fees and you’re budgeting $15,000 for rehab and expenses. That leaves the potential investor you’re selling to with $34,000 of equity in the home. ($114,000 - $60,000 - $15,000 - $5,000 = $34,000) Equity is the value of the home minus what they paid to acquire and rehab the property.

Ideally, the total of the purchase price, cost of the repairs, and your fee should be 70% or less of ARV. Our example is right on target because our total cost is $80,000 which is around 70% of the home’s ARV of $114,000.

The reason why 70% is a good target is because that’s the general limit of what a bank will lend an investor on a property. For example, the $114,000 house above is likely to be approved for a maximum loan of $79,800. Also if your investor is looking to flip the property, the 70% rule gives them enough cushion to pay the 6% real estate agent commissions and other selling expenses, and still make a profit on the sale.

The key to keeping your investors coming back for more is finding them profitable investments. The more they make from your deals, the more they want to work with you and pay your fees.

How to get funding for real estate wholesaling

For most wholesale real estate investors, the cost to run your business is limited to the deposits you have to put down to get a property under contract and the costs to market the property to potential investors.

You should focus on saving in an online savings account or a business checking account. Keep this money separate from your personal expenses so you don't accidentally spend it.

If you're having trouble saving up the money to fund deposits on a home, consider credit cards that offer 0% interest promotions when you use a balance transfer check. You can write yourself a check and deposit the amount into your bank account. You can then use that money as a deposit on a deal and you’ll have a number of months to pay off the credit card without incurring interest charges.

The smart strategy is to use the money to get a property under contract, find an investor, and then pay off the balance before the 0% promotional offer expires. Otherwise you’re going to pay a lot in credit card interest and it’s going to throw all the math off on your deal.

How to build your wholesale real estate network

Building your network of investors and other real estate professionals will be crucial to your success. One of the best places to network is your local REIA (Real Estate Investing Association). BiggerPockets is a free online community dedicated to real estate investing and allows you to search for members in your local area.

You can also look up local real estate investing groups on Facebook. You can join us in the FinanceBuzz BiggerPockets Fans - Real Estate and Investors group. The community there will be happy to chime in with their experiences and point you in the right direction if you're in their area.

FAQs about wholesale real estate

Bottom line

You might be thinking it’s a good time to buy real estate, and you may have heard that wholesale real estate can be a lucrative business. Although this is true, the income potential will be determined by your ability to find properties, negotiate a purchase contract, and deliver solid deals to your investor network will determine how successful you will become. But because the real estate wholesaling business does not require a lot of knowledge or capital, many first-time real estate investors start with this strategy.