Real estate wholesalers procure contracts for houses that are distressed or have a low market value and then assign those contracts to investors, at a much higher price. They make a huge profit on the homeowners’ behalf.
The practice of real estate wholesale has become popular amongst entry-level investors who want to make big money in a short time. They do this at the expense vulnerable homeowners by using aggressive sales techniques to convince homeowners to sell their homes for less than the market value so that they can resell them for a higher rate.
A total of 544 911 properties were estimated to have been sold off-market in 2019, with an average wholesale price of $17 200. This is equivalent to $10 billion of lost equity, which wholesalers pocketed through assignment fees. That’s about $18,000 every minute in the United States.
Homeowners who lived in a distressed house had limited options to sell their home for cash if they couldn’t make repairs. Wholesalers who are looking to make a profit will take advantage of those in financial difficulty. It is also difficult to sell a house that’s not in turnkey condition via the MLS. Sundae, however, has created a marketplace where sellers can connect directly with investors to receive competitive cash offers. We have eliminated the middleman, so homeowners can get the best possible price for their house.
What is the process of real estate wholesale?
This is how a typical real estate wholesale deal plays out.
- Real estate wholesalers find a property at a price below market value. This is usually because the house is in distress or the seller wants to sell the home quickly.
- Real estate wholesalers make an offer, and then negotiate with the seller. The home goes under contract when both parties have agreed on a price.
- Real estate wholesalers look for cash buyers or investors who are interested in buying the contract rights to flip the home and make a profit.
- The wholesaler retains the difference. The investor receives the rights to the contract in exchange for the wholesale fee.
- Real estate wholesalers receive a cut of between $5,000 and $10,000 for each deal.
Double closing is another option. The wholesaler buys the property, pays for the closing costs and then sells it to the investor. This requires that the wholesaler secure funding but can be a good option if the assignment of the contract to an end buyer is not a viable alternative.
What is the difference between a wholesaler and a real-estate agent?
Real estate agents represent both buyers and sellers in order to coordinate the real estate transaction. Real estate wholesalers act as middlemen between property investors and sellers. Real estate agents receive a commission on each deal, usually 6% of the sale price. Wholesalers charge a flat rate for every deal.
You must pass the state exam and complete pre-licensing courses to become a licensed real estate agent. Wholesalers do not need to have a license. This is unless wholesalers are doing more than one transaction per year in Illinois. Wholesalers can choose to obtain a license if certain benefits are important to them, such as access to the MLS.
What is the difference between a wholesaler and an investor in real estate?
Real estate investors buy property below market value in order to sell it at a higher price later or earn income through rentals. Investors may buy and hold property that they believe will appreciate quickly. Investors can also repair a distressed home and sell it immediately for a profit. They could also rent out a property or hire a property management company. To be successful as a real-estate investor, you must have the money to buy properties.
Real estate wholesalers, on the contrary, don’t require much capital to make a profit. Wholesalers might be required to pay a deposit to secure exclusive rights on the contract. They don’t have to finance the purchase of the property, unless they choose to use a “double close”. Real estate wholesalers also have a faster exit strategy than investors. They can make a profit within a few weeks.
Who can become an estate wholesaler or agent?
Anyone can become an real estate wholesaler in most states without any specific training or education.
Wholesalers may:
- Search real estate listing sites like Realtor.com
- Bandit signs are a great way to promote your business.
- Look for any legal notices in the newspapers or public records that may indicate motivated sellers
- Drive through up-and coming neighborhoods to identify distressed properties and contact the owners
Wholesalers may:
- Visit trade shows or networking events
- Create a marketing campaign via email or a website to promote your business
- Prepare yourself 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.