How Does Real Estate Wholesaling Work?

Considering the state of the real estate market in 2022, you’ll likely be inundated with offers as soon as you put your home on the market. Some of those offers may be from private buyers, but some will definitely be from wholesalers. Before you accept any offer, ask yourself – how does real estate wholesaling work?

Understanding the motivation and mechanics behind the offers you receive is the first step in finding the best buyer possible. By reading this article, you will learn how real estate wholesaling works, how to spot a wholesaler, and learn to differentiate whether someone is making a genuine offer or simply trying to make a profit at your expense by flipping the property.

What Is Real Estate Wholesaling?

Real estate wholesaling is the process of entering into a temporary contract with a homeowner that gives the wholesaler the right to sell the property to a third party. The wholesaler then sells the property to the third party for a profit. The wholesaler does not purchase the property.

We should stress that real estate wholesaling is legal. Some wholesalers use unscrupulous and underhanded tactics to get homeowners to sign contracts, but wholesaling is not a real estate scam per se. There are many federal and state laws intended to prevent homeowners from getting outright defrauded and virtually all wholesalers know how to avoid crossing that line.

How Does Wholesaling Real Estate Work?

Let’s say you are selling a property and get approached by a wholesaler. They get your house under a real estate contract and agree to sell it for a certain amount by a certain date. Then, they go look for a buyer to sell the contract to and pocket the difference between the amount you agreed on and how much they actually sold the home for.

To exemplify – the contract you sign with the wholesalers lists the price of your property as $200,000. They search for buyers and manage to sell your home for $230,000. The $30,000 difference between the listing price and what the property actually sold for is called the ‘spread’. The wholesaler gets to pocket the $30,000.

How Is Real Estate Wholesaling Different from Real Estate Investing?

A real estate investor is the end buyer. They may resell your property but only after they have purchased it. A real estate wholesaler does not buy your property. Further, investors will most often perform any repairs needed or remodel the house after they buy it, while this is not something a wholesaler does.

What Are the Disadvantages of Making Real Estate Deals with Wholesalers?

We’ve explained how wholesalers make a profit. So, obviously, you get less money than you potentially could. And, ultimately, that’s the main disadvantage of making real estate deals with wholesalers. But it goes further than that in practice.

Wholesalers will often approach owners of distressed properties that are in a rush to sell. Let’s go with a $300,000 home this time. Your home could be worth $300,000 in the traditional market if it were in perfect condition, but serious repairs need to be made – let’s say the roof needs to be replaced and the HVAC system is severely outdated.

Because the home is not in pristine condition and they need to sell it in a certain time-frame and make a profit, they cut the value of your home to 80%, so now it’s at $240,000. From that, they estimate what the repair costs could be and deduct them from the price.

In this instance, you are dealing with an honest wholesaler and they correctly estimate that the repairs would cost around $30,000. So, the offer they make you is $240,000 - $30,000 = $210,000. They sell the home to an investor for $230,000 and now you’re out $20,000 that you could have used to pay off some debts or take your family on holiday.

And all of this is presuming you are dealing with an honorable wholesaler. The more unscrupulous ones will use underhanded tactics. They may present themselves as real estate investors and keep you in the dark about how the process works.

If they know you are in a rush to sell and assess that you don’t know the true value of your property, they could present an unrealistic picture of the state of your property and low-ball you. It is not uncommon for them to inflate the repair cost estimates and pressure homeowners into signing the contract right away.

In short, if you are feeling pressured at any point or the process is not transparent, be extremely wary. Do your research on the potential buyer and don’t rush into signing any contracts.

An Additional Risk of Selling Real Estate to a Wholesaler

Besides making less money than you could, selling to a wholesaler comes with an additional risk – the deal may not go through. Because they are not the ones buying your home, there is always the possibility that they cannot find a third party to actually buy it. This leaves you sitting on your house for the duration of the contract, without any way to look for other buyers yourself.

Why Do People Sell Real Estate to Wholesalers?

We’ve answered the questions – how does real estate wholesaling work? We’ve explained the disadvantages and risks of making real estate deals with wholesalers. This naturally leads to the question – should anyone ever sell their property to a wholesaler?

If the answer was a resounding no, wholesalers would be out of business. Yes, if you sell your house to a real estate wholesaler, you won’t make as much money as you would otherwise. But good wholesalers have a wide network of investors and other buyers to whom they can sell your house.

So, when people are selling distressed properties, wholesaling real estate is sometimes their only option. While not optimal, good real estate wholesalers may be able to sell your house when nobody else could or it would take a lot of work. In short, selling to a wholesaler simplifies the process at the cost of losing money. For some people, that’s a deal they’re willing to make.

Is There a Way to Sell Distressed Real Estate Other than to Wholesalers?

If you are in California, yes, you have a better option – contact SleeveUp Homes. We are Southern California investors that will buy your property as-is for top dollar and you can close in as little as 7 days. You are selling directly to us and we will take care of any repairs needed in-house, which is why we can give you the best offer possible.

In addition, we take care of the closing costs and you won’t be paying any realtor commission. But don’t take us at our word – request a no-obligation cash offer and compare it to offers you’ve received from wholesalers. We’re confident you’ll notice a stark difference.

Author:

Cesar Gomez , Broker /

Cesar has worked as a real estate agent and broker in the southern California region since 2013.

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