What is Wholesale Real Estate?
In addition to buying and selling properties outright, wholesale real estate is another way to generate income in this competitive market. In this article, we will take a closer look at wholesale real estate and when it is a good option for your portfolio.
What is Wholesale Real Estate?
When you “wholesale,” you are acting as a kind of middleman between a seller and a buyer. Wholesalers offer purchase contracts to individuals wanting to sell their homes. These are often properties in need of certain repairs or from individuals needing to move in an emergent situation. The wholesaler guarantees a certain sum within the contract, which will be given to the seller minus a fee once the property is sold. Most purchase agreements between sellers and wholesalers also stipulate a deadline by which the home must be sold.
Traditional property investors buy properties up front, then try to sell them or rent them for a profit. Wholesalers are not selling the property. Rather, they are selling their rights to the purchase contract they offered the seller initially.
How Do Wholesalers Make Money?
In general, real estate wholesalers stand to make a profit by finding sellers willing to sell their homes at below market value. These individuals may be in foreclosure or have another emergent reason for selling, such as dilapidation. This means they will often accept a lower amount of money in exchange for a quick sale.
Once the wholesaler and the homeowner agree on a price, a contract is put into place. The wholesaler then locates an interested investor, such as a house flipper, to buy the property for 5 to 10 percent more than the wholesaler paid. The flipper will go on to make needed repairs, then resell the home at an even greater profit.
Pros of Wholesale Real Estate
The main advantages to wholesale real estate have to do with how quickly these transactions take place. This can mean a fairly steady stream of income, versus depending upon the somewhat fickle housing market. Specific pros of wholesale real estate include:
- Little money required up front (low risk initial investment)
- No credit score required
- Profits can be made quickly
- Valuable experience negotiating and navigating the real estate market
Individuals with a firm network that can easily line up interested buyers would be well suited to wholesale real estate investing.
Cons of Wholesaling in Real Estate
Wholesaling is not for everyone. It requires shrewd negotiation skills, a solid business network, and a lot of grunt work to find the right properties. Other things to consider include:
- Profit margins are usually lower in wholesale transactions than in other real estate investments.
- Some property owners may not be comfortable with the wholesale process.
- Inventory can also fluctuate greatly, which means your income may be unpredictable at times.
Funding for Wholesale Real Estate Investors
Because turnaround times for wholesale buyers are so fast, funding also needs to happen quickly. Many wholesalers opt for a type of short-term, hard money loan known as “transactional funding.” Also called “flash funding” or “same day funding,” these loans can be issued and repaid within a span of days. This whirlwind financing may seem overwhelming, but it is critical in maintaining a competitive edge in a business where properties go fast and double closings are inevitable.
Pine Tree Financial Partners offers hard money loans for all types of real estate investors. We pride ourselves on our customized products and fast processing time. If you are looking to fund your next project in the state of Colorado, contact our office or go online today to get started.