What Exactly is Real Estate Wholesaling?

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Answered by: Marti, An Expert in the Investing in Real Estate Category
The dictionary defines "wholesaling" as the sale of commodities in quantity usually for resale (as by a retail merchant). We usually think of wholesale in connection with large discount stores, such as Costco or Sam's, rather than the sale and purchase of a home. However, the concept of wholesaling works quite well in real estate transactions.

What exactly is wholesaling of real estate? It is simply buying and reselling quickly. Occasionally, real estate wholesaling is also called flipping. Recently the term "flipping" has developed an unpleasant reputation. Some people were buying houses and reselling them quickly at highly inflated prices, usually to buyers who were not aware of the true real estate market in that area. And, unfortunately, some of these unscrupulous buyers were working with unscrupulous appraisers and/or brokers who produced phony appraisals and phony loan papers. This activity is not wholesaling of real estate - it is fraud.

Real estate wholesaling, done properly, can be profitable to the person selling the house, the wholesaler and the end buyer of the house. It can be a win-win-win solution. With the state of the current economy, many people are finding they can no longer afford their home. They may have been laid off from their job, going through a divorce, relocating to a different city or state, or their children may all be out on their own and their "empty nest" is simply too big or too expensive. This creates an excellent opportunity for real estate wholesaling.

When a homeowner finds they must sell their home, for any reason, this is referred to as a "distressed property" in real estate investing circles. The property itself is not distressed -- it is not (hopefully) falling down or has broken windows and pipes -- it is the homeowner who is distressed. This is an opportunity for the real estate wholesaler to step in and help relieve the distress.

Let's say a wholesaler hears from a friend about a family that has to move out of state. The wholesaler investigates the neighborhood and after doing his/her due diligence, determines the family's house is worth $100,000. The wholesaler sits down with the homeowner and determines what they owe on the house and what additional money they need to enable them get out of the house and move away. Let's say this amount turns out to be $50,000. The wholesaler buys the house for $50,000. The homeowner pays off what is owned to a bank or mortgage company, then moves out of state with their family and a little extra cash. Then the wholesaler turns around and sells the house to someone else for $70,000.

The original homeowner has saved their credit and avoided possible foreclosure. The new owner has a house with instant equity. And the wholesaler has made a profit, while helping both the original homeowner and the new homeowner. This is a win-win-win situation. This is real estate wholesaling.

The wholesaler may also decided to do some repairs to the house before selling it. This is called a fix-and-flip. The house may only need a small amount of cosmetic work, such as new carpets and paint. Or it may need more extensive work, such as a new kitchen or bathroom. The wholesaler may either do the work themselves, or hire a contractor. After the repairs are finished, the wholesaler can sell the house to a new owner for more than the $70,000 used in the previous example. This is also real estate wholesaling.

This is not a get-rich-quick method of real estate investing. Real estate wholesaling requires a thorough understanding of the current market in specific neighborhoods, an understanding of what repairs and renovations are needed along with their costs, and patience. Real estate wholesaling is a good way to steadily earn a good income, and a way to help distressed homeowners at the same time.

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