The Pros & Cons Of Wholesaling Real Estate: An Investor's GuideJun 30, 2023
Wholesale real estate exit strategies have gained a lot of momentum in recent years. Wholesale real estate investors of every experience level, beginner and veteran, are drawn to the enticing opportunity to build wealth without exposing themselves to too much risk.
However, as attractive as wholesaling can be, it’s not without its drawbacks. Like any investment strategy, real estate wholesaling comes with its own set of advantages and disadvantages. Therefore, we’ve created this guide to inform investors about the pros and cons of wholesaling real estate.
Are you ready to dive into real estate wholesaling, examining its potential benefits and pitfalls? Here at Real Estate Skills, we’ll teach you everything you need to know about the pros and cons of wholesaling real estate, including the following:
- What Is Wholesaling Real Estate?
- Pros & Cons Of Real Estate Wholesaling
- Is Wholesaling Real Estate Right For You?
- Wholesaling Real Estate Pros & Cons: FAQs
- Final Thoughts On The Pros & Cons Of Wholesaling
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What Is Wholesaling Real Estate?
Wholesaling houses have emerged as a popular investment strategy within the housing sector, fueled by its ability to generate quick profits. This particular real estate investing strategy offers many advantages, including rapid turnaround times, minimal capital requirements, and a relatively straightforward approach, making it an ideal starting point for beginners.
Wholesalers serve as vital intermediaries (aka the middleman), connecting cash buyers to motivated sellers facing foreclosure or other urgent situations. Due to the nature of their real estate business, wholesalers aim to facilitate a real estate transaction that might otherwise have never occurred.
However, before connecting property owners with potential buyers, they must promise the current owner they can find a buyer for the home at a predetermined price. Not only that, but the wholesaler must also acquire the sole right to buy the house. Once they control the property purchase rights, wholesalers transfer these rights to other buyers, pocketing a modest profit.
The term "wholesaling" accurately captures the role of wholesalers: acquiring investment properties below market value and transferring them to other investors at fair prices. When executed effectively, this step-by-step process benefits all parties involved. The current homeowner gets the proceeds they want, the end buyer secures their next deal with an attractive after-repair value, and the investor earns a wholesale fee that they negotiated with the home buyers. Thus, everyone in the deal gets what they want.
Now that we’ve identified what wholesaling is, let’s look a the pros and cons of real estate wholesaling.
Pros & Cons Of Real Estate Wholesaling
Wholesaling has proven it belongs in the pantheon of real estate investing strategies. However, like every other strategy it can be compared to, wholesaling has both pros and cons. More importantly, aspiring wholesalers familiar with the benefits and drawbacks before they get started will have an advantage. Let’s look at the pros and cons of wholesaling real estate.
Pros Of Wholesaling Real Estate
There are several benefits of wholesaling real estate, not the least of which include the following:
- Quick Profits
- Little To No Cash Or Credit Score Requirements
- Low Barrier To Entry
- Limited Risk
- Gateway Investment Strategy
While there’s no universal timeframe for a wholesale deal, connecting sellers with buyers is relatively quick. Wholesale real estate entrepreneurs can take anywhere from a few hours to a few weeks to earn a profit.
Still, the fact remains: The speed of implementing and completing a wholesale deal significantly benefits investors. Investors can generate short-term profits and maximize income efforts.
For context, wholesale deals only take a fraction of the time to complete relative to their rehabbing and flipping counterparts, ultimately facilitating a quicker turnover of capital and the potential to pursue a higher volume of deals.
Little To No Cash Or Credit Requirements
While there are exceptions (like earnest money and double closings), the overwhelming majority of wholesale deals require little to no cash flow or credit on the investor’s behalf. Assigning a wholesale real estate contract instead of purchasing real property navigates around needing a real estate license, Realtor, substantial upfront capital, or a strong credit profile. As a result, both new and seasoned investors will find unique advantages for their particular situations.
On the one hand, the lack of required capital and credit essentially democratizes the entire wholesaling industry, allowing anyone—regardless of their financial resources—to partake. A distinct lack of money is no longer an obstacle for anyone aspiring to wholesale distressed properties.
Seasoned investors, on the other hand, may allocate their untapped capital toward other wealth-building investments. By wholesaling without significant upfront capital or the help of lenders, those with more access to capital can put their money to work in different ways to maximize their profits.
Low Barrier To Entry
As previously discussed, new wholesale real estate investors won’t find the need for capital to be too much of an obstacle to overcome, making it relatively easy to break into the wholesaling industry. On top of that, however, wholesaling requires the least amount of experience—relative to rehabbing and scaling an entire rental portfolio.
That’s not to say wholesaling is easy, only that it requires less experience and knowledge in the real estate sector than other exit strategies. Whereas rehabbing and owning rental properties need substantial capital, credit, and expertise, wholesaling allows individuals to enter the market with minimal resources.
Due to its relative ease, wholesaling allows anyone and everyone to participate in the real estate market and build wealth without becoming a real estate agent. Perhaps even more importantly, the level of difficulty—or lack thereof—facilitates entrepreneurship, encourages individual thinking, and provides a platform for individuals to pursue their financial freedom.
As an entry-level strategy with minimal upfront capital and credit requirements, wholesaling is an excellent investment for the risk-averse. To be clear, wholesaling does expose investors to some risk, but less than other real estate investment vehicles. As a result, mistakes made by new investors are more likely to serve as learning opportunities than debilitating capital losses.
While investors may not be risking much capital, however, they can potentially waste time, which is a significant risk in and of itself. At the very least, time is an investor's most valuable asset, and anything that wastes it can harm their pursuit of building a wholesale business. Therefore, while wholesaling is less risky than other investment strategies, it’s essential not to waste anyone’s time.
Gateway Investment Strategy
In lieu of the previously mentioned benefits, wholesaling is a great way to break into the world of real estate investing; it provides new investors with a profitable yet approachable investment opportunity in the short term. Few exit strategies, for that matter, offer such a unique combination of potential and risk management.
Wholesaling is so approachable, in fact, that many investors use it as a stepping stone into subsequent exit strategies. The knowledge, experience, contacts, and confidence investors gain can easily translate into other fields in the real estate sector. Everything investors learn from wholesaling may be applied to other areas of the real estate industry. Whether it's a network of buyers and sellers or a little extra knowledge in drafting a purchase contract, wholesaling experience can be extrapolated into other exit strategies with an attractive profit margin.
Additionally, wholesaling may give investors the cash they need to start rehabbing and flipping, which is much more capital-intensive. In fact, it’s pretty standard for investors to wholesale until they earn enough cash to move on to other strategies.
Cons Of Wholesaling Real Estate
Not unlike every other investment strategy, wholesaling has many drawbacks to keep in mind. While the benefits greatly outweigh the negatives, wholesalers need to keep these drawbacks in mind at least:
- Inconsistent Paydays
- Difficulty Finding Buyers
- Maintaining An Updated Buyers List
- Relatively Low Profits
Wholesaling is not a typical nine-to-five career path; it’s a wealth-building vehicle deployed by entrepreneurial-spirited investors who want to control their time and finances. As a result, wholesalers can’t expect consistent paydays; there’s no paycheck coming in on a regularly scheduled basis. Instead, profits are realized upon each completed deal.
Inconsistent paydays are to be expected, but whether or not that’s a drawback is up to the individual investor. After all, inconsistent doesn’t mean infrequent. Wholesalers who treat the exit strategy like a wholesaling business can still make inconsistent profits at higher prices on a regular basis. Those following a wholesaler system may collect their fees more often than predictable paychecks.
Difficulty Finding Buyers
Some people may suggest finding buyers for wholesale deals is difficult, and they may be on to something. Finding a buyer requires matching the perfect property with an investor when they are looking for one; both timing and preference need to align, which sounds difficult.
However, wholesalers need to look at it another way. Wholesaling is more about finding the right property (on social media, with a direct mail campaign, or another way) for the right buyer. That way, wholesalers will know which properties to look for on the market. Once wholesalers prioritize the buyers first, they may find it easier to facilitate deals.
You can also check out this video below on how to find cash buyers online for free!
Maintaining An Updated Buyers List
Finding buyers can be difficult for inexperienced wholesalers, but once they do, they may find themselves with repeat business opportunities. Most buyers are, after all, rehabbers who are constantly flipping houses. Therefore, when a connection is made, it’s in a wholesaler’s best interest to maintain relationships, which leads to another potential drawback: keeping an updated buyers list.
Buyer lists are simultaneously wholesalers’ best friends and worst enemies. On the one hand, a well-kept and updated buyers list is the quickest and most profitable way to facilitate wholesale deals. On the other hand, maintaining a buyers list requires a lot of work. Wholesale real estate investors must constantly contact their buyers to meet their needs.
Maintaining a buyers list is similar to maintaining any other relationship. There needs to be constant communication and mutual respect for the other individual. Only when the needs of each are met can wholesalers fast-track their investments and profits.
Relatively Low Profits
To be perfectly clear, wholesaling houses is a great way to build wealth. However, wholesale deals typically generate fewer profits than flippers and landlords. Whereas most wholesale deals net the investor about 5% to 10% of the end buyer’s acquisition price, the average gross profit of a flip reached $67,900 as recently as last year, according to ATTOM Data Solutions.
On a deal-to-deal basis, wholesales net much lower profits. However, wholesale deals are also much less risky and can be completed in a fraction of the time. Efficient wholesalers are entirely capable of completing several deals before rehabbers complete even one, all without risking any capital at all. Therefore, while wholesales may not net as much profit, they can still result in a lucrative career that doesn’t expose investors to many risks.
Ready to start wholesaling real estate? Join Alex Martinez at his FREE training to learn how to get started with house-flipping and wholesaling!
Is Wholesaling Real Estate Right For You?
Unfortunately, there’s no one-size-fits-all answer to the question, “Is wholesaling real estate right for you.” Instead, you need to take an unbiased look at yourself and confirm whether or not wholesaling can get you one step closer to your goals. At the very least, knowing if wholesaling houses suit you depends on your specific objectives, risk tolerance, amount of free time, and available resources—all intangible things unique to each individual.
With the intangibles out of the way, it’s time to look at the tangible skills you’ll need to become a successful wholesaler. Wholesaling requires strong people skills, like negotiating with potential buyers and sellers. Maintaining relationships with people on a buyers list also takes a lot of work. When all is said and done, it’s a people business, so wholesalers need to be good at working with—you guessed it—people.
Wholesaling also requires an intimate knowledge of the local market. Investors need to know the neighborhoods they are wholesaling in like the back of their hands. The more knowledge wholesalers have of a given area, the more likely they will complete a deal and make success habitual.
Ultimately, nobody is more equipped to tell you if you are ready to wholesale real estate than you. Therefore, compare your traits with those required of a wholesaler and decide accordingly.
Wholesaling Real Estate Pros & Cons: FAQs
The pros and cons of wholesaling real estate may be intimidating to those just starting their journey. Therefore, we have compiled a list of the most frequently asked questions and proceeded to answer them for the sake of beginners.
Is Wholesaling Real Estate Worth It?
The potential returns from wholesaling often justify the time and effort invested in completing a deal. However, more often than not, investors will get out o wholesaling whatever they put into it. Therefore, the answer to the question “Is wholesaling worth it” is often dependent on how much work the investor intends to put in.
Investors who dedicate themselves to mastering the craft will find that the benefits outweigh the negatives. Without the need for capital and low-risk opportunities, wholesaling is a potentially lucrative venture without many downsides.
However, investors must examine the pros and cons of wholesaling real estate despite the overwhelmingly positive benefits and determine if it's worth it.
What Is The Hardest Part About Wholesaling Real Estate?
The hardest part about wholesaling houses will depend on where the investor’s strengths and weaknesses lie. While investors lacking interpersonal skills may find networking with buyers and sellers the most challenging part of wholesaling, others will quickly point out the nuances of contract law.
Case in point: there isn’t a single facet of wholesaling that’s harder than all the others, only independent tasks which require unique skills to navigate. Fortunately, for the sake of all new investors, each skill can be honed and turned from a weakness into a strength.
Is Wholesaling Better Than Flipping?
Objectively, there’s no way to determine if wholesaling is “better” than flipping. In reality, determining which investment strategy is better will depend on several factors unique to the individual executing the strategy. Additionally, wholesaling and flipping offer distinct advantages and considerations unique to their platforms.
Subjectively, however, wholesaling is better than flipping for investors who lack the knowledge, capital, and experience required for more advanced real estate exit strategies. Furthermore, wholesaling is better for investors who prioritize quick profits and a more hands-off approach to investing.
Remember, above all else, that it’s essential to be mindful of your goals, resources, and comfort level when deciding the best strategy.
Can A Beginner Do Wholesale Real Estate?
New investors cannot only wholesale deals, but they are encouraged to start their investing careers as wholesalers. As an entry-level strategy, wholesaling doesn’t require advanced techniques or skills, making it more accessible to beginners who have yet to complete a real estate deal.
Additionally, wholesaling is relatively straightforward compared to rehabbing and building a rental property portfolio. Last but certainly not least, wholesaling was tailor-made for new investors who lack access to large sums of cash for other more capital-intensive strategies.
Read Also: Wholesaling Real Estate For Beginners
How Do Wholesalers Get Paid?
At first glance, real estate wholesalers get paid by introducing buyers to sellers. However, wholesalers do much more than simply introduce two parties; they facilitate deals that may have never happened otherwise. In doing so, they develop connections with buyers and attempt to form a symbiotic relationship.
The foundation of the relationship centers around the wholesaler trying to find the cash buyer for their next deal. In return for their services, the buyer will give the wholesaler a cash payment as a fee.
How Do I Become Successful At Real Estate Wholesaling?
There are several ways to become a successful wholesaler, but almost all of them involve these steps:
- Educate yourself
- Build a network
- Find motivated sellers
- Analyze deals
- Negotiate contracts
- Build and maintain a buyer's list
- Execute contracts and assign deals
- Maintain relationships after deals are completed
- Learn from experience
- Stay persistent
Final Thoughts On The Pros & Cons Of Wholesaling
Wholesaling is a proven exit strategy that belongs in every investor's toolkit. However, like every other exit strategy, wholesaling has peaks and valleys. With every benefit, there’s a complimentary drawback that needs to be accounted for. That’s not to say the negatives should scare investors away, but rather that they should keep investors from getting complacent. With due diligence and an understanding of what can go wrong, even new investors can sidestep unnecessary mistakes and increase their odds of success.
How do I start wholesaling real estate? At Real Estate Skills, our team of experts is ready to provide the tools you need to navigate the pros and cons of wholesaling real estate. We're committed to providing the knowledge, resources, and support you need to become a successful real estate wholesaler. So avoid common mistakes and maximize your returns by leveraging our expertise.