BiggerPockets

What Is Wholesaling Real Estate?

What is Wholesaling?

Wholesaling is the art of contracting properties that you plan to resell to another Investor, Wholesaler or retail customer before you close on the property. The Wholesaler is on the front lines of the real estate business. Often times this occupation can be confused with â"Bird-Dogging,' which is the process of finding properties for Investors to buy. While a bird dogger is paid a fee for each address they refer, a Wholesaler runs a complete business model including marketing, negotiating, corporately contracting the properties, advertising the contracts for sale and ultimately earning an "Assignment Fee".

The NAR (National Association of Realtors) invests a lot of money with lobbyists to convince the country that wholesaling is an illegal Real Estate activity. The reason they do this is two fold. One, because it cuts into the business of licensed real estate agents and they have a duty to earn the yearly fees associated with being a member of the NAR. Two, there are plenty of folks out there that misrepresent themselves, mislead people and run general scams involving real estate. Unfortunately, the rules of real estate are loose and it is difficult if not impossible to see these scams coming unless you are educated on the business.

I spent the first ten months of my real estate career running around town with one character after another, trying to find someone who had success in real estate and was honest. I got ripped off, wasted a ton of time and became genuinely frustrated with the whole business before I met Paul Regan, one of my mentors to this day.

Wholesaling can be defined similar to â"Options Trading' in the stock market. You have a piece of paper that represents a â"piece of property' or in the stock market a block of stocks aka a â"piece of company'. Once you possess this piece of paper you have the right to sell it to whomever you like. If you contracted a piece of property for $150,000 dollars and then sold that contract with an â"Assignment of Contract' for $10,000 more, the total cost of the property is now $160,000 dollars. The person who purchased the contract from you would then close with the original seller and everyone walks away content.

The "art of the flip" is what Wholesaling is all about. The word flip has taken on a lot of interesting meanings over the past ten years. For the sake of this article, a "flip" will refer to your ability to put a property under contract and then sell it to another Investor before you have to close.

Certain media groups have also termed the word "flip" as the illegal process of purchasing a property with what is known as a "straw-buyer", taking money out of the property and then letting the property fall into foreclosure.

People with decent or excellent credit are attracted to an "EASY" $5-$10k just by putting up their credit. It all looks great on paper and in a perfect investing environment it just might be.

The credit or "straw buyer" is told that there is nothing to worry about because a large sum of money will be kept in an escrow account in order to make any payments that the tenants do not cover. The "scammer" makes their money up front and walks away leaving the buyer to deal with anything that might, and usually does go wrong.

It is important that you understand the difference between these two types of businesses, as people can immediately jump to conclusions when you tell people what you do. As you see people's guards go up, occasionally you may need to clarify what you do for a living.

For example, think of the first person or image that pops into your head when you hear the following professions:

• I'm a lawyer
• I have an internet company
• I'm a Real Estate Investor

There will be as many different visions of who these people are as there are readers of this book. As with these other professions, wholesaling has both a great reputation and an earned negative reputation. I hope with the help of the techniques I will teach you in this article, you will never have to break the law to achieve great success in real estate.

Hope this helps,

Matt Gerchow

Comments

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  Breau Williamson — over 3 years ago

  Where would someone need to look in order to find a good mentor, better yet what are you looking for in one? Thanks. Breau

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  Joseph Ilg — over 3 years ago

  Does the title company prepare the contract? What goes in the contract in order to not be tied to the property if my buyer walks?