The most challenging aspect of real estate investing is getting your foot in the door.
Theoretically, anyone can become an investor. However, there are certain strategies that require a lot of cash, experience, and connections. This prevents a large percentage of the population from accessing real estate investing.
Then, there are other methods that are relatively accessible to anyone—including those who don’t have the cash to make a major investment or can’t afford to take on excessive risk and become overleveraged. Real estate wholesaling with an options contract is one such method.
The Benefits of Wholesaling With Options Contracts
In theory, wholesaling is pretty simple. An investor goes out and finds what he believes to be an incredible real estate deal and signs an agreement with the seller that gives him the option to buy the property at a later date. This option includes certain language that allows the investor to then go out and find another investor and assign the contract to him at a higher purchase price.
The original investor then transfers the contract and cashes the difference. The seller, the original investor, and the actual buyer all benefit. Here’s why.
From the investor side of things, wholesaling with options contracts is highly advantageous. It yields compelling benefits like:
- Low barriers to entry: Unlike most other forms of real estate investing, you don’t need a lot of cash or credit. You’re simply acting as a conduit between the seller and the future buyer.
- Time: With an options contract, you don’t have to feel rushed to make a deal happen. There’s a predetermined period of time within which you can find a potential investor. This takes the pressure off and allows you to work your contacts.
- Flexibility: Wholesale investing presents a lot of flexibility. Not only do you have the option of purchasing the property yourself as a buy-and-hold investment, but more importantly, you also have an array of investors you can assign the option to. Successful wholesale investors work with a variety of buyers, including individual investors, institutional investors, contractors and builders, and recreational buyers. With such a diverse pool of possible investors, it’s easier to close deals.
- Low risk, high reward: With little or no cash involved, there’s minimal risk on your end. However, you simultaneously have the opportunity for a high reward. Sure, there’s a lot of time and energy involved in finding an investor to take over your contract, but the financial commitment is quite low.
- No holding costs: Typically, a real estate investor has to actually purchase a piece of property before he’s able to resell at a profit. This means there are repairs, fees, commissions, and upgrades that have to happen—all of which eat away at profits. With a wholesale contract, you don’t actually take ownership of the property. This means there are no holding costs. In this sense, your profits are true.
- Quick cash: Wholesaling real estate gives you the opportunity to earn a quick return. Done right, a deal can pay within days (and sometimes even hours).
Wholesaling isn’t a perfect investment strategy, but it’s certainly a viable one for investors who face certain constraints. It can also be an effective approach in both hot and cold markets, which makes it a surprisingly sustainable tactic.
How to Start Out Wholesaling
If you’re a total real estate investing newbie, the first step can feel like a blind leap off Mt. Everest. It’s scary, nauseating, and overwhelming. But it’s also empowering!
Once you take the first step, you’ll realize that it’s really just lifting one foot and putting it in front of the other. Sometimes you’ll take two steps forward and one step back. Other times you’ll look up and notice that you’ve made significant progress.
Here’s the thing: you can only do so much research and planning before you have to give it a go.
Proceed with caution, but make sure you’re proceeding! Find a deal that fits your criteria and offer a purchase agreement with an option contract. It may get turned down—and that’s okay.
But there’s also a chance that all of your research and due diligence pays off and you secure a decent deal. There’s only one way to find out!
Do you have other questions about getting started as a wholesaler?
Leave a comment below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.