Is Wholesaling Real Estate Legit? What To Know Before Investing

Wholesaling is synonymous with many of today’s best real estate investing strategies. Few investments, for that matter, combine such a relatively low barrier to entry with such a high-profit potential. It is entirely possible to run an incredibly lucrative real estate business as a new investor, which has many people on the outside looking in, asking one simple question: Is wholesale real estate legit?

The answer is clear: wholesaling is a legitimate real estate exit strategy. Not only is wholesaling houses legit and not a scam but there may be no better time to learn how to wholesale. ATTOM Data Solutions’ latest Home Equity & Underwater Report says, “47.2 percent of mortgaged residential properties in the United States were considered equity-rich.”

The latest data suggests that the number of equity-rich homes in the United States is dropping. As a result, the number of opportunities for real estate wholesalers may be increasing.

If you're eager to learn the fundamentals of wholesaling real estate but still have some unanswered questions, this guide has been created to provide you with all the necessary information. It covers everything you need to know about wholesaling’s legitimacy, including:

• What Is Wholesaling Real Estate & How Does It Work?
• Is Wholesale Real Estate Legit?
• Can You Really Make Money Wholesaling Real Estate?
• Can You Lose Money Wholesaling Real Estate?
• Do I Need A Real Estate License For Wholesaling?
• What Are The Pros & Cons of Wholesaling Real Estate?
• Final Thoughts: Is Real Estate Wholesaling Worth It?

What Is Wholesaling Real Estate & How Does It Work?

Wholesaling real estate is a popular investment strategy gaining momentum in the housing sector thanks to its relatively quick profit potential. It offers numerous advantages, including short turnaround times, minimal capital requirements, and it’s easier than most other strategies to break into, making it an ideal starting point for newcomers.

Wholesalers are intermediaries bridging the gap between cash buyers and motivated sellers who may be at risk of foreclosure. They facilitate transactions that may not occur. Before introducing sellers to potential buyers, they secure the right to purchase property at a discounted price. When investors control the right to buy the home, they transfer their right to another buyer for a small profit.

The term "wholesaling" accurately captures their role in the real estate market: acquiring investment properties below market value and transferring them to other investors at fair prices.

When executed effectively, this process benefits all parties involved. The original property owner receives their proceeds, the end buyer gains access to a valuable investment opportunity with an attractive after-repair value (ARV), and the wholesaler earns a fee based on their involvement; it creates a win-win scenario for everyone.

Wholesaling coincides with many potential upsides and very few drawbacks, which begs the question: Is wholesale real estate legit? Does it really live up to the hype? In a word, “yes,” but keep reading to learn why.

You can also check out our in-depth video showing you how to wholesale real estate step by step here:

Read Also: Motivated Sellers: How To Find And Negotiate With Them

Is Wholesaling Real Estate Legit?

Wholesaling real estate is legit by every definition of the term. That is to say: Wholesaling is legal, conforms to the rules of the housing sector, boasts a lot of potentials, and is a genuine real estate investment strategy. No matter how you cut it, wholesaling real estate is legitimate.

Investors nationwide have been wholesaling properties, making a lot of money, and connecting sellers with buyers for many years, and there’s no reason new investors can’t do the same. Investors may partake in all of the benefits wholesaling offers if they abide by the laws and regulations that govern it; this leaves one question to be answered: Is wholesaling real estate legal?

Yes, wholesaling properties is legal. Nonetheless, investors must fully disclose that they are the primary buyer in a transaction and intend to transfer their contractual rights to purchase the property to another buyer.

The real estate contract must state that the wholesaler is not buying the property. Instead, they enter into a bilateral purchase contract with the seller, clearly stating their intention to acquire an equitable interest in the property. It's essential to make this distinction - wholesalers are not purchasing the home itself but securing the rights to buy it.

It cannot be emphasized enough that wholesaling is legal as long as investors adhere to the law. To ensure compliance, wholesalers need to prioritize transparency and integrity. They should openly communicate their intentions, as greater transparency leads to better outcomes. Furthermore, seeking guidance from a qualified real estate attorney or professional is paramount to confirming compliance before engaging in wholesale transactions.

Check out our FREE training at Real Estate Skills where you can gain insider knowledge, expert strategies, and essential skills to make the most of every real estate opportunity that comes your way.

Can You Really Make Money Wholesaling Real Estate?

Not only is it possible to make money wholesaling real estate, but wholesales are some of the best ways for an inexperienced real estate investor to break into a very lucrative industry. Despite having a relatively low barrier to entry, wholesales have proven they can build wealth when executed correctly.

That said, there’s no fixed or typical wholesale salary. While The Motley Fool suggests that the average wholesaler can earn an annual income ranging from $21,500 to $98,500, it's important to note that actual earnings can vary significantly based on the state and the individual investor.

It is common practice for wholesalers to charge end buyers (flippers or rental property owners) a fee ranging from 5% to 10% of the acquisition price. However, some wholesalers may opt for a flat fee ranging from $10,000 to $15,000. It is essential to understand that salaries in this field depend entirely on unique circumstances and the variables associated with each successful real estate deal.

Can You Lose Money Wholesaling Real Estate?

While it is possible to wholesale real estate without using your own money (or even a hard money loan), there are circumstances where investors can lose money on a deal. Much like every other type of real estate investment strategy, wholesaling does coincide with inherent risks, and the loss of capital is one of them.

If, for example, a seller wishes to protect themselves with an earnest money deposit, a wholesaler must front the cash to satiate the homeowner. If the wholesaler can complete a deal, they may receive their deposit back. However, there are times when deals fall apart. If a deal falls apart and the wholesaler can’t find a buyer for the subject property, they will lose any money they put down as an earnest money deposit, ranging from 1% – 3% of the sales price.

Sometimes, homeowners won’t allow investors to assign wholesale contracts to an unfamiliar end buyer who is in the house-flipping industry. If that happens, wholesalers may attempt a double close, which requires them to front the entire purchase price and close on the house themselves. The whole idea of a double close is for the wholesaler to buy the house and resell it immediately, but there’s always the risk something falls through. Whether it’s not finding another buyer or price discrepancies, there’s always the risk of losing money.

As an investment, wholesaling coincides with inherent risk. However, successful wholesalers who mind due diligence and stick to a proven system will simultaneously mitigate risk and maximize profits.

Do I Need A Real Estate License For Wholesaling?

Wholesaling real estate does not require having a real estate license. However, becoming a licensed agent or Realtor can provide valuable advantages. Licensed wholesalers gain access to a valuable network of professionals and resources to help build out a home buyers list without even using social media.

Whether it’s the Multiple Listing Service (MLS) with its on-market properties or a nationwide network of real estate professionals, having a license can go a long way in helping wholesalers.

It is important to note that licensed wholesalers, who are also real estate agents or Realtors, have additional disclosure obligations and must prioritize transparency even more than those without a license.

Read Also: Can A Realtor Wholesale Property? The (ULTIMATE) Guide

What Are The Pros & Cons Of Wholesaling Real Estate?

Wholesale real estate is often regarded as one of the top exit strategies in the housing sector. However, like any other investment strategy, wholesaling has its pros and cons. It's important to examine both aspects to determine if wholesaling real estate is worthwhile for investors.

Pros Of Wholesaling Real Estate

The pros of wholesaling real estate include, but are not limited to, the following:

• Low Capital Requirements: Traditional wholesale deals don’t require investors to front their cash for a deal. Instead, the buyer they introduce to the seller will finance the deal. In some circumstances, investors may need some skin in the game (like a double close or earnest money deposit), but they are few and far between.
• Limited Risk Exposure: Wholesale real estate is a beginner strategy for a reason; it limits investors’ exposure to risk. The lack of upfront capital or the need for a lender limits the downside of a wholesale deal. That said, investors still need to be wary of not wasting anyone’s time, which is equally as valuable—if not more so.
• Quick Turnaround: While no universal timetable exists to complete wholesale deals, they are ubiquitous with short-term deals. Some wholesale deals may be completed in as little as a few hours; they are the exception. More often than not, wholesale deals will take anywhere from a few days to a few weeks to complete, which is drastically shorter than most other real estate exit strategies. Without the need to go through escrow, use a title company, work with a brokerage, pay a down payment, worry about liens, improve a credit score, or anything else that typically accompanies a real estate transaction, wholesales happen quickly.
• Learning Opportunities: Wholesaling allows new investors to learn the ropes of the real estate industry in a low-risk environment. With a little on the line, investors can soak up all the information they need to further their careers in the industry.

Cons Of Wholesaling Real Estate

The cons of wholesaling real estate include, but are not limited to, the following:

• Relatively Low Profits: Although wholesaling returns may be lower than rehab returns, they appeal significantly to risk-averse investors with limited time availability.
• Market Dependence: At the core of wholesaling is identifying distressed properties, whose availability can vary with market fluctuations. Therefore, finding a deal may be made harder or easier depending on the state of the market.
• Relies On A Strong Network: Building a robust network with gurus and other like-minded professionals is often essential for successful wholesaling, but new investors aren’t often awarded the luxury of a large network at the start. Networking with a lot of people requires a lot of work.

Final Thoughts: Is Real Estate Wholesaling Worth It?

Is wholesale real estate legit? Yes, wholesaling is a legitimate real estate exit strategy. However, for wholesaling to be legit, investors must exercise ethical integrity and transparency. Those who abide by the rules will find that building a wholesaling business is both lucrative and rewarding.

At Real Estate Skills, our team of experts is ready to provide you with the tools you need for wholesaling. We're committed to providing the knowledge, resources, and support you need to make wholesaling worthwhile. So avoid common mistakes and maximize your returns by leveraging our expertise.