Judging by its track record and previous experiences of real estate investors, the chances of being successful and making profits are high. Real estate is a low-risk investment that will mostly generate a positive cash flow. This is mainly the reason why investors enter the real estate market, because of its lower risks and lower costs. However, there is one branch of real estate that has been deemed high risk and requiring vast experience, real estate wholesaling.
Real estate wholesaling can be defined as the investment in cheap and undesirable properties for the purpose of selling them without fixing them. So it is basically a similar concept to fix and flip, but without the fixing part – which is where the risk lies. Wholesale is basically when an investor decides to buy a low-cost property and then sell it again for a higher price to a buyer. From a wholesaler's point of view, it doesn’t matter if the apartment needs extensive repairs or is seriously flawed as long as the price is too low. People who buy property from wholesalers are usually investors who are willing to fix-and-flip a property.
The concept of real estate wholesaling is that the middleman who is the wholesaler does not invest his/her money in the property. They merely buy the contract under a contingency plan to give them the chance to back out of the deal in case they can’t find a buyer before the closing date of the property. For example, a wholesaler buys a contract of a property for $40,000 with estimated repair costs at $5,000. The expected price of the property after repairs is $60,000, so if he sells the property for $45,000 then the wholesaler has made $5,000 in profit in a matter of days only without investing anything.
The idea might sound lucrative and easy to execute. However, if you think about the required contacts that a wholesaler needs to perform these transactions, then you’ll be able to understand why this strategy is challenging. Real estate wholesaling requires a vast network of buyers, sellers, and real estate agents that are all vital to execute the transaction. This is exactly why most people fail at real estate wholesaling; it is just too much work and too much experience to guarantee its success.
Two Reasons Why People Fail at Wholesaling
Lack of Planning
The main problem with wholesaling is that people think they can enter this branch of real estate with little to no money on hand and expect to buy and sell contracts without hindrance. Truth is, wholesale properties don’t just magically appear from the sky – a detailed plan with targets needs to be placed before starting out, and that is the problem. If you are a new investor, it is almost impossible to do that, you can’t succeed in an area that requires so much experience and contacts.
Wholesaling is Unstable
Real estate wholesaling is not set in stone and it is not a science. A person who is setting out to start a career as a real estate wholesaler will find obtaining reliable information is hard to come by because there are so many different ideas used by each wholesaler. Which idea can you trust? Real estate has always depended on numbers, profits and potential but wholesaling is a personal craft that is hard to understand completely. A few wholesalers would advise focusing on your network, while others advise focusing on finding the cheapest properties, and your networks will create themselves.
To give a verdict about real estate wholesaling is perhaps unwise because as a real estate investing strategy, it has seen success and people have made money. But most investors aim for profit when they enter the real estate market and unfortunately, wholesaling does not give any guarantees of that. A wholesaler can buy contracts of two properties and fail to sell either of them, which means they can lose their determination.
Time and consistency are the two most important underlying factors in wholesaling. Not all investors are able to quickly close deals. When deals aren’t closed, time is lost, investors lose motivation, and a huge gap is created between deals, leaving investors with no profits for long periods of time.