What is the risk involved with wholesaling?
Member since 2024 · 2 posts · 2 votes
What is the risk involved with wholesaling?
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Real Estate Agent · Atlanta, GA · Member since 2022 · 352 posts · 219 votes
2yHey Evan!
I would recommend reading through this forum and you can learn a bunch about wholesaling.
When getting a house under contract you have to provide valuable consideration which is Earnest Money, during your due diligence period you have to sell your rights to this contract to a buyer. Most wholesalers require no-refundable "earnest money" so in the event the buyer backs out of the contract, you are not at a loss.
17 Replies
- Real Estate Agent · Atlanta, GA · Member since 2022 · 352 posts · 219 votes2y
Hey Evan!
I would recommend reading through this forum and you can learn a bunch about wholesaling.When getting a house under contract you have to provide valuable consideration which is Earnest Money, during your due diligence period you have to sell your rights to this contract to a buyer. Most wholesalers require no-refundable "earnest money" so in the event the buyer backs out of the contract, you are not at a loss.
- Rental Property Investor · Arlington TX · Member since 2023 · 21 posts · 12 votes2y
If you stay on these forums you will get plenty of info. You can check out https://home.flipwithrick.com/freewholesaling Flip with rick also has a youtube channel with a lot of good info. As far as saying you are finding them a buyer I think that language may be problematic if you are not a licensed agent, but I am not an attorney. When you wholesale you do a contract with the buyer that you should have some way of performing on from the start. You are then essentially selling that contract. I am in Texas so currently there is not a lot of regulation or need to be licensed here, but rules vary by state as noted above. You will need to make sure that you use a contract/purchase agreement that clearly states it is assignable. Check out the videos they also have contracts and keep learning. There are a ton of helpful folks here that love to chat with new wholesalers like us, so keep asking questions. Your risk will typically be your earnest money and your reputation if you start signing contracts you fail to sell or perform on yourself. Your contract should have a due diligence/inspection period that allows you to walk away with your earnest money but if you miss that window you could be out whatever you put as EMD. However you want to make sure that your deals are closing as often as possible so that you have a reputation as some one who performs. The other risk is time. It takes time to get deals and it can get discouraging grinding away I have been at this for months and no deals yet but I just don't have a ton of time to be on the phone or driving so I will just have to stick with it longer to get that first deal under my belt.
Your best bet to learn wholesaling is to go work for a wholesaler. Depending on where you are, there's probably a large institutional wholesaler that is always hiring. At your age the experience is more valuable than the money you won't make while there.
To answer your question directly, the biggest risk, and one that 99% of new wholesalers suffer from, is wasting your time learning the intricacies of wholesaling when it really doesn't matter. All that matters is whether or not you can generate off market deals. If you can, you'll learn the nuts and bolts as you do deals. If you can't, you'll be out of business and none of the "how to" stuff will matter anyway.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes2y
There isn't a huge risk wholesaling since you don't own the property and can always back out. Worst case you lose your earnest money (which you can even get back by being up front with what you're doing and putting in a contingency in the contract). There are some legal concerns in certain areas, Illinois and Philadelphia for instance requires you to have a real estate license to wholesale from my understanding.
The biggest issue is that most simply don't make much money wholesaling. There are marketing costs involved as well as your time. And most wholesalers just don't make enough for it to be worth their while.
- Member since 2024 · 2 posts · 2 votes2y
Hi, thanks for all the replies!
Its reassuring to hear theres not too much financial risk involved. It seems like the business model isn't really sustainable from what y'all are saying, but I'm gonna try it out anyways and see if I can get just one deal under my belt during the summer. A few thousand might not be much to you established investors but for me, that plus the valuable experience would be monumental for kicking off my real estate journey.
- Specialist · Member since 2021 · 267 posts · 113 votes2y
Quote from @Evan Lipsky:
Hi, I'm a current student in college getting wanting to get started in wholesaling. I understand the general concept of how it works, but not a lot of the intricacies. Once I find a house that I want to get under contract, and then I get that house under contract, what if I can't find a buyer soon enough? What would happen if I backed out of the contract? Like I said I'm in college(and obviously don't have much funds) so I wouldn't want to end up losing a bunch of money that I don't have much of. Wondering if this is something I can get into with little to no financial risk or if I should wait until I'm out of college and have more money.
- Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes2y
Quote from @Evan Lipsky:
Hi, I'm a current student in college getting wanting to get started in wholesaling. I understand the general concept of how it works, but not a lot of the intricacies. Once I find a house that I want to get under contract, and then I get that house under contract, what if I can't find a buyer soon enough? What would happen if I backed out of the contract? Like I said I'm in college(and obviously don't have much funds) so I wouldn't want to end up losing a bunch of money that I don't have much of. Wondering if this is something I can get into with little to no financial risk or if I should wait until I'm out of college and have more money.
The risk involved in wholesaling if you do not do it right is loss of reputation, money and possible fines since in some states you need a license to wholesale. To your specific questions:
1. If you can't find a buyer soon enough then you will lose your Earnest Money Deposit.
2. Regarding backing out of the contract- It depends on how your contract is written.
3. Regarding whether or not this is something you can get into with little to no financial risk- the answer is yes, but you will not make any money. You won't make any money because you will be starting into an endeavor with the wrong mind set. It's a business and investments in time and/or money are required. I recommend you use your time in college to study not only for your degree but study what's really required to invest in Real Estate. - 2yPreston DeanBusiness MemberRealtor · Fort Worth, TX · Member since 2021 · 779 posts · 368 votes
Quote from @Evan Lipsky:
Hi, I'm a current student in college getting wanting to get started in wholesaling. I understand the general concept of how it works, but not a lot of the intricacies. Once I find a house that I want to get under contract, and then I get that house under contract, what if I can't find a buyer soon enough? What would happen if I backed out of the contract? Like I said I'm in college(and obviously don't have much funds) so I wouldn't want to end up losing a bunch of money that I don't have much of. Wondering if this is something I can get into with little to no financial risk or if I should wait until I'm out of college and have more money.
Hi @Evan Lipsky
Generally speaking wholesalers have an agreed upon time to "find a buyer". Speaking strictly for Texas and properties on the MLS. Example.
Property listed on the MLS for $200K. Wholesaler gets it under contract for $160K and has a 14 day option period (inspection period). In Texas you have to get funds to the seller to receive an inspection. Those funds are called an option fee. In Texas the typical amount is $50 per day. So at 14 days that is $700. If you cannot find a buyer in the 14 days then you back out of the contract and lose your $700.
Again,
Strictly speaking for Texas and properties listed on the MLS. If you get properties locked up UC off market then that is a different story.
United Real Estate DFW Properties 565 Reviews - Specialist · Member since 2021 · 267 posts · 113 votes2y
I'm a wholesaler with three years of experience. First, let me say this because you're new. I noticed several real estate agents post a reply on this forum. In my opinion, they should stay off of this forum if they are not a wholesaler themself. Because all they do is attempt to discredit or discourage wholesaling with information that isn't exactly correct. There is a forum on BP for real estate agents, they should stick to posing on it instead. Secondly, wholesaling is simple to learn but not simple to do. Locating property and investors who are interested in the property is a challenge but not impossible. I believe the best rule of thumb is to not draft a contract without an investor on the sidelines waiting to take over the contract. Thirdly, full disclosure with the seller is a must. They must be fully aware you will be assigning the contract. I don't know about other states, only what I've read on BP. In Texas, wholesaling is fully legal. You do not need a realtor's license and you do not have to pay any earnest money as others have mentioned. That's the sweet thing about wholesaling, it can be done with no out-of-pocket funds. Stay with it Evan, you're on the correct path.
- Specialist · Member since 2021 · 267 posts · 113 votes2y
Quote from @Preston Dean:
Quote from @Evan Lipsky:
Hi, I'm a current student in college getting wanting to get started in wholesaling. I understand the general concept of how it works, but not a lot of the intricacies. Once I find a house that I want to get under contract, and then I get that house under contract, what if I can't find a buyer soon enough? What would happen if I backed out of the contract? Like I said I'm in college(and obviously don't have much funds) so I wouldn't want to end up losing a bunch of money that I don't have much of. Wondering if this is something I can get into with little to no financial risk or if I should wait until I'm out of college and have more money.
Hi @Evan Lipsky
Generally speaking wholesalers have an agreed upon time to "find a buyer". Speaking strictly for Texas and properties on the MLS. Example.
Property listed on the MLS for $200K. Wholesaler gets it under contract for $160K and has a 14 day option period (inspection period). In Texas you have to get funds to the seller to receive an inspection. Those funds are called an option fee. In Texas the typical amount is $50 per day. So at 14 days that is $700. If you cannot find a buyer in the 14 days then you back out of the contract and lose your $700.
Again,
Strictly speaking for Texas and properties listed on the MLS. If you get properties locked up UC off market then that is a different story.
- Specialist · Member since 2021 · 267 posts · 113 votes2y
Another real estate agent I see. Let me ask, do you allow a wholesaler to take on a property you've listed on the MLS? Most realtors will not allow a wholesaler to steal their glory. That's why I will look for property that's off-market as most wholesalers do.
- 2yPreston DeanBusiness MemberRealtor · Fort Worth, TX · Member since 2021 · 779 posts · 368 votes
Quote from @Randall E Collins:
Another real estate agent I see. Let me ask, do you allow a wholesaler to take on a property you've listed on the MLS? Most realtors will not allow a wholesaler to steal their glory. That's why I will look for property that's off-market as most wholesalers do.
Hi @Randall E Collins thanks for the reply
In my post I was simply giving an example for the gentlemen. And in regards to your question, "Do you allow a wholesaler to take on a property you've listed". If my clients want to accept a wholesale offer then yes. Obviously they will be counseled against this but ultimately the property is theirs and they can do what they wish.
United Real Estate DFW Properties 565 Reviews - Specialist · Member since 2021 · 267 posts · 113 votes2y
Quote from @Preston Dean:
Quote from @Randall E Collins:
Another real estate agent I see. Let me ask, do you allow a wholesaler to take on a property you've listed on the MLS? Most realtors will not allow a wholesaler to steal their glory. That's why I will look for property that's off-market as most wholesalers do.
Hi @Randall E Collins thanks for the reply
In my post I was simply giving an example for the gentlemen. And in regards to your question, "Do you allow a wholesaler to take on a property you've listed". If my clients want to accept a wholesale offer then yes. Obviously they will be counseled against this but ultimately the property is theirs and they can do what they wish.
- Wholesaler · Tampa, FL · Member since 2020 · 116 posts · 114 votes2y
Hi Evan,
To be quite frank, I believe that the best way to get started is to take action. Funnily enough, taking action doesn't always mean going out there and signing an agreement with the first seller who says 'yes' to your offer. I worked for a small wholesaler in Tampa Bay when I first started, that's how I found my first flip deal. After two years and two flips on my belt, I went full time with wholesaling and it's been a great journey so far.
To say that there's no risks would be a lie, it's important to understand that to be able to sustain a wholesaling business you need to be able to generate leads in volume. There's ways to do this in the beginning at a lower cost but there's always an investment.
Finally, it's super important to always remember that the whole point of our business is to facilitate the transaction for both the seller and the buyer. We're the ones out there trying to find solutions for both parties, so it's important to always keep that in mind when negotiating. Your reputation does matter.
I would try to find a local wholesaler that is willing to work with you and I would get instructed in how to dispo a deal before you go under contract with anyone.
If you have any questions I'm always happy to share my knowledge.
Good luck to you!
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