What is real estate wholesale?
There are many options for real estate investment, but the most accessible route of getting started is real estate wholesale. In this context, “wholesaling” is similar to the kind of wholesaling that manufacturers do. They produce a huge quantity of retail goods, sell those goods to retailers at a low price and make a modest profit per item. The retailer then sells those goods at a higher retail price to make a profit of their own. In effect, everyone profits from the fact that at the end of the chain, someone is willing to purchase that good at an elevated price.
The concept holds in real estate wholesaling, but there are several notable differences. Here’s what a typical real estate wholesale process might look like:
- The wholesaler looks for real estate opportunities – The goal is to find these opportunities before they are put on the market, and here is the first rule of effective wholesaling. You must be ready to hustle. There are a lot of wholesalers out there looking for a deal, and none of them succeed by waiting around for a phone call or a lead.The best opportunities are homes that are in rough condition but located in an area where they would be highly valued if rehabbed. Homeowners that need to sell their home right away, which is common if they are attempting to avoid foreclosure, are often willing to sell their property well below market value, if only to get rid of it in a hurry. It’s the wholesaler’s job to find these properties before others do. That takes a lot of looking around and making some phone calls. Alternatively, real estate wholesalers may drum up business with direct mailing (there are businesses that generate leads for wholesalers) or with effective online marketing. You will have to market to get ahead, but there are plenty of avenues for doing so effectively.
- The wholesaler negotiates a sale price and signs a contract with the seller – This contract is typically called a purchase and sale document, and states that the home will be purchased within a given timeline. The buyer may be the wholesaler or it may be someone else, and this is left open on the contract. The take home point is this: Once the contract is signed, the wholesaler effectively has control of the property and needs to find a buyer.
- The wholesaler calculates what their offer price will be – For some wholesalers, this is the toughest part of the job, though it’s a snap once you get the hang of it. In principle, it’s simple. The goal is to make a profit when selling the home to a buyer, but that buyer will, of course, also want to make a profit from flipping or renting out the property. It’s also going to cost money to repair and fix up the home. Finally, there are always those inscrutable fees and fixed costs that need to be accounted for, like holding costs and transaction costs.All of these expenses need to be subtracted from the value of the home after it has been repaired. Put succinctly, it looks like this:
The wholesaler’s offer equals the after-repair value, minus the buyer’s desired profit, repair costs, fixed costs and fees.
It doesn’t look tough when laid out that way. The real difficulty is determining what the home’s value will be following repairs, and knowing what the repairs are going to cost. The former is accomplished by doing some deep research into the local market. In general, homes will sell at a price similar to what other homes in the area sell for, assuming they are similar in size and condition. So, if wholesaling on a four-bedroom home, check the local market for what other four-bedroom homes have recently gone for. This should be the guiding number. Another way to figure this out is to approach real estate agents with experience in the market. They keep extensive data on real estate transactions in their area, but they aren’t going to give the information away for free. This is where those people skills will come in handy. The agent may be willing to offer the data if the wholesaler passes on any leads that they cannot handle themselves.
The repair costs are trickier to determine, because homes are complex and it’s rarely apparent what work needs to be done, unless you have experience as a home contractor. That’s the answer, then. Link with a reputable contractor and get the full picture from them. They will, of course, require compensation for their services, but it’s worth it to prevent any nasty surprises.
Once those numbers are gathered, a final offer can be made. Just remember that the buyer is looking to make a profit as well, so that offer will need to be below market value following repair. It may need to be considerably under that number. The implication here is that savvy wholesalers make an offer to the original property owner that is below the current value of the home, considering its condition.
- Negotiate the deal with a buyer and finalize the wholesale – Wholesalers aren’t selling property. In fact, wholesalers may only “own” the property for a few minutes before handing it over to the buyer. They may not ever actually own the property. It’s the contract that is of interest to potential buyers, whether they want to flip the property or rent it out following repairs. The wholesaler makes their case and their offer, ideally emphasizing the profit potential on the buyer’s end. Again, negotiation and people skills will win out here.Once the deal is done, assuming the transaction went well, keep the buyer’s information handy for future transactions. This will greatly speed up and simplify the process going forward.
Wholesaling, at its core, is about becoming a real estate middle man, and profiting by acquiring what amounts to a finder’s fee.
Although wholesaling takes considerable knowledge of how real estate transactions work, as well as the nature of local real estate markets, the financial commitment can be minimal, and sometimes as little as zero. This is the reason it’s so accessible and attractive to so many. As long as you have the knowledge, the people skills and the willingness to put forth effort, wholesaling can generate impressive profits.