What Is Real Estate Wholesaling?
Wholesaling or real estate wholesaling is about getting a property under contract for a certain price and selling the contract for a price just a little bit higher than what you have the property under contract for.
That little bit higher price, the difference between what you get it for and sell it for, is your profit. So, for example, you may get a property under contract for $100,000 and you assign it to another buyer for $110,000 or $115,000, and the difference between those two is your assignment fee which is your profit.
Assign the Contract?
Now, the reason it’s called wholesaling is that you’re not actually selling it to a buyer that is someone that’s going to live in it. You’re selling it to somebody else who’s going to do something to the property to increase its value. So, for example, you buy a property from a motivated seller or, sorry, you don’t buy a property, you acquire a property, or you put a property under contract from a motivated seller. That seller is motivated for many reasons.
And then you find a buyer who is doing a fix and flip, and you assign that property to that buyer who will then do the fix and flip and will enhance the property by whatever means they think they need to. Whether it’s a simple fix and flip, where they just put in new carpets or they just do some painting or there’s a major fix and flip where they’re going to be moving walls or renovating bathrooms or renovating kitchens. And all that contributes to the overall cost, which ultimately affects their profit.
And then what that person will do, or that company will do is, once they’ve renovated the property, they will put it on the open market for sale. And I do recommend putting it on the open market and by the open market, I mean MLS. And then the person that buys that property will be the ultimate owner and that’s the retail buyer.
So the person in the middle, the fix and flipper, is the wholesale buyer and you’re the wholesale seller but you never really take possession of the property.
Wholesaling is a Job
So, the challenge with wholesaling is that it’s really a job. It’s not really real estate investing, because you’re out there looking for properties all the time. You’re looking for buyers all the time. Its a daily activity. Real estate investing by definition or at least what most people think of as real estate investing is you invest in a property; you sell the property, or you rent out that property. In wholesaling, you never acquire property. You’re just looking for deals for other people.
And there are a lot of people out there looking for similar deals, like what you’re looking for. The challenge will be finding the deal or finding the property that somebody else, a fix and flipper, will want.
Motivated Seller
So why are people trying to sell? Why are sellers motivated? Sellers are motivated for many reasons.
Usually, it’s because they have run into financial difficulty. They may have let the property get out of control, meaning they haven’t been maintaining the property. So now it requires a lot of work, and nobody wants to list it because they don’t think they can sell it. Or another reason is that they inherited a property. It’s a property that they got in a will where a family member died and left it to them. And they’re not really a property manager and they don’t really want to carry the property.
The other thing that’s unique about wholesaling is you never want to take control of the property. What I mean is, you never want to purchase the property. You just want to take control of the property. You can take control of the property by putting in an agreement of purchase and sale, that is, putting an offer on the property for a price that you are negotiating with the seller.
Work with the Seller
And that’s really the value that you’re providing to the ultimate buyer, the fix and flipper. The value is that you are going to work with the seller to come up with a price that you think you need to come up with to be able to attract the buyers that would be interested in purchasing a property like this.
So, when you’re talking to the seller, you’ve got to make them aware that you are not necessarily going to take possession of the property. You are just looking for a property for a group of investors. And you should call it a group of investors that you represent because you should be representing a group of investors as a wholesaler. You’re not going to be representing just have one fix and flipper that you’re looking for property for. You’re going to have multiple investors so that when you find a property there’ll be a bunch of people that you’re going to be able to send this property out to who would look at the property and eventually purchase the property under the terms and conditions that you’ve negotiated with the seller. So, the seller should be aware of that.
The Assignment
And then what you do is you put the property under contract using an agreement of purchase and sale and you ultimately will assign that contract. And so that’s very clear, you’re NOT selling the property. You’re strictly selling the contract to another buyer, the fix and flipper, for a price. And that price is referred to as the assignment fee.
So that’s pretty much what wholesaling is. But I wouldn’t get into wholesaling as a real estate investments strategy. I consider wholesaling a job, not a real estate investment strategy.
