Finance Corner: Wholesaling

Finance Corner: Wholesaling

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When most people think about wholesaling, they picture a popular big box store such as Costco. These stores sell their goods at a discounted price, but they make up the loss in profit by offering larger-than-average sizes. The trade-off works well for both parties. Wholesale retailers get the same profit that a typical retailer would, and customers get more product for a lower-than-average unit cost.

Table of Contents - Finance Corner: Wholesaling

Real estate wholesaling starts off on a similar foot as retail wholesaling. A real estate investor acquires a property, often one that requires substantial work, and turns it over to a commercial buyer at a discounted price. The buyer, in turn, can opt to fix up the house and sell it to a retail purchaser. The other option is to turn the property into a rental that can accrue profit in the long-term.

If you’re interested in a different type of real estate investment than the traditional landlord-tenant model, read on to learn more about wholesaling.

The different types of real estate wholesaling

As with any other sector of the real estate industry, there is a significant amount of nuance when it comes to wholesaling. For instance, there are three different types of wholesale real estate investment:

Traditional wholesaling

This is perhaps the most straightforward and above-board method of wholesaling. It involves finding a fixer-upper property that’s being sold at a significant discount, closing on it and then marketing it to an investor who will buy it and fix it up. This method takes time and involves a capital infusion, but it can also turn into a sustainable business model.

Assignment investing

This method is the most common form of real estate wholesaling. It involves a mediator finding a property for a nominal fee. The mediator then turns the listing over to an investor for a reasonable markup, or essentially a finder’s fee. In this case, the go-between has to put up little capital, and the investor gets to skip the search.

Double close

Double closing falls somewhere in between assignment and traditional wholesaling. In the double close, the mediator purchases the property outright before selling it to the investor in a limited time frame. This method is much faster than traditional wholesaling, but it involves a lot more paperwork.

Finding the right property

Finding the right wholesaling opportunity likely means cruising local listings for distressed properties. A distressed property is, by definition, a property that is being sold for far lower than its market value. Often, distressed properties are either under foreclosure, or they’re known as a “fixer-upper.” Sometimes, they’re both.

For the savvy entrepreneur, a distressed property could hold substantial value, provided you know how to identify the right property. Before you buy a distressed property, make sure that you have a good idea of the cost of any improvements that need to be made and factor those into

your purchase. It would be best if you also took care not to over-improve your property to the point where it is too expensive for the neighbourhood in which it sits.

Though you’re most likely to run across a distressed property by searching through recent foreclosure listings, there is another way that you could find one. Sometimes, distressed properties are sold by panic sellers or motivated sellers. When someone is going through a personal transition — like a divorce — they often want to unload their properties as quickly and with as few hassles as possible. In this case, their property becomes “distressed.”

In the case of a panic seller, real estate investors may find themselves able to purchase a property that requires little work for less-than-market value.

If You Require Repairs …

If you find yourself purchasing a distressed property with the hopes of turning it over to a residential buyer, you’ll likely need to improve the condition of the home. If this is your first time, don’t worry. If you follow one simple step, you can get your house repaired and still maintain a decent profit margin.

Here’s the secret: be patient.

Talk to several contractors and get quotes from all of them. Take the time to shop around and listen to improvement ideas from a lot of different people. If you’re honest about your intentions, you may even be able to strike a deal with one of the contractors in exchange for repeat work.

Financing your wholesale endeavour

Fortunately for people who are intrigued by real estate wholesaling, financing isn’t especially complicated.

In terms of the initial price that you’ll pay, that will (obviously) change depending on the property. In the case of a foreclosure, banks price the property so that they can recoup their initial investment. Buyers can occasionally expect an additional discount based on the overall condition of the property.

As with any real estate purchase, that price point isn’t etched in stone. You can always negotiate with the seller. Even better, as with a traditional real estate purchase, you may be able to secure financing for your purchase. The trickiest aspect of getting the loan is finding a bank that will provide a mortgage before improvements are made.

What is the wholesaling time frame?

Depending on which point in the cycle you choose to participate, you can expect your involvement to take varying lengths of time.

Those investors involved on the front end of the wholesale cycle will see the smallest window. If you are working on an assignment or a double close, then your wait time may be as short as a couple of days. Traditional wholesalers may be involved for as long as 40 days.

People who enter at the second point in the cycle — often referred to as “fix and flip” — will often see a protracted involvement, sometimes as much as three months or more, depending on the length of time it takes to fix the home and then find a buyer.

Wholesaling can be a great way for people with a knack for spotting a deal or who loves a good project to get into real estate investment. Knowing how to find the right property takes time, but can lead to an excellent return on investment.

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.