Wholesale Real Estate: The World Of Real Estate You Probably Know Nothing About (But You Should)
If you know what wholesale real estate is, you are probably a fix and flip investor, rental property investor, real estate agent or someone who is looking for a way to make money in real estate without needing any capital. Everyone should know about wholesale real estate.
Real estate wholesaling is a simple concept. Let’s say there’s a house in your neighborhood with an overgrown lawn, badly in need of a renovation. You get in touch with the owner of the property and make them an offer at $100,000. They accept your offer. You take the signed contract of sale to your friend the neighborhood flipper who agrees to take over your role as buyer and pay you a $5,000 assignment fee at closing. You just made $5,000 for “flipping a contract”.
Many real estate investors and REALTORS® don’t like wholesalers. Why? Because there are a lot of wholesalers chasing a quick buck who have no idea what they’re doing. The wholesalers who do know what they’re doing provide a valuable service to sellers and can open up the world of off-market real estate to you.
In today’s real estate market, where housing inventory and mortgage rates are at or near record lows, we are experiencing a massive supply and demand imbalance that is forcing home prices through the proverbial roof — up 10% from February 2020 through December 2020 according to the S&P Case-Shiller U.S. National Home Price Index.
In many markets, on-market listings are feeding frenzies. Sellers are getting multiple offers before the listing is active, buyers are offering above asking price and waiving contingencies to win the deal. It’s madness and buyers will certainly regret how much they are overpaying and how much they are settling for a house they wouldn’t be chasing in a stabile market. In cases like this, if you’re a buyer, it makes sense to take a step back and explore a better way to buy real estate.
Do you see where I’m going with this? Before we go there, let’s take a look at real estate as an asset and where the value is captured.
Transaction: a close friend and investment banker once said “the problem with real estate is that it’s an extremely illiquid asset with extremely high transaction costs.” REALTORS® typically charge 5–6% to the seller.
The belief that because the seller pays the buyer agent’s commission doesn’t cost the buyer anything is flat out silly. We just bought a house for 2.5% less because we didn’t use a buyers agent. We saved over $10,000.
Renovation: flippers aim for a 30% gross margin. So if they sell a house for $200,000, their cost (purchase price, renovation) would be right around $140,000.
There’s a preference for “turnkey properties” and it makes sense. Buying a house is a significant investment, the last thing most buyers want to do is pay for expensive repairs or coordinate construction and delay their move in. My wife and I recently bought a primary residence with 5% down, invested $60,000 in a cost effective renovation and had the property re-appraised for $150,000 more than what we bought it for. While the appraisal value doesn’t really matter because we have no interest in selling anytime soon, I can tell you we certainly gained significant equity in the property — more than enough to drop PMI. This opportunity to force equity appreciation doesn’t exist when you buy turnkey. Why? Because the flipper already extracted that value.
Ultimately, retail buyers lose value in both of these areas.
So, here’s where I’m going with this post… There’s a better, smarter way to buy real estate. Look where others aren’t — look for off-market wholesale deals. Get comfortable with the idea of buying a fixer upper.
Interested in learning more about wholesale real estate? There’s more to learn at OfferMarket.