Wholesaler Makes Money for Himself—and Everyone Else
Every so often, someone challenges me (or one of my students) with the notion that wholesalers are the remoras of the real estate world, living parasitically off of the ‘real’ investors, who are metaphorical sharks of our business.
The whole image of real estate entrepreneurs as the predatory attackers of unwary or unprotected buyers, sellers, and tenants bothers me a lot—when is the world going to realize that we’re saving the world from this real estate crisis one house at time?—but the idea that wholesalers somehow make money for nothing, or feed off of others without adding any value to the process, is particularly heinous, and shows a huge misunderstanding of how wholesale transactions work.
Real estate wholesalers work with a very particular kind of property seller and a very particular kind of property buyer. Your seller will always be one who is highly motivated to sell, generally because of personal or financial challenges and because of the poor condition of his property; your buyer will always be an investor or landlord who isn’t afraid to tackle a lot of repair work in return for a lot of profit.
Now, a seller who really wants to get rid of a piece of real estate has a lot of options about how to go about doing that, from hiring an real estate agent to put the property on the market to advertising in the local paper to putting a sign in the yard. The problem is, all of these things cost money, ranging from 6% of the ultimate sale price at $20 for a sign. More importantly, they all take TIME—especially in a slow market—and, in the case of property ownership, TIME generally translates into EXPENSE.
So let’s imagine for a moment that the seller in question owns a single family home that he inherited from a distant relative. It’s worth $250,000 in fixed-up condition, but needs $50,000 in repairs and upgrades in order to sell for $250,000. Not only does this seller not have the money or desire to fix up this house—he doesn’t even have the spare cash to make the $2,000/mo mortgage, tax, and insurance payments. Therefore, he makes up his mind to sell the property cheap and be done with it.
At this point, the seller has 2 choices: market the property to the public and hope that the right buyer comes along quickly, or calls a wholesaler, get an immediate offer, and have the property sold in 30 days or less. Which is likely to be more profitable for him? Well, let’s see.
No matter what, a property that needs $50,000 in work is going to sell to a real estate investor rather than a homeowner. The percentage of homeowners who have the desire and the cash to deal with this level of rehab—no matter WHAT the purchase price—is so tiny that finding one is somewhat akin to winning the lottery.
Real estate investors use certain formulae to determine the amount of profit they want from any given deal. The most common of these is to start with after-repaired value, or ARV, reduce that amount by 30% for profit and holding costs, then subtract repair costs to get to the offer. So in our example, the typical investor would want to pay:
$125,000 purchase price
Our imaginary seller can eventually expect to sell his property directly to the investor for around this price, no matter how he goes about finding the buyer.
Now, if our seller had spent months or years building up a list of potential investor buyers in anticipation of eventually inheriting this home, it might be a quick and easy thing to get his price. However, most sellers don’t have such a thing, so they do what they can to market their properties in the hopes that one of these buyers will come along. In a typical scenario, the seller hires a real estate agent, who puts the property on the market via the MLS, where it remains for an average of 3-8 months, depending on the circumstances. When the property sells, the seller receives:
$125,000 sale price
-$7,500 (6% commission to agent)
-$6,000 (payments made during the 3 months the property was on the market)
Not bad—but there’s another choice. If, rather than waiting for the right investor buyer to respond to the MLS listing, the seller had simply called you from the postcard you sent him when you found out he had inherited a property, you would have made him an offer immediately, with a 30 day closing date. In this case, your offer would be
$125,000 YOUR sale price to the investor buyer
-$10,000 profit for you
$115,000 offer to seller
With a 30 day closing date and no commission to an agent, the seller would actually RECEIVE:
-$2,000 (payments made during the one month the property was on the market)
$113,000 –$2,000 MORE than in the previous scenario
And you, the wholesaler, would go to your buyer’s list to find one of those investor buyers who wanted to pay $125,000 and collect $10,000 in profit before you yourself ever had to close on the deal.
The net result: the seller makes about the same money overall, but saves months of worry and hassle. The end buyer—your investor—pays exactly what he would have paid the seller anyway, only without the hassle of sending out the mailings, doing the negotiation, etc. You make $10,000 for your efforts in marketing to and finding the seller, and in building the list of buyers in the first place.
The product gets moved from the guy who just wants to sell it to the guy who just wants to buy it by a professional who has focused his business on putting such transactions together
In other words, everybody wins.
And THAT is why wholesalers actually ADD value to junker real estate transactions!