What is Wholesaling Real Estate?
Many of Rehab Financial Group’s borrowers find their properties through real estate wholesalers. Others have no idea what wholesaling real estate is, or how wholesaling works. RFG gets a number of phone calls from wholesalers, looking for buyers to assign their contracts to. It can be a messy business if not done right, but can also be extremely profitable for those involved when things go smoothly.
Wholesaling works in this way – the real estate wholesaler finds a property that can be bought below market price (usually distressed) and puts it under contract, sometimes putting its name “or its assigns” on the buyer line. The wholesaler then endeavors to find an investor willing to buy the property at a higher price than the contract amount. The wholesaler then assigns the contract to the investor, and is paid the difference in price as its fee.
In another scenario, the real estate wholesaler closes on the transaction with the seller at the contract price, and then immediately sells the property to the investor at a higher price. Either way, the wholesaler makes a profit within a few days. Accordingly, two things are of paramount importance to the wholesaler – the first is to find the deals, and the second is to develop a group of investors to sell it to.
So what is the catch? Anyone with a lot of experience in real estate investing will know that closings do not always happen as expected. For example, what if the investor buying the property from the wholesaler fails to close, after the wholesaler has committed to the property and all contingency dates have passed? The real estate wholesaler can lose its deposit, or worse, if they already bought the property in anticipation of a quick sale, the wholesaler will have their capital tied up until they are able to liquidate the property to another investor.
In addition, many sellers are hesitant to deal with wholesalers, feeling that if there is someone willing to pay a higher price for the property, they want to capture that price, not give it away to the wholesaler. Accordingly, a savvy seller will not allow the contract to be assigned. Conversely, many investors do not want to buy from a wholesaler, as they are paying a premium for the wholesaler’s work in securing the property. It is really a balancing approach for all parties to decide what cost they are willing to absorb in order to have some of the work of buying or selling a distressed property done for them.
Lastly, both the seller and the investor buying the property must discuss the transaction with the title company closing the transaction and the lender (if any) to the investor. Many title companies and lenders have restrictions on how quickly a property can be resold when purchased by a wholesaler. Many, including RFG, will not permit “simultaneous transactions” when the wholesaler buys from the seller and then sells to the investor at the same time.
Wholesaling fees can run from minimal (less than $2,500.00) to a substantial sum. We have seen assignment fees in excess of 25% of the selling price of the property. Again, it is up to the investor purchaser to do their homework to make sure that the purchase from the real estate wholesaler will be profitable when the wholesaler’s fee is included in the equation.
If you chose to wholesale real estate, or deal with a wholesaler, make sure you understand how the transaction will work and know who all the parties are. Wholesaling can be very profitable when everyone has done their homework and the potential loose ends are tied up.
All of us at Rehab Financial Group, LP wish to take this opportunity to wish all of you a happy holiday season and a prosperous 2014!