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Wholesaling is deal prospecting. Finding houses to get under contract, and assigning your interests and obligations under that contract to another buyer who will pay you an assignment fee. All with the permission of the seller, according to the law anyway. (Others use Options.) The steps are as noted above: 1) Find a deal 2) Get it under contract 3) Find someone who will pay more 4) Sell it to them You may close on the deal between steps 2 & 3, which will require financing and incur costs. Most wholesalers, however, never close on deals themselves, unless simultaneously selling it, thereby never requiring their own financing. From a return on investment, it looks great on paper. No money down. Sign a few papers when you get it under contract. Wholesale the property to another investor and sign a few more papers. Get your check at closing. No money (actually, a minimal earnest or option money is required), and you walk away with a check. But what skills are involved? And what are the real costs? And do all deals close? GOOD WHOLESALERS FIND GOOD DEALS The key to making money wholesaling is finding deals below MAO. You have to know your repair estimates, and ARV. You have to be able to negotiate. But, most importantly, you have to know what your return on investment is. Return on investment? Didn't HoustonRealNews just establish this was a "no-money down" strategy? YOU ARE AN INVESTOR, SO, YOU HAVE AN INVESTMENT We are not trying to be cheeky. It comes naturally. If you are an investor, you are spending time analyzing deal after deal. You are developing routes to put out your signs. You are inspecting properties, skiptracing leads. Sending out letters. Sending out more letters. Sending out bags of popcorn that say "don't let your equity go POP!" What else could you be doing with that time? That is a big cost. HOW MUCH CAN I MAKE? AS MUCH AS YOU CAN GET Finding deals is not easy, and wholesalers work hard to earn money. A recent market trend we have witnessed over the last 3 years, suggests wholesaling to be even more profitable than it used to be. Wholesalers used to settle for $2,500 flip fees. However, with new participants to the real estate investing market willing to pay SuperMAO, good wholesalers have become very adept at squeezing all the low-risk profit out of a deal, or only wholesaling high-risk deals. (Our parent company tends to wholesale deals that we could conceivably build from scratch for 10% more total cost than the total of rehab costs and management time). A wholesaler has a significant investment into every contract negotiated. Homevestors, a Dallas-based wholesale operation, spends thousands, rumored to be in the $5,000-$10,000 per deal found. Is it crazy that to earn $15,000 on a deal picked up for only $5,000? Its a business, the price at which the wholesaler sells has to reflect the investment made. TIIIIIIIIME, IS NOT YOUR SIDE The problem that wholesalers have is that when they first get a property under contract, they can sell it to the highest bidder. But if that buyer does not close, the wholesaler has a short amount of time to find another buyer. (In the negotiation session, we will discuss time as a factor in negotiations.) The reduced time means a lower price. Why? The economic theory of sunk costs. The wholesaler already spent all the costs involved in the deal. A $15,000 profit might now only be $5,000. Last time HoustonRealNews checked, $5,000 was better than nothing, which is what the wholesaler gets if the deal falls through. IMPLICATIONS OF WHOLESALING Three main consequences have occurred through the rise of wholesaling profitability and the recent market trends:
2) Wholesalers telling the sellers that it will be "just one more week" to save the wholesaler from a time crunch 3) More deals falling through when wholesalers pay more because they expect to get more 4) Increased flipping regulation Item 1 is just the way it goes - more competition, less margin. Economics. Items 2, 3 and 4 are a concern for all investors. This kind of activity really causes major PR problems for the industry. And, it eventually may cause shrinkage via regulation of any legal operation of the industry. If you have questions and would like more dedicated and one-on-one/small group education, we can set up live in-person or on-the-job learning sessions - upon request or at a regularly scheduled time. Related Articles -BASIC EDUCATION OVERVIEW - Basic Investing ARV - After Repair Value Birddogging Contract for Deed Dealing with Contractors Estimating Profits Evictions - A Primer Executory Contract Foreclosure Overview Foreclosure Types Overview Hard Money Loans - a/k/a Asset Based Lending* Lease Options Leverage MAO - Maximum Allowable Offer Multi-Family Investing Basics as Presented by David Lindahl on March 4, 2006 No-Money Down Real Estate Investing Options Part-Time v Full-time Passive Investing For Beginners Pre-Foreclosure Profit Calculation Remodeling for Beginners Rent vs Buy Is Really Rent vs Sell Seller Financing as Investor Buying Tool Skiptracing Subject To Wholesaling Return to Listing Return to Investor Education |
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