Wholesaling: What You Need to Know

Wholesalers tend to stay in the shadows of real estate industry, though they often play an important role in the real estate development ecosystem.

Before we get into the minutiae of wholesaling, let’s examine what is wholesaling and who are wholesalers.  Wholesalers are the middlemen who create value by providing access to otherwise off-market deals. The job of a wholesaler is to find an off market real estate property, get it under contract and then assign contract (real estate purchasing rights) to another party in exchange for a meaningful fee.   Wholesalers strive for win-win transactions: the receiving party wins by getting access to valuable real estate, and the wholesaler wins by earning a sizable fee without ever having to do any development work with the property.

Wholesaling as a way to develop deal-making skills and professional network

It takes networking to find an off-market property and then identify a developer who would be willing to pay premium for it.  Perseverance comes into play, as there’s a lot of time and effort that goes into targeting and finding motivated sellers willing to sell their home at a deeply discounted price.

Robust analytical skills are required to be able to figure out the numbers – how much you can afford to pay the seller and still be able to assign the contract for a fee to the developer.  This requires a thorough understanding of the development process and the costs involved, not to mention figuring out the value of the developed asset.

Finally, solid negotiating skills are also a must as you would need to negotiate with two parties — the initial owner of real estate, and the final developer to get the price that leaves you with “enough meat on the bones” for your fee.

Building Up Your Initial Capital

Many people hesitate to get into real estate because they don’t have the initial capital.  For example, an average flip in Maryland can easily set you back $40,000 in terms of required cash or “skin in the game”, as you should be able to borrow the rest.  Wholesaling is a great way to learn how to value real estate and build up your capital foundation in the process.  It is not uncommon for a developer to start out as a wholesaler, learn the ropes, build up their capital base, and then graduate into development a few years later.

The Dark Side of Wholesaling

We spoke about the benefits of starting out as a wholesaler; now let’s look at some things to be weary when purchasing a property from a wholesaler.

A wholesaler’s sole goal is to sell, not to make you money – the reality is that should never blindly believe a wholesaler when it comes to numbers.  They may promise a good deal, but not all of them are.  If you’re buying a property from a wholesaler, you must run the numbers yourself, including the repair costs and the after-repair-value (ARV), to be sure the picture being painted is accurate. Failure to carefully scrutinize every assumption taken by a wholesaler can cost you lots of money, so trust, but verify!

Time is of the essence. When you purchase an investment from a regular seller off Multiple Listing Service (MLS), you typically have at least 30 to 40 days to conduct your diligence.  However, when you purchase from a wholesaler, things move much faster, leaving you little time to do your due diligence.  Very often there is no escape, or inspection clause once you submit your deposit and get the property under contract with the wholesaler. This means you are working with imperfect information, and you have to hope your assumptions about the project hold up.

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Should you find a great deal and have a need for financing, please consider PSG Lending (www.psglending.com) for helping you finance the transaction.  We close in as little as 1 week and finance anything from flips to commercial real estate.