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Understanding Real Estate Wholesaling

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It’s hard to imagine a world where there is no wholesaling. To picture a world where wholesaling doesn’t exist almost seems unfathomable because it is such an essential part of business where the focus is on goods. Though it is nearly impossible to imagine a world without wholesaling, it is still something that is hard to give the appreciation it deserves.

Sure it is easy to refer back to the old common understanding that wholesaling is the matter of buying something and one price and turning around and selling it for more. We can all think of numerous examples of wholesaling outside of real estate and we understand what it is in terms of real estate. However, what lies beneath the surface of this seductively simple definition can provide you with your own set of understandings that will allow you to grow your business in ways others can’t… because they’re not you.

One key to success that I tend to trumpet whenever I get the chance is to apply differentiation to your business and the best way to differentiate is to understand the surrounding roles and factors of your field and where you fit in. Recognizing what you can do and where that fits in to the bigger picture is key!

Now there is no better example for illustrating how a real estate investor plays a role than wholesaling. Wholesaling has long been regarded as the best entry level position for most fledgling investors and for good reason.

  • You’re simply dealing with contracts (Purchase Agreements or Options) which doesn’t require anymore than a little earnest money.
  • As you grow your business, your experience as a wholesaler is invaluable.
  • It’s as complicated as you make it, so you can start off with simple deals and as you grow and learn you’ll be able to add to your repertoire and develop at your own pace.
  • Wholesaling provides you with a way to develop your funds for your own buy & hold strategies.
  • Provides you with another exit strategy possibility in future deals.

A speaker once told me that “If you don’t write big checks you can’t lose big checks” and there is a long standing belief among investors that it is better to have started with little than to start with a lot for the shear reason that you need to scrap it out and understand how things work without the luxury of having all the funding you need. It forces you to learn, work, and think harder about your business. I believe this to be true, but I also believe that one of the underlying reasons is because you need to go through a wholesaling stage to become a well rounded, successful investor. It’s a bit ironic because wholesaling isn’t technically investing; it’s a business, one that you would be wise to set up a separate entity.

Here is a quick run through of what wholesaling is:

Wholesaling is when you buy something and then turn around and sell it for more resulting in you making a profit. Right off the bat, that is not necessarily how it works when it comes to real estate investing. You can by all means buy the property and then find a buyer, but that’s not the most prudent thing to do. What wholesalers will do is find a property, speak with the seller, negotiate a price based on the MAO (Maximum Allowable Offer), and get the property under contract. You may have to put down some earnest money, but with a seller who isn’t a bank you can, at most, expect to put down $100-$500 in earnest money, however I’ll typically offer $10 and the sellers generally accept that.

Now you have your deal under contract and it is very important that you understand that you can sell the rights of the contract to another investor. You make the spread between what the original Purchase Agreement price was and what the wholesale price you sold it for is. The money is yours, and you are done. That’s the wholesale method in its simplest form; it’s the process (we’ll cover wholesale process in the next post).

If you really get what just happened then you are in fine shape to become a wholesaler because the process, input, output, and result will always be constant.

The real trick to making your wholesaling work for you is how you go about building your business around this model of an engine (contract a low price, then sell it for more, make money).

In the next post I will be covering the role of a wholesaler in a community of investors because we all know networking is the key and there’s no truer example than that of the wholesaler.



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home staging in toronto4/20/2011

graceace@gmail.comI also believe that one of the underlying reasons is because you need to go through a wholesaling stage to become a well rounded, successful investor.

George3/18/2010

georgesalarcon@yahoo.comThanks for explaining about the wholesale connection to real estate.


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