What is Real Estate Wholesaling and Why You Should Care
Updated: Aug 24, 2021
You are in the market to buy a house, and want the best deal you can find. Then Real Estate wholesaling, not retail, market is where you should be looking.
What is real estate wholesaling?
Funny, it actually has little to do with real estate. Wholesaling is the practice of finding motivated sellers, contracting a deeply discounted price, and assigning their contract to a buyer, profiting in the form of a fee (the difference between the contract and buyers price). Think of it as a real estate pawn shop: 1) an owner has a need to sell, 2) they offer to sell at a fraction of the retail value for quick cash, 3) buyers pay cash for a great deal, 4) the pawn shop owner (wholesaler) makes a fee for facilitating the sell/buy transaction.
How do wholesalers determine pricing?
A wholesaler identifies a potential property and estimates the following numbers: ARV (after-repair-value) home value after the home has been fully rehabbed, and cost of repairs. Then apply a simple calculation:
ARV - 20% buyer profit margin - repair costs - minimum wholesaler fee = MAO (maximum allowable offer). The MAO is the maximum price a wholesaler will offer to place a property under contract, usually much less. Note that 20% profit margin plus repair costs are already factored into the Wholesaler's asking price.
Cash Buyer vs Down Payment
When investors purchase a property from a wholesaler, they come with cash for the entire purchase. Whether it is from a personal portfolio, retirement fund, hard money loan, or other investors money, the closing is the result of a "cash" purchase. Why is this important: minimal inspection period, no appraisal, no funding qualification, quick to close - in 3 to 10 days in most cases.
How can a non-cash buyer leverage this type of transaction?
Many of the homes that wholesalers contract are in disrepair: foundation problems, structural damage, mold, wood eating insects, hoarders, etc. Mortgage lenders usually require the home be in sound condition per Fannie Mae requirements before a loan will be processed for purchase, determined by the inspection and appraisal reports. There is a way around these types of home conditions to secure a loan.
1) Approach a lender accustomed to working with Real Estate Investors. These types of lenders have experience with distressed properties.
2) Get pre-qualified for a loan, determine the maximum loan amount you qualify.
3) Come to closing with a 20% down payment. This will also avoid PMI (Private Mortgage Insurance), which is for the lender and no benefit to you -- the home owner.
4) Find a home in the area of interest from a Wholesaler. Wholesalers are easy to find online. Contact them and ask to be placed on their "buyers list," they will be more than happy to send you their listings. Places to find Wholesalers: Google/Bing searches for +"Real Estate Wholesaler", Facebook, Craigslist, and local REI meetings.
5) Your maximum price for a home should be determined as follows:
Maximum Purchase Price (MPP) = ARV - 20% of ARV - repair costs - closing costs
ARV - Determine ARV from local sales of homes in repaired or good condition within the past 6 months. A Realtor can help you determine this value. Be prepared to pay a Realtor $100-$150 to perform a CMA (comparative market analysis). The fee will cover their MLS costs, training costs, and time to complete this task and go over it with you. Under no circumstances should you sign a contract with the Realtor to represent your purchase.
Have (3) local General Contractors provide an itemized quote to completely repair the home, including appliances. Find (3) General Contractors prior to finding a house, have them on call to estimate the project.
These can be estimated, based upon the purchase price, by your Title company. Identify a Title company you want to work with before finding a home.
6) Submit an offer-to-purchase to the Wholesaler. Even if the asking price seems to good to be true, never offer the asking price. Make an offer 50% of your MPP, then negotiate up without going over your MPP. If proof-of-funds is requested, present the pre-qualification letter. If earnest money is requested, you may be able to negotiate the amount down, and be sure that it is fully refundable.
7) Bring the above information to your lender. While the offer is being negotiated show the lender that you have done your homework, and that you want a loan for the following:
a) purchase price,
b) closing costs,
c) hold-back in escrow for repairs, and
d) less your downpayment. Emphasize that the loan amount will be 70% or less of the ARV. The hold-back account will be used to pay contractors based upon estimates received.
Note that all of the above must be completed quickly, as with these types of transactions - time is of the essence.
It may seem intimidating to purchase from a Wholesaler, but the up-front work will provide you a comfortable, like-new home with typically 30-50% equity at the time of purchase. Good luck, and know that if the above still seems daunting, we are here to help.
For more factors to consider when buying or selling a home, contact Trinity Oasis Home Solutions for a one-time free real estate consultation.
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