Wholesale real estate demystified

by Paul Bernard - Residential Equity Partners, LLC.
October 9, 2013

Most of us know that "wholesale" in the world of products, stores and shopping means "from the manufacturer and at a very low price and usually in large quantity". When compared to how the word "retail" is used in this same context, most people understand this means the final sale to the end user and at full price. These two words have been used more and more in the real estate business lately to describe similar classes of transactions. In the real estate arena, the word "retail" simply refers to the transaction where the property is sold to the party intending to use it or live in it. Retail sales are most often handled by a licensed Realtor and typically include major marketing efforts, listings on the Multiple Listing Service and an Open House. Whereas the true meaning of the word "wholesale" in this context is not so clear and a bit muddled. Is it possible to wholesale a property if you did not build it?

In its simplest form, wholesale real estate transactions are between parties not intending to use or occupy the property. This could be two landlords trading properties with each other, a bank selling a bank-owned property to a developer or between any two other parties where neither one intends on living there. Imagine for a moment, a person working from home scouring the Internet for distressed properties. This person is not an investor or developer with intent to buy a house, they are not a Realtor looking for a property to list and sell, instead they are looking for a property some other developer would want to buy. If you had the time, technology and a basic understanding of how real estate investors, developers and landlords worked; you too could become a real estate wholesaler.

The three basic wholesale models can be defined fairly easily. 

1. Bird Dog - this is where the wholesaler finds the property a developer wants to buy, performs some preliminary research then simply refers the property to the developer and collects a small fee. In the mid-west where property values are modest and reasonable, this fee typically ranges from $100 to $300. However, in the big coastal cities east and west, the property values are much higher and so are the bird dog fees. Sometimes $500 to $1,000 would be more reasonable fees to expect in Los Angeles, San Francisco, New York and Chicago. The more valuable the property, the more you get paid. The Bird Dog model is by far the easiest but also has the least amount of control for the wholesaler and still requires a concerted effort in marketing and research. 
2. Assignment - the basic concept is the same as Bird Dog, but this time with more control over the property and requiring a bit more effort and knowledge too. Here, the wholesaler will need to locate the owner of the property, make an offer to buy and get the property under contract. The purchase offer has some language that allows the contract to be assigned to another party before the purchase is completed. The wholesaler in this model must have a good working knowledge of real estate, construction costs and be able to perform assessments on properties and negotiate a favorable purchase price. The signed contract is what is sold to the developer and not the house itself.  The wholesaler is done when they assign the contract and get paid. The developer would then fund the purchase, complete the renovation and eventually sell the property through a retail transaction or keep it in their rental portfolio. This wholesale-by-assignment model requires a bit of sophistication, working knowledge of contracts, construction and capable investors ready to buy the contracts on short notice. Assignment fees are based upon the value of the underlying property and the contract terms. Typical assignment fees range from $2,500 to $10,000 and sometimes more, depending on the value of the underlying property and the terms of the contract being assigned. 
3. Double Close - is identical to the Assignment model above except that a double escrow or double close is set up and performed at the title company. In this case, the wholesaler would actually buy the property, legally taking title to it and funding the purchase themselves. Then, on the same business day, sell the property to a developer in a completely separate transaction. Here the wholesaler can mark-up the property to align themselves with even higher returns. It is not uncommon for really great deals with deep discounts to be marked up $10,000 to $25,000 or more and still be favorably priced for the developer. That mark-up would be the wholesalers profit from the sale of a property they owned for an hour or two. Again, a certain level of sophistication, knowledge of construction estimating and real estate transactions is a requirement for success using this model. 

The successful wholesale operation must have a marketing campaign to locate discounted properties and distressed sellers. This could include Internet-based research, flyers, direct mail and other similar systems. Beyond marketing, locating the properties and structuring deals, having developers ready to buy the properties found is a critical step that cannot be overlooked. Some wholesale deals come from working investors and developers where they find more properties than they can handle. Instead of turning the opportunity away, the contracts are assigned or sold to another developer for a fee. 

Get started with finding a developer or investor willing to take on another Bird Dog and ask them to mentor you. They teach and you get paid to learn with each deal. As your knowledge grows, move into the Assignment model and on to Doubles. Are you already wholesaling property and need to expand or grow your operation? Maybe another investor/buyer is the missing piece of your strategy?

Please visit our website to learn more about our firm and how we operate in the dynamic world of residential real estate. http://www.ResidentialEquityPartnersLLC.com