Wholesaling in real estate investing, also called contract flipping, is purchasing a home and reselling it to a buyer in a short period of time and without any repairs or rehab work. Before getting into the funding, what are the other necessary components of the deal?
The Buyer
Most wholesale deals are sold to rental investors or fix-and-flip investors. The wholesaler’s value is in the skills and resources to locate deep discount homes that can be sold to another investor with a profit in the middle. Rental investors want a ready-to-rent property that they can buy below market value, usually a 5% to 10% discount. They want to lock in equity at the closing table.
The fix-and-flip investor may be selling to a retail buyer, but more often they are fixing up the property to sell it to a rental investor. Knowing this, the wholesaler will need to locate properties that have enough room in the middle for their profit, but also for the rehab work and a profit for the fix-and-flip investor.
The successful wholesaler will network to meet and build relationships with both types of investors. The wholesaler will build out a database, a buyer list, with these buyers, their neighborhoods of interest, price ranges, and general requirements for the properties they want. The first step is the tail end, as you want buyers before you locate properties.
Funding with an Assignment Contract
Assignment contracts are not legal in all states, so check your state laws before working with this type of contract. The assignment contract is very much the same as a normal purchase contract, except the Buyer(s) box has the wholesaler’s name and a phrase similar to “and/or assigns or assignees.” This means that the seller is being informed that the buyer/wholesaler’s intent is to assign their rights and obligations in the contract to someone else.
The wholesaler put up a small amount of earnest money, generally a few hundred dollars, when the contract is signed with the seller. Then an assignment contract is executed with a buyer for enough money to fund the purchase and some profit for the wholesaler. When it is signed, all of the wholesaler’s rights and obligations in the contract pass to the buyer. The wholesaler is out of the deal, attending closing only to get a check for their profits.
Funding with a Transaction Loan
There are companies out there that specialize in lending to real estate investors, and they do what is called a transactional loan to fund a wholesale deal. The loan is for the amount of the purchase of the property from the seller. Then the transaction lender attends the closing to the buyer to collect their fees for the loan and their investment to buy the home. The wholesaler gets what’s left as profit.
The fees and interest charged by these lenders are high, but when it is the only way to get a deal done, and the numbers work, then it is worth it to the wholesaler. As with the assignment contract, the only money invested by the wholesaler is the earnest money deposit.
Wholesaling can be a fast-turn profitable business with minimal cash at risk. Learn the process, build a buyer list, then work hard to find properties that fit the bill.
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