Has Wholesaling Jumped The Shark?

Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...

From Dennis Fassett, Cash Flow Mercenary...

The word is out about wholesaling.

I read a piece in, of all places, the Huffington Post, titled “Fast-Start Real Estate Investing.”

It was all about wholesaling. It was written by a “TV Personality,” and in typical mainstream media fashion it was about an inch deep.

He did make a good point when he wrote:

“What I want to help new investors with is how to gather cash to evolve in their real estate investment to more long term cash flow strategies. Long term rental property or multi-family investment are cash flow strategies that are supporting many nice retirement lifestyles. However, they do normally require cash for down payments to get the mortgages necessary to buy the properties.”

Fair enough. But how many wholesalers do you know who actually do that? I know very few. Most wholesale as their primary real estate business, and instead of using the funds to buy rentals, they wholesale to put food on the table.

Which is just fine.

He went on to talk about how wholesaling is all about growing “your cash nugget into a gold bar,” and he ran through his litany of disclaimers about risk and education.

Then he provided a good, if very high level, overview of what wholesaling is all about.

What is Real Estate Wholesaling?

He writes that like retail wholesaling, the real estate wholesaler is a middle-person between a seller and a buyer. This role and position requires that you add value, or you aren't needed and deals won't happen. The great thing about real estate wholesaling is that it requires NONE of the overhead and massive costs of retail wholesaling.

money A computer is a big plus, but most of us have one of those, and all of us can get access at a library or digital coffee shop. That's it, as the rest of your business is all about finding properties that you can control and turn over to buyers with a profit in the middle. How much profit? Hundreds to thousands of dollars is pretty typical.

He adds that there are only a couple of ways in which you'll need to come up with a little cash. First, you'll normally need earnest money to control/buy a property. Second, as you get better at this, you may want to spend some money on marketing, but it's not necessary to start.

I disagree completely with both of these.

In fact, I think it’s exactly the opposite. I’ve been wholesaling for years, and not once have I needed a single dollar to control a property. It’s just not necessary.

And regarding marketing, you’ll definitely need a few bucks for this when you’re getting started, whether it’s for direct mail, which is what I do, or bandit signs, or a website, etc., etc., etc.

How Real Estate Wholesaling Works

He went on to say that as a wholesaler, you locate properties, generally single-family homes, with motivated sellers. These are sellers who need to sell, preferably in a hurry, and they can sell at a decent discount to the current value of the home and still pay off the mortgage.

He added that most of your customers will be other investors, generally either a fix & flip investor or a long-term rental property investor. The decision as to which is normally related only to the condition of the property. If it doesn't need work to get a tenant installed, then direct to the rental investor is the way to go.

I disagree with his point on this as well.

Rehabbers and landlords are two completely different types of investors, and it doesn’t have a lot to do with the condition of the property. As a landlord, I’m willing to pay more for a property than a rehabber would, because I don’t build “profit” into my buying equation. All I care about is that the property cash flows with my target ROI.

He’s spot on when he writes that the challenge is to buy the property at enough of a discount to sell it to your buyer at a discount as well. But he goes on to write that:

“Even a rental property buyer is an investor and will want to buy below current value to consider it a good deal.”

Again, I disagree. I’ve paid more than “market value” for several of my properties in great areas, and I’ve done so with gusto, because of the cash flow. That’s something you should think about the next time you have a wholesale deal in a good area. Try marketing it to a landlord and you could increase your profit substantially.

What Risk?

Once you locate a home that can be purchased at a significant discount to current market value, you gain control of it and present it to one of your buyers. You generally will know what they want and will be pretty certain the deal will happen.

He says the best way is to do an "assignment" contract. It is a wording change for the buyer, which now says "YourName and/or assignees." This means that you will be assigning the contract to your buyer. They take over the deal and you're paid your commission, usually at the closing. In either case, your total risk is just the earnest money, so it's a pretty good strategy.

There he goes talking about an EMD (earnest money deposit) again. Your total risk in wholesaling, when it’s done right, is pretty much zero. Which makes it a great way to get started.

So now that wholesaling has gone mainstream, watch out for a bunch of new people jumping in.