Thinking about Flipping? Think Again! Here’s Why Wholesaling May be a Better Alternative

29

I would guess that real estate reality TV shows have done more harm to more investors over the last several years than any of us can comprehend. The thrill and excitement of watching a couple of regular guys buy and fix a property for $100,000 and (maybe) sell it for $125,000! “Wow – Can you believe these guys just made $25,000 profit by fixing up a house?!” (I always find it interesting how these shows never actually show the house being sold … they typically end showing scenes of an open house and an estimated sale price and profit figure.)

There’s no denying that the idea of flipping houses has become a mainstream phenomenon in recent years. However, what you never actually see in a reality show is the breakdown of all of the costs associated with flipping a house and the true net number at the end of the day. When you see a “profit margin” of $25,000 flash across the screen at the end of the show, the average viewer typically has no understanding of what costs that were absorbed out of that 25K.

Chances are, if you’re a BiggerPockets member, you already understand that the investor had purchase costs, financing costs, holding costs and selling costs. At the end of the day, what appeared to be a $25,000 profit may in fact be much less.

Herein lies the question just about every experienced real estate investor has had to ask him or herself when analyzing a property. “Am I better off simply wholesaling this property or should I take a chance on fixing it up and selling it?

I still wrestle with this question on a daily basis. However, I know some extremely successful investors who have ultimately decided they are better off wholesaling EVERYTHING rather than taking on additional risk by fixing and selling on the retail market.

A Closer Look at the Costs

In the example above, let’s suppose the gross margin based on SALES PRICE – (PURCHASE PRICE + REPAIRS) was $25,000. At initial glance, this may seem like a good deal. However, perhaps the additional costs that are not discussed on the show added up as follows:

Purchase Closing Costs: $1000
Hard Money Origination Fees: $3,000
Hard Money Interest (3 months): $4,500
Insurance: $500
Utilities: $500
Real Estate Selling Commissions: $7500
Closing Cost Contribution: $2500
Additional Inspection Repairs: $1500

= TOTAL ADDITIONAL COSTS OF $21,000

So taking into consideration all of the costs that weren’t disclosed on the show, the actual profit number may have only been $4,000?! I realize this may be a little bit of an exaggeration, but not necessarily. Many new investors simply don’t calculate all of the buying, selling and holding costs associated with a transaction.

Analyzing the Risks

And while you can typically zero in on your approximate purchase costs and selling costs, the biggest unknown is your holding costs. What if it takes nine months to sell your the property and your interest expense is through the roof? What if you own the property during the coldest months of the year and your utility bills are way higher than expected. What if the house gets vandalized or you have a busted water pipe while the house is sitting vacant?

Related: How NOT to Flip a House: An Embarrassing Story of Wasted Time, Money, and Opportunity

Investors that have flipped enough houses know that all of these risks are very real. I’ve had many properties over the years that appeared to be slam dunks, but ultimately ended up losing money or just breaking even.

Over time, many investors decide that the hassle and risks associated with buying, fixing and flipping just aren’t worth it … and in many cases they are probably right. Even in the example above, let’s say you can shave some of those costs and pull off an estimated net profit of $10,000. If I could wholesale that same property and make $7,500 without ever buying it and taking on the risks of flipping, you can bet I’d wholesale that house all day long.

Don’t get me wrong, I’m not advocating that all house flippers become wholesalers. I absolutely believe there is great money to be made in flipping houses. However, the more houses you flip, the more attractive wholesaling becomes when you can make quick money without the hassle and risks associated with flipping.

I’d like to hear from you guys – anybody make the change from flipping to wholesaling? Or are there a lot of you like me who still make the decision on individual properties whether to wholesale or flip?

Photo Credit: FlyButtafly

Subscribe to our mailing list

* indicates required Email Address * First Name Last Name
Share.

About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

29 Comments

  1. Just Beginning you must educate yourself about real estate wholesaling. I for 1 can tell you it is not easy. The cool thing about it is you literally have very little to no risk involved when flipping homes to a cash buyer. I have personally experienced both. And both definately have their benefits. Some properties you come across have an enormous about of equity potential. Those you may want to bring in a partner or fix and flip yourself. Fix and flip, wholesaling, and buy and hold are my 3 business models I focus on. Ultimately there are benefits to learning different aspects of the business. Great Article!

  2. Also capital gains= zilch. One has to start somewhere, breaking even on first one is NOT TO BAD. If profits are low- wholesale. The bigger the risk, the bigger the reward, with experience-very little risk.

    Like Brandon, I live in Hooter Ville, wholesaling is not a viable option. Buy and hold for at least two years (7 the best) is the best alternative= maximum profits.

    My formula- buy REO, fix up, rent out, refinance, get $300+ positive cash flow and move onto the next one.

    • Ken Corsini

      Jim – thanks for the post. You bring up a great point … investing really depends on your market and personal preference. If buy and hold is the best fit for you – by all means go that route!

      Thanks for contribution!

  3. I appreciate the perspective, but I think the article is a bit misleading. Your “example” simply makes up numbers. What if the house sold for an extra $50k? That’s a $54k profit!! Flipping is awesome!

    You also say “what if” you could wholesale the house for $7,500? Well, if that’s true, you would get that money plus the flipping profit if you flipped instead of wholesaling. In addition, if you are using the 70% rule (or some approximation), you should never come out of a deal with only $4k profit.

    Seems to me that the better approach for an article like this would be an analysis of the typical profit made by wholesalers vs flippers calculated on an income/time spent with the risk taken weighed in. Just making up numbers to illustrate why one method of investing/job is better than another doesn’t seem convincing to me.

    Adrian

    • Ken Corsini

      Adrian – I think you missed the point of the article. I am not arguing that wholesaling is better than flipping.

      … and of course I “made up” numbers for my example … that’s why it’s called an example.

      The point of the example was to point out the often over-looked breakdown of costs associated with flipping. I believe when analyzing a deal to flip, if the numbers are going to thin, it’s better to look at wholesaling as an alternative.

      I agree with you – IF in the example above, the selling price was going to be 150K, I’d probably want to flip that instead of wholesale as well.

      I think an article written analyzing the difference in profit, time, risk of wholesaling and flipping is a great idea. BiggerPockets actually has a place for members to do this:

      http://www.biggerpockets.com/blogs

      Perhaps you can write this article and share with us your research and perspective.

    • I am afraid I find myself agreeing with Adrian.

      The article’s example uses a $125,000 ARV house. If an investor followed the 70% rule, they would never take this house on if the purchase price + rehab = $100,000. 70% of $125,000 is $87,500. If that was the purchase + rehab, there would be an additional $12,500 profit using the numbers in the example. $16,500 should be the profit realized from this deal by a disciplined investor.

      The paradox of wholesaling is that if it’s not a good deal for you, it’ll be a worse deal for someone else after you absorb your wholesaling profit. Using your numbers, if you add $7,500 to the cost for your buyer, by the time they’re done with the deal, they’ll have suffered a $3,500 loss.

      I agree with the main point of the article that there are additional costs above and beyond the purchase and rehab costs. I disagree that the solution is to wholesale such properties to others who will see even more cost and risk with the property.

      I think wholesaling can serve as a useful and profitable strategy in an investor’s arsenal. I think wholesaling is best when your buyer’s list consists of investors who use different strategies from your own. That way if you come across a deal that doesn’t work for you but would work for them, you wholesale it and everyone comes out a winner.

      • Ken Corsini

        David – If every inspiring investor understood the 70% rule and calculated costs accurately, there wouldn’t be much point to my article.

        In regards to wholesaling, I disagree with this statement completely: “if it’s not a good deal for you, it’ll be a worse deal for someone else after you absorb your wholesaling profit”

        I’ve wholesaled a TON of deals to investors this year that had no intention of flipping the properties. For buy and hold investors who are planning to get the property rent ready and lease long term, my wholesale pricing can still make sense.

        • Ken, your example of being a rehabber who wholesales a property to a buy-and-hold investor is exactly what I was talking about in my last paragraph. Thank you for underscoring my message with your excellent example.

  4. I agree… by far, wholesaling is the way to go when you are just starting out. My normal costs for getting a house under contract was gas money + $10 earnest money. Of course there is time involved, but nothing compared to the endless weeks of torture when rehabbing a house.

    When all is said and done, you probably make more money wholesaling on a per hour basis than actual rehabbing and flipping.

  5. Ken…

    My variation that I tell people is:
    -Market constantly. You make the best deals when you have to many deals to consider.
    -Keep houses that are the easiest and most profitable to turn into rentals.
    -Keep the ones that are high profit rehab deals.
    -Wholesale the rest which will provide money for marketing and standing overhead.

    This will keep you busy and optimize profits. Trying to force profit by ignoring costs and not allowing for surprises means that you will only “just get by” – if you are lucky. Getting tied up in marginal deals prevents you from doing high profit projects. NOT wholesaling properties you do not want is a waste of resources and places a higher burden on income, which creates a heavy drag as to reaching your preferred lifestyle.

    Use everything, waste nothing.

    • Ken Corsini

      I think this is an excellent and concise strategy:

      -Keep houses that are the easiest and most profitable to turn into rentals.
      -(Flip) the ones that are high profit rehab deals.
      -Wholesale the rest which will provide money for marketing and standing overhead.

      Thanks for the post!

      • Two comments; first, what about Income Taxes? No capital gains at 15% if the property is held less than a year. Tax will be based or “Ordinary Income”.

        Also, if a partner or the Fix and Flipper is a Realtor then at least 50% of the commission is saved.

        The guy who held for 7 years has a huge advantage because he can 1031 Exchange the properties into replacement properties when he sells them and never pay taxes.

  6. I agree most don’t consider all the costs when flipping, but to wholesale you have to have a great deal, Most likely you are wholesaling to an investor who wants at least as much room as the 70% rule allows for. To successfully wholesale you would have to have a home with plenty of profit to flip and then some for the wholesalers profit.

    I personally think if you have the money to flip, then flip it and don’t give away most of the profit wholesaling. If the deal ins’t good enough to flip, it probably isn’t good enough to wholesale.

    • Ken Corsini

      Mark – Why do you assume that you have to wholesale to another investor who plans to flip the property? Most of my wholesales are to investors who plan to hold and rent. These investors typically do minimal rehab and can still make great returns … even if the deal didn’t make a great flip.

      • Ken,
        Can you give an example of some numbers where it makes sense to hold but not flip? It seems to me that usually these would line up, and I’m having problems visualizing when they wouldn’t.

        • That is interesting you feel that way. I feel that usually there isn’t any much overlap in deals that make good flips and those that make good holds. I’ll guess others think that way too given how nobody even considered wholesaling to a landlord when talking about it as a crappy flip deal.

          In my local market I could say buy a junker for $110K, put $50K into it and resell it for $230K. After taking into account all the stuff Ken points out so many people forget about I’d be looking at like a $33K profit pretty easy.
          That same place would probably rent at like maybe $1600. If you use the 50% rule leaving $800 monthly NOI and then do just a terms refi on the $160K at 5% you have a $859 payment and an expected net loss of $59/month.

          Strategy is pretty obvious there!

  7. I see your point about being able to maybe wholesale a thin flip to a buy and hold guy if the cash flow worked, and you aren’t looking to hold.

    Originally I was going to comment along a similar line to some others that if you had a deal that was that thin you would have a hard time wholesaling it to anyone that wasn’t a first time newbie, and with a deal that bad probably a last time newbie as well.

    • Shaun,
      I’m responding to this post as BP won’t let me respond to the post above. My question was poorly worded. I’m sure there are lots of flips that won’t make good long term rentals, but I’m wondering what the numbers would be on a house that would be a good long term rental but would be unsuitable as a flip.

      • Ken Corsini

        Adrian – maybe your market is just different the mine. Almost all of my wholesale deals make great rentals but poor flips. I’m marketing one right now for $44,900 (built in ’92, nice curb appeal) … it will rent for $800/mo. The house could be rent ready for 15K … but would need at least 25K for a flip.

        An investor looking to buy and hold could be into the house for 60K with 800/mo in rent. In my market, those are good numbers.

        An investor looking to flip the property would be in it for 70K but would have big problems trying to sell it for more than 75K (mainly b/c it won’t appraise for more than this)

        We sell these types of “B” properties to hedge funds and other buy and hold investors all day long.

        Hope that answers your question.

        • I’m in Colorado, where you’d be lucky to get a crappy condo for that price. That pricing is interesting, because it seems people would buy more of those up instead of renting them – the mortgage would be something like $375/month.

  8. I also think that there are a few things to consider on these home flipping shows. One being the cost of labor in the state they are rehabbing. Obviously your rehab budget is going to be a lot higher in California than it will be in Georgia. Further, the shows never mention the cost of labor, and only refer to the cost of materials, or the fact that to really rehab an early 1900s house takes a lot more money than are budgeted. Are the workers potentially being subsidized by the show? Flipping homes really is romanticized on TV. Nevertheless, wholesaling properties does not have half the adventure that renovating them has.

Leave A Reply

css.php