Equity in wholesale deals

12 Replies

I'm not clear on how equity factors in to a whole sale deal. Does equity matter in a whole sale deal? I've been to a few wholesaling seminars, however, no one mentions if this is a important factor and if it matters (I suspect that it does).

Any clarification on that would be greatly appreciated.

@Doug Pretorius Interesting, I can't recall ever hearing any of the Gurus I've met or attend seminars in Baltimore talk about the importance of equity when you wholesale. I'm still not 100% clear on exactly how the equity in wholesale deals work but that's something I'll have to research more as well as lease options. 

I want to add as many tools to my tool kit as possible. Thanks!

When wholesalers state that they have "equity" in the deal that simply means that they have the property under contract at a price point that if and when they sell the property they will be compensated as the fee is already built into the price.  There are A LOT of things Guru's don't talk about. 

And YES, there has to be equity in the deal.........meaning that the house is worth MORE than what the sellers owe and want for the property. Hense "equity"............

Got it, thanks @David Bokman ,

Off of what Doug mentioned about lease options not requiring equity. In the event a seller doesn't have the equity to qualify a wholesale as a fix and flip to an end buyer, then that would be taking a lease option into consideration?

@Ellis Thurman Jr Yes you can do it that way. Lease options tend to work best with move-in ready homes in nice neighborhoods. But you can also wholesale lease options to contractors (who plan on living in the house themselves) if they need work. Unlike flippers who want a huge discount so they can immediately resell for a profit. Contractors are just looking for house they can build some sweat equity in.

Gurus may not have mentioned that the deal needs equity because it could be that they are assuming that everyone knows that.  They shouldn't leave out a detail as important as that.  All 'traditional' wholesale deals need equity.  

@Ellis Thurman Jr to add to what @Roland Paicely said gurus may not mention it because that makes it sound harder. Gurus sell the dream of it is easy, you don't need money and you can do it with no risk. None of that is true.

To follow up on what @Doug Pretorius said, If the seller owes a mortgage more than the property is worth, essentially he can't sell. If the seller has lots of equity because he has owned it for many years or has  entirely paid off the mortgage then he has lots of equity and can sell for less. 

When an investor talks about equity they mean they are buying for less than as is market value.

Thanks for that feedback. I am aware of the Equity and how important it is. I've just never heard any of the guys to sell the education mention that. I can see how that would make few wholesalers look bad when they have a property under contract with only 20% equity in it.

How could you help someone in a bind and need to sell their home with very little equity in there home? In that case, off what Doug mentioned, you'd do a lease option. I'd assume the investor would lease the property to someone else and they would essentially continue to pay the mortgage?

I've been trying to understand the concept of equity needed for a wholesale deal in concrete terms, @Ellis Thurman Jr as this was news to me. Here's two scenarios:

1. A home owner has 75K in equity and owe 25K (100K property). If they were to sell for 75K, they would pay 25K to their lender and keep 50k for themselves.

2. A home owner has 25K in equity and owe 75K. If they were to sell for 75K, they would pay 75K to their lender and keep nothing for themselves.

I can see how the equity position of the seller will determine their motivation/ability to sell at a discount to a wholesaler. But it looks like from this thread https://www.biggerpockets.com/... that equity also matters for the end buyer. Am I on track considering the seller side of things @Ned Carey ? How do these scenarios relate to the end buyer in a wholesale deal? Or is there a different scenario to consider for the buyer? Also looping in @Will Barnard from the linked thread.

@John Maxi yes you are right regarding equity as the seller. If you have no equity as a seller then it is tough to sell.

How "equity" is defined depends on the situation and context. "Equity" for a buyer usually means they are buying below current as is market value. But technically if they paid all cash they have 100% equity. Does that make it more clear?

@Ned Carey , yeah, that helps thanks. I guess I would summarize the buyer side as (in this context) equity means the buyer has a "get out of jail free card". If something happens and they can't go through with any of their exit strategies, they have a cushion to *likely* sell for more than they paid for it anyway. Hence the saying, "you make your money when you buy"!