Equity in Wholesaling?

Question

Hey BP,  why is it necessary for a seller to have higher equity in their home when doing a wholesale deal? What happens if they don't have equity?

Barry Pekin · Answer

@Chase Guelette,

The whole key to wholesaling is to find houses where the owner has some real motivation to sell at a discount.  They're dealing with some sort of distress, either financially, emotionally, or physically (to the property) where they really want and need to get rid of the house quickly.  They don't want to, or can't, take the time and money to fix it up to get the best price.  That's what most people do, and then list it with an agent.

In order for an owner to sell their house at a discount, there has to be some good equity in there.  If you find a house where the seller really wants out, there's a $350,000 mortgage balance outstanding, the house would be worth $400,000 all fixed up, and there's $35,000 in work that needs to be done to it, the best you can offer (rough numbers, of course) is maybe $240,000.  This would require the seller to bring $110,000 to closing.  I'm guessing that a distressed seller that can't take the time and money to fix up their property isn't going to be pay that kind of money to sell their house.

Let's say that same home owner has a $200,000 mortgage balance outstanding.  Same situation, they're going to walk away with $40,000.  The source of their stress/distress is gone and they have a chunk of change in their pocket.

Now, there are ways to make deals work with low equity, but that's not the norm and is a whole different topic.

Lydia R. · Answer

@Chase Guelette Like @Barry Pekin said, wholesaling is all about finding motivated sellers who are willing to sell their property at a discount. Having equity is once piece of the equation, but remember that the more equity a seller has the less willing they will be to sell at a steep discount unless they are deeply distressed. You have to find a balance between equity, motivation and purchase price. There are creative solutions for properties with little to no equity...but thats another topic for another post.