What is Wholesale Flipping?
There are many ways to make money in real estate. As they say, there are more self-made millionaires in real estate than all other industries!
The most common type of real estate investing is the “buy and hold”. Becoming a landlord is what most people think of when they think of real estate investing. Almost everyone has someone in their family or someone that they know that is a landlord. The idea is to have a monthly cash flow and overtime to gain equity in the properties that are being rented to create wealth.
The problem is that in the current market, properties are not gaining in equity as much as in the past. The other issue is that in this economy it is not easy to find tenants with a secure income. Not to mention being a landlord can be more like a job unless you have a good management company in place. What I believe it boils down to is ego! People want to own properties to say “I own properties”!
These are some of the reasons that Wholesale Flipping has become so popular in the past few decades. Another reason, the main reason, is that Wholesale Real Estate requires a small amount of capital and can generate profits quickly. It takes more transactions overtime, but the amount of money realized can be more than owning several rental properties.
The concept of wholesaling is very similar for properties as it is for any other product. You wholesale the property to someone that is going to make improvements of some kind and they will eventually sell the property retail. Or, if they are a buy and hold investor, they will keep it for themselves and rent it out for cash flow. The process of Wholesale Flipping in its most basic form is simple. A wholesale investor will simply make an offer on a property and then “assign” that contract to the end buyer who is most likely either a “buy and hold” investor or a “fix and flip” investor. In this most basic form of flipping properties, the wholesale investor doesn’t have to actually invest any of their own money. They will usually have to put up a deposit, but they will get that money back within the “assignment fee” when the property is purchased by the end buyer.
The only issue here is that both the buyer and seller will know what profit the wholesale investor is making. If the profit is significant, which we obviously hope that it is, then assigning the contract might not be the way to go.
So let’s talk about the most profitable wholesale deals that are out there; Simultaneous Closings. It is not as simple as assigning contracts, but the method of performing Simultaneous Closings is where a wholesale investor can make some real money. In a simultaneous transaction, a wholesale investor will be the buyer and seller within the transactions of buying and selling the property usually the same day, but at least within a short period of time.
If a wholesaler buys the property, that means that they came up with the money to purchase it. However, their intention is to sell it the same day they bought it as to not incur “holding costs”. Holding Costs are costs associated with buying and owning a property. First, you have closing costs which include the title company fees for the closing, property taxes, other and other fees associated with the closing like recording fees for recording the new deed so that the property title is in the wholesaler’s name. There are other costs like property insurance, maintenance, and points and interest charges on the money they used to purchase it.
Now having said that, it is still a wholesale deal even if the wholesaler has to hold onto the property for a period of time. The profits just won’t be as much. This is usually because of resale restrictions imposed by the lender if the property was a short sale or bank owned property. Banks started restricting the resale of these types of properties specifically because they realized wholesale investors were making profits by reselling the properties after they purchased them from the bank.
At the end of the day, if you have the funds to either wholesale or flip the property same day or hold onto the property to wait out the resale restrictions, you will make more profits than assigning contracts. The real purpose of assigning contracts, other than not having the funds, is to structure deals with low-profit margins in a way as to incur the least amount of costs. No matter how you convey or sell the property, wholesale investing is the path of least resistance and will protect an investor from losing money on any deal as long as they do it properly.