Wholesaling: Every Investor Needs To Learn and Apply This

Many times, real estate investors think of wholesalers as mere beginners who will eventually gain enough experience to get out of the wholesale arena and graduate to the rehab real estate level.  Instead of looking at one as being more superior then the other, I believe it is important for everyone involved in real estate investing to recognize the necessity of bird dogging, wholesaling and rehabbing within their investing business.   An investor may decide to focus on one particular technique, but all three methods of investing are viable and relevant tools for a real estate investing business.

My experience is that the most successful full time investors primarily sell everything in their inventory “AS IS.”  Why?  I believe it’s because of: 1) time value of money; and 2) cash flow.  If you come across an abundance of rehab opportunities within your local market, it is impossible to take on all these opportunities with your current resources (financial and physical). This is why referrals (bird dogging) and wholesaling begin to become important options for your business.  So instead of saying “my plate is full” now, a real estate investor can expand their inventory with the intentions of unloading that inventory within 30-120 days and many times without ever taking title to the homes. 

Anyone who has ever taken on a property rehab knows that you can be out of pocket with a ton of working capital throughout the project.  Why not replenish those reserves with a few quick flips so you do not feel the “cash flow” crunch?  I have witnessed many local investors go in and out of business in the last three years by taking on three rehabs right out of the gate without understanding how much capital it truly takes to get three homes rolling along in the rehab process.  It’s not easy!  I believe if more investors implemented bird dogging and wholesaling into their real estate investing repertoire, they would not feel such a cash flow crunch within their business.

The beauty of wholesaling, meaning closing on transactions and selling them as is shortly thereafter or simply assigning the homes before taking title, is the minimal risk it entails.  After all, this is what financial institutions do with real estate.  They gain title through the foreclosure process (REO’s).  They evict, re-key, secure, winterize, cut the grass and clean out the homes, then immediately market those same homes for sale. They do not wait three months and then start rehabbing the homes. They do not fall in love with the homes!  This kind of mindset would not make financial sense to them because they have an abundance of inventory coming down the pipeline because all of the irresponsible borrowers in the United States.  If you are coming across multiple, legitimate real estate deals but are passing on them because you fear not being able to assign them before closing or you do not have the resources to rehab them, rethink your options.  You could always wholesale those properties and keep that working capital flowing back into your business each and every month.  No more shuffling credit cards to get your rehabs done.  Use your wholesale profits to move them ahead quickly towards completion and quickly towards your payday.

Here is an example of how wholesaling real estate can help your business stay afloat during the rehab process.  This example is of a complete rehab on a detached, single family home with estimated costs for the project at approximately $80,000.  Estimated completion time is four to six months depending on contractors’ timeliness, etc. 

Construction Phase 1-Draw 1

Demo costs                      $3,000

Framing                           $4,000

Roof                               $3,000

Permits                           $1,000

Basement waterproofing     $5,000

New windows                   $6,000

New siding                       $8,000

Total cost of first phase –  $30,000

Total amount needed to begin (typically one third) – $10,000

If you were not wholesaling, you would need $10,000 to start your project.  If you are cash poor, it is extremely tough to come up the needed funds even if you have a lender giving you draws to complete the work on the home.  (As you may know, lenders will only give you draws on work completed.)  How can the work be completed if you cannot start it?  This ebb and flow continues throughout the entire rehab project until it is completed.  So who funds this type of project?  The answer is you.  Hopefully, you do not have to find that out the hard way.

By completing one wholesale deal a month with an average profit of  $10,000, you would be able to fund the start of your rehab with the money made on the your wholesale flip.  When the rehab work is completed, you can pay the contractors the remaining 2/3rds needed with the construction draw from your lender.  If you are dealing with a small bank, they usually can wire the funds directly into your account after the draw inspection is completed.  Under this scenario your business has not only stayed afloat, but has turned a handsome profit!  

If you were completing four rehabs a year with an average profit of $25,000 each, then you are making $100,000 a year.  Plus, if you quick turn 12 houses along the way, you double your income to $200,000+ and you keep your rehabs moving along quickly without having to slow down because you do not have the cash to start different levels of the project.

Wholesaling cannot only be a lucrative real estate investing tool, but also a useful one to help you get into the rehabbing business as well.  For more information on how to wholesale properties, check out Steve Cook’s course, Wholesaling for Quick Cash.