Let's assume that John is interested in getting involved with real estate but does not have very much money or experience. John joins a local real estate club that meets every month in his city. He learns that one investor, named Kathy, will pay him a “finders fee” if he lets them know of any properties that are available that appear to be “distressed” and have owners who want to sell their property.
Wholesaling Case Study Part 1 – The Property
John thinks this is great because he drives all over town at his current job and does drive through neighborhoods many times during the week. While driving to see a client, John spots a house on 1234 Oak Trail. The house looks like it has not been maintained, although he sees a car in the driveway. He tells Kathy about the property.
Kathy decides to check on the property and do some research. She drives to 1234 Oak Trail and finds that the owners are still living in the house. She knocks on the door and chats with them briefly. Kathy finds out that the owners have been trying to sell the house for quite a while due to the wife's job transfer. The man in the house is the husband, who has been staying at the house, while his wife and kids moved to the city where the new job is located.
He wants to sell the house immediately, but because of the time of the year, some minor repairs, and other factors, the house has not sold. Kathy runs the numbers and sees that it is a good deal. She knows that if she can get the right terms, this is a property that one of her investor friends, Tom, would certainly be interested in.
Kathy inspects the property and negotiates a purchase agreement with the sellers 3 days later when the wife is home visiting. Kathy uses the right contract and puts down $50 of earnest or ‘good faith' money to secure the contract. She also has the right conditions clauses associated with the purchase agreement, and because of this she carries very little risk.
Wholesaling Case Study Part 2 – The Deal
Tom is a real estate entrepreneur who buys properties and fixes them up (Rehabber). He then puts them in the retail market by listing them with a real estate agent. He enjoys working with his crew (on occasion) for the re-hab of the properties. More often than not, however, he lets his crews handle the rough and technical aspects of repairing properties.
He also appreciates Kathy's work, because she always seems to find good properties that fit his criteria. Of course, she meets with Tom regularly and knows what he is looking for. Tom decides to buy the contract from Kathy (Wholesaler).
Kathy is paid $4,500 for her time and effort putting the property under contract and working with the sellers (Wholesaler). Kathy takes $500 of the money received from Tom and gives this to John for his work finding the property (Bird Dog Scout).
Tom takes the property through a full re-hab after closing with the sellers. He ran all the numbers and even inspected the property before “buying” the contract. He knows that with $15,000 of repairs the property will be worth $150,000. He will earn the most money, but he also will put in the most time, have the most expense and carries the most risk.
Wholesaling Case Study Part 3 – The Investors
What you have just walked through is the anatomy of a short term real estate flip. In this example there were 3 different people involved in the transaction. In case you missed it, John was the match-maker or scout, Kathy was the wholesaler, and Tom was the retailer/rehabber. Each of them played an important part in the process and each of them required different levels of knowledge and carried different levels of risk. Yet, each of them was equally important.
For example, Kathy had to know and understand what type of properties and what type of profit margin Tom needed on his real estate transactions. She also had to inspect the property and get a good sense of its value. For her to put the property “under contract” she has to understand how to complete the contract. She also needed to be very familiar with the required protections needed in the contract to reduce her liability.
Tom in this situation carries the most risk and will have the most time and money involved. Consequently, he also stands to earn the most in additional income. He does not mind paying Kathy her “finder's fee” because she provides him with a valuable source of inventory that he can fix, update and then later re-sell to retail buyers.
Sometimes Tom finds these properties himself and puts them under contract. Depending on the property he may handle the complete process of fixing it up and bringing it into retail sale condition and then list it with a real estate agent. In other situations, he will simply put the property “under contract” and then sell or “assign” the contract to another investor. He will do this if he needs some quick cash or if he does not have time, money or personnel to re-hab another property.
Since he knows what constitutes a good deal, he can negotiate with the motivated sellers, put the property under contract and then sell the contract to one of his friends who also re-furbish and re-hab properties. He knows that the most important thing is “buying correctly” and at the right price. By simply selling off these contracts, Tom has a quick and easy source of cash to keep the cash flow high. With this cash flow he will borrow less on his re-hab deals, or he can keep the cash for emergencies or unexpected cost “overruns” on his fix up deals.
I hope you enjoyed this short case study on how wholesaling real estate works and the overview of each of the players involved in the short term buying and selling of real estate, otherwise known as Wholesaling Real Estate.