Buying Real Estate Wholesale

The builder example is the best and easiest to understand. There is a strategy that was so prevalent that laws were passed against it, so now builders do it themselves. They buy the first couple of units in a project for a lower, wholesale, price to generate interest, income, and buy down the construction loan cost.

A construction loan is at a higher interest rate traditionally. By buying units as residential investments, or personal residences the carrying cost for the builder goes down. Those first few units are crucial to infusing cash flow into a project so builders will sell them, some times, at a discount. When the project is complete, and sold out for a higher price, those first few units will go back up for sale. The original buyers for a "hot" property will make a profit above and beyond carrying costs. 

A builder is creating wholesale properties in the process of buying the land, doing site work, building the project, and selling the product. Each step in the process is a whole sale opportunity to "buy in" for a percentage of the profits. The end result is only a twenty percent margin, as a rule of thumb, so the pickings are really pretty slim there. Builders deal in volume.

One of the most important factors in wholesale real estate is cash. At sheriff sales or foreclosures the buyer pays cash for a property. So those people standing around waiting to make a bid very often have between two hundred to five hundred thousand dollars in cashiers checks. They carry hundred, five, ten, and twenty thousand dollar denominations to make exact change. 

The person who is in the upper tier of wholesale real estate is the hard money lender. They lend money to people buying those foreclosures for cash at higher rates and fees. Usually a hard money person charges a double digit interest rate with two to four points paid "up front." The idea is that once the buyer gets control of the property they will refinance the property by more conventional means quickly. So if you only keep the money for a month the lender can make the two to four percent even if you never make a payment.

Those hard money lenders have a quick reclamation clause in thier contract. If the buyer doesn't refinance or doesn't continue with the payments the lender takes the property back. The lender themselves are a source of whole sale opportunities. They also deal in volume. Some lenders are not "hard," they simply make loans with attachments. These may be preforeclosure, debt consolidation, or emergency cash lenders who in turn end up with properties, or property equity.

Wholesale properties are usually figured at twenty five to fifty per cent of retail. A $500K house needs to be bought for $250K to be a deal. Some people will pay a higher percentage, some less. It depends on the economic value to the investor. Some investors have a geographic area they like, other's are fixer buyers, some will only buy properties they can rent out for a cash flow.

Real Estate is about churning money. The real estate is the security. It's the money that makes money, or not, as the case may be. Investors can build an  inventory or look to maximize profits. Some investors buy to sell for a profit. You can get onto a waiting list of some investors who go to auction, or subscribe to a news letter. You can do it yourself with the help of a guide like Dean Street at John L. Scott. He publishes a variety of tools for foreclosure sales and in some cases can arrange financing.

Foreclosures as a hot topic in today's press tell us that lenders are "writing down" loans. This means that properties are selling for less than is owed. These can be a source of wholesale property by how much of a loss the lender is willing to take. There are groups of Real Estate Owned Properties across the country that qualify for wholesale pricing. The principles we are discussing here still apply. Lenders will sell for full retail what they can.

Another source of wholesale properties are those properties that have fulfilled thier economic use. A young couple my partner and I worked with for fourteen years bought a run down apartment building on Rainier Avenue. There were two ways to look at the property. One way was to fix it up, the other to tear it down. They chose to fix it. There again the twenty to fifty per cent rule applies. If some one before you has run a property into the ground to take a rental income, let's say, there is no reason for you to pay retail.

Obviously the buyer pool for cash or fixer transactions is small. Most people don't consider these avenues viable for them. There are those people who shop for properties according to numbers. One buyer who is dear to my heart has a person who looks at anything that might be a good deal. For him the numbers work. He makes offers on properties every month, and has for probably thirty years. His offers are traditionally low. It's all numbers that work. He rents out to hold the property. Some properties rely on others to make them cash flow. He buys around the State of Washington.

It's easier to get a property to cash flow in a non urban, rural area. If you begin buying in small towns for cash flow, and make sound investments, the income can accumulate. There again, like our friends with the apartment building on Rainier they cash flowed right out of the gate. There are toss ups. It's what makes sense to you that matters.

In the other three articles I talk about buying strategies. This idea of buying wholesale is just one. The investor buyer is by far the best source of properties at a discount. You may be the person creating those wholesale opportunities, but chances are you'll start out small and work your way up. The most important thing to remember is to build equity, as well as cash flow, then use the ability to tap that equity to make other transactions.

There is a say in real estate; that we only sell a property in order to buy another. It's a constant process.