If you are thinking about investing in real estate or you are just getting started as a real estate investor then you are probably interested in learning more about the concept of wholesaling. When investors refer to wholesaling they are talking about wholesaling houses which many investors confuse with the concept of flipping houses which is not the same thing.

So what is wholesaling? Wholesaling is simply signing a contract to purchase a house and then assigning (transferring the rights) to that purchase contract to a third party in exchange for a fee which is called an assignment fee. As an example if you have a contract to purchase a house for $80,000 and you assign the rights to that contract for an assignment fee of $10,000 then the investor that is ultimately purchasing the house will pay you $10,000 and pay the seller $80,000. The investor’s total purchase price in this example would be $90,000.

The first question you are probably asking yourself is why would anyone pay a fee to someone else in order to purchase a property? This is a very logical question and generally speaking in real estate usually the only fees that a buyer pays are transaction fees like closings costs. So why would someone pay a third party a fee? The answer lies in the purchase price. You see the word “wholesaling” is derived from the word “wholesale” indicating that the property is at a wholesale price and not at a retail price.

Typical wholesale prices are approximately 65% to 70% of fair market value and are often advertised and marketed as “wholesale deals”. In the above example the retail price was $140,000 and the wholesale price was $90,000. Wholesale deals are cash only prices requiring either cash or hard money to purchase them. Retail houses are usually purchased with a mortgage. That is the main difference but there are other differences as well.

Typically wholesale deals have no inspection period, non refundable deposits and no contingencies for inspections, surveys, mortgage qualification etc. That is why they sell at a discount because cash investors have to lay out a lot of cash (sometimes borrowed at high hard money interest rates) and repair the property and resell it for a profit. Since the investor that is buying the property is taking a lot of risk they are compensated for this risk by being able to purchase the property at a substantial discount to a regular retail buyer with a mortgage. They have to have the entire purchase amount available in cash so they are not the same as your average retail real estate buyer.

These deals are usually advertised as wholesale dealsindicating that they are at wholesale prices and are an amazing bargain. This is not the same as the retail price which is what a house would appraise for. Many new investors do not understand the difference between a wholesale deal and a retail listing of a house for sale. It is very important to understand the difference. Most beginning investors think a wholesale deal is just a house for sale. That is a big mistake to make and hopefully after reading this article you will not make that mistake.

So why would someone pay a fee to someone else in order to purchase a house? Let’s look at the above example of the house that is being purchased for a total cost of $90,000 which includes the assignment fee. What if the actual fair market value of this house (what it would appraise for) is approximately $140,000?

In this case buying it for $90,000 would be an incredible opportunity for the buyer and they buyer would probably have no problem with the fact that the person who located the house and signed the contract to purchase the house wanted a fee of $10,000 in order to assign the purchase contract to them.

The person assigning the contract that made $10,000 in the above example is known as a “wholesaler”. They are simply locating a deal for another investor in exchange for a fee and are known as a bird dog, property scout or deal locator. Wholesaling is a great way for new investors to start out because it allows the new investor to learn without risking any of their own cash or credit. If the new investor cannot find a buyer for their wholesale deal they can simply cancel their purchase contract and move on. As long as the contract is cancelled prior to the end of the inspection period the wholesaler should have no problem with the seller and should not forfeit their security deposit. Smart wholesalers put down as little security deposit as possible typically $10 or $100 at most. If they decide to cancel their purchase contract their risk is minimized to the amount of deposit that they put down on their purchase contract.

There are two key things that I would like to point out to you. Firstly the only reason a seller would sell a $140,000 house for $80,000 is because they have to. In the wholesale real estate business these sellers are known as desperate or distressed sellers. This is why our company is called the Distressed Real Estate Institute.

Distressed sellers fall into two categories. Either they are in some kind of financial distress or the property is in some kind of physical distress. Examples of financial distress could be foreclosure, bankruptcy, considering a short sale, divorce, loss of income, judgments, court cases and many other reasons why they might want to sell in a hurry. Examples of physical damage to the property could be fire damage, hurricane damage, mold, Chinese drywall etc.

If you want to find great deals at great prices you will have to learn how to buy from a seller that has to sell not a seller that wants to sell. The only sellers that have to sell are the ones that are facing foreclosure, about to lose their home or have so much damage to their property that inhabiting the property is not possible. These sellers have no choice. They cannot list their property on the market and wait 3 to 6 months for a buyer to materialize. They have to sell right now before the foreclosure auction etc. That is what makes them a desperate seller and if you want to be a wholesaler you are going to need to know how to find and market yourself as a buyer to these desperate sellers.

The second thing that I wanted to point out is that the concept of assigning contracts will not work with bank owned properties, short sales or any situation where the owner of the property is a bank and not an individual homeowner. In these situations the wholesaler will actually have to close on the property, own it and then resell it for a profit to the end buyer. This would actually be flipping not wholesaling since you would be taking title to the property. However usually both the purchase and sale are completed on the same day and are known as a double closing or simultaneous closing. Many times the money to purchase the house before it can be resold for a profit is borrowed from a transactional funding company.

Wholesaling is a great way to get started investing and learning about real estate. I started out as a bird dog finding deals for other investors and I suggest that you do the same. Wholesaling is the best way to learn how to find great wholesale deals without risking any of your own money. If you make a mistake the most you can lose is your security deposit which should usually be no more than $100.

If you would like to wholesale and be a bird dog and locate deals for us then visit this link on our website to find out more about our Partnership Program  http://lexlevinrad.com/partnership.html