I would like to talk to you about the difference between wholesale and retail real estate. If you are a real estate agent then this article is especially for you. And if you are a real estate investor you will benefit by reading it too! As a disclaimer I would like to point out that I am currently a licensed Realtor ® myself. I spent many years as a wholesale real estate investor without a real estate license. So I have seen both sides of the same coin and that is what I am going to share with you. On a side note if you are a real estate investor and if you are thinking about getting your real estate license then I encourage you to do so. There are many benefits to being licensed.
Let’s start our discussion with retail real estate. According to the National Association of Realtors ® there are over 1.2 million real estate agents in the U.S. Most real estate buyers interact with retail real estate and retail real estate agents. Most buyers and many real estate agents are not even aware that there is such a thing as wholesale real estate. So most buyers don’t have any understanding of wholesale real estate and the realtors that show them properties often don’t understand wholesale real estate either.
You see in retail real estate the customer is king. The customer is always right. Just like in any retail business like a store or restaurant. If you insult or upset a customer they will simply leave and take their business elsewhere. If a customer wants to look at a property then in the customers view the agent should show it to them. I see customer’s request specific showing times from real estate buyers all the time. For example the customer says “I would like to see this property at 2 p.m. on Wednesday”.
These customers believe that the real estate agent should show them the property just like the waiter in a restaurant should bring them their entrée. And therein lays the problem. You see as a real estate agent if you let customers treat you this way then you are simply a commodity to them. In fact if real estate law allowed you to then you could just send your assistant to show them the property. Buyers can afford to be as fussy as they need to be because they are shopping for the perfect home that they plan on moving into and living in for many years. So it is understandable that they will be picky. There is a lot of real estate to choose from and there are many real estate agents willing to show them as many houses as they need to in order to earn a commission.
In retail real estate the customer feels like the real estate agent is being adequately compensated via their commission. So in the buyers mind wasting the realtor’s time is justified. Now on a million dollar listing I would agree that 3% of a million dollars ($30,000) would be a nice chunk of change for most real estate agents. However the average listing price in the U.S last year was only $230,000. 3% commission on a $200,000 house is only $6,000.
If the real estate agents broker takes 30% of their gross commission then the real estate agent is left with $4,200. And that is before expenses! If you want to make more money as a real estate agent then the real question is how hard was it for you to earn that $4,100 commission? Well in most cases as a buyer’s agent it turns out that it is actually very difficult!
Here is an example of a common scenario. A buyer contacts a real estate agent and says that they are interested in looking for a home. The buyer’s agent if they are a new real estate agent is often quite excited at the prospect of earning a commission. You see big producers don’t jump every time a buyer wants to see a property. But new real estate agents do and that is why they don’t make much money.
So assume in the above scenario a relatively new real estate agent spends an hour or so figuring out the needs of the customer over the telephone. Then the real estate agent arranges a time with the customer to go and look at some properties. A typical real estate agent might show 3 or 4 houses to a buyer. Some hard working and diligent real estate agents can show as many as 7 or 8 houses in one day. This usually takes up an entire day!
At this point the buyers may or may not see something they like. If they want to look further then the real estate agent has spent approximately 5 or 6 hours (maybe more) without making any money.
The process often repeats with another day or two of showing more properties. At this point the realtor might have spent 20 hours looking for a house for their buyers and still have not made any money. If the real estate agent is lucky, the buyer is loyal and ethical (which they should be) and stays with the agent until one of their offers is accepted and the real estate agent earns their commission.
But unfortunately this often does not happen. A more common scenario in the real world is that the buyer is speaking to other real estate agents at the same time. And they are going on appointments with multiple real estate agents. And another real estate agent shows them a house that they love. And they make an offer and it gets accepted. And the other real estate agent earns the commission.
You see in retail real estate the sad fact is that with over 1.2 million real estate agents the competition is fierce. And the customer is always right. And if the customer does not like working with one real estate agent it is very easy for them to start working with another. There is very little loyalty in the marketplace. For this reason, many times the broke real estate agents are working the hardest showing properties while the real estate agents that are making good 6 figures in commissions are going from one closing to another picking up commission checks.
What is the difference between these two real estate agents? What differentiates the two? Why do some real estate agents make a lot of money while others struggle to get by?
The answer really boils down to just two things. The first is specialization and the other is knowledge. The best advice I can give to any real estate agent out there is to specialize in one area and then become very knowledgeable in that specialty. If you want to become the luxury waterfront condo specialist or the gated country club specialist then you need to learn everything you can about your product. That way when you do talk to customers you can differentiate yourself from other real estate agents by being more knowledgeable about your product.
When you pick a specialty you can focus on branding yourself as a specialist in your area of expertise. Your website, business card and social networking profiles can all brand you as a specialist in that expertise. If you know your product better than anyone else then buyers will see that you are knowledgeable. And they will flock to you like a flock of seagulls because they see that you know what you are doing. And they will come back to you and refer their friends to you. And you will make a lot of commissions with a lot less effort. That is how you make money as a real estate agent!
So how does wholesale real estate differ to retail real estate and why does it matter to you as a real estate agent? There is a huge difference between wholesale real estate and retail real estate. In wholesale real estate there is a smoking hot deal that is usually a bank owned property or some kind of distressed situation where the seller needs to sell quickly. Wholesale real estate sells at 65 cents on the dollar or less. That means that there is a lot of equity in a wholesale real estate deal. A $200,000 house at 65 cents on the dollar is $130,000. That is $70,000 in equity to the first buyer that grabs it. And wholesale real estate is cash. Cash buyers did not accumulate cash by being unsophisticated. Cash investors are savvy and they know a deal when they see one. And they will pounce on it and buy it in a second and they don’t need a realtor to do it. They just need to talk to the seller. And if the seller is a bank then they just need to talk to the listing agent.
In wholesale real estate a whopping good deal is a deal that you need to buy right now before someone else does. The big dilemma is that too many real estate agents don’t really understand what a good deal is. You need to have a sense of urgency in wholesale real estate. You need to make a decision to buy right away if you see a good deal. If you don’t someone else will.
You see in wholesale real estate it is not the customer that is always right. It is the repeat cash buyer that buys again and again and again from the same seller. That is why the same cash buyers buy multiple properties from wholesalers and listing agents. Ask any wholesaler that is flipping 10, 15 or 20 houses a month to cash buyers. They will tell you that they have cash buyers that have bought 20 or 30 houses from them in just one year. These cash buyers are sophisticated and they have lots of cash. And then didn’t accumulate all that cash by being stupid. So if you are a real estate agent and you are going to talk to cash buyers you should know at least as much as they do.
You need to understand the language of wholesale real estate. You should know terms like After Repair Value (ARV), how much it would cost to repair a house, comparable retail sales and wholesale prices. Imagine if you will that you are a wholesaler and you have a smoking hot wholesale deal that every cash buyer would want. And imagine that you have a huge cash buyers list of 20,000 cash buyers. Do you think it would be difficult for you to find a buyer that wants the deal? Of course not! The first cash buyer that you called would want the deal. It would be sold on the first phone call!
Do you see the difference between wholesale and retail real estate? I hope this article helped you.