How Will a Recession Impact Wholesaling

What’s up, freedom fighters? Hey, welcome back to the show. Today I had a question from a friend of mine. By the way, you can ask questions too, and I’ll try to tackle some that I think would be most relevant that a lot of people would have, by going to flipnerd.com/ask. Simply go there. We have a little form that you can fill out to ask your question, and I’ll do my best to answer it if it’s one that I think a lot of people have, a good question. So ask good questions.
But today, I had a question from my buddy, Jonathan, who actually is here in my market who basically said, “Hey, a lot of people are talking about a recession. You know, you have a lot of experience and I’ve heard from a lot of people, “What do you think would happen to wholesaling in a recession?” Let’s talk about that.
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Okay, so what happens to wholesaling? And I’m going to broaden it out a little bit to talk about just the real estate market in a downturn. So I started right before a downturn in the last cycle and kind of lived through this myself. You know, there’s a lot of lessons learned when you go through a market cycle. And truthfully, that is probably one of the reasons that Jonathan asked me and a lot of . . . you know, there’s a lot of real estate investors that are crushing it right now but they haven’t been through a couple market cycles. So this is some good conversation, and it’s timely. Now, you know, you always have to use a grain of salt with the media because the media, you know, it’s very political, talks about a lot of things.
Of course, there’s a bunch of people that want to, you know, bring Trump down or that literally, I think, Bill Maher said something the other day, like, “We need a recession to stop Trump.” And then now it’s everywhere in the news about the recession, recession, recession. I don’t know when it’s going to happen. It will happen, the market will slow down. We probably already feeling that a little bit depending on where you’re at. But I want to talk about the different things that you need to be prepared for.
Now, here’s the truth, I’m not going to inject any fear into this at all, the biggest opportunity that you have to build wealth and really set the tone for your legacy would be in a down market. And here’s why. Some people are going to go away, which that doesn’t need to be you. And some people are going to take advantage of the opportunity that presents itself. And I don’t mean that in a negative way. You’re not taking advantage of anyone, you’re just taking advantage of the situation that a lot of people are going to go away. Basically, houses are going on sale and not everybody will be able to participate. But you can if you’re prepared.
So I want to go into a few different areas here. By the way, this is a question for my buddy, Jonathan. And if you have any questions, I try to answer some of them on my show if they’re really good questions like this one that I think are timely and a lot of people will benefit from. You can just go to flipnerd.com/ask. We have a little form there. And I review the questions that come in every once in a while and do my best to cover them. And I’d like to cover here on the show or go on a Facebook Live.
So what happens in a downturn? Well, it kind of depends. It depends on your market, how robust is your market? Like I’m here in the Dallas-Fort Worth market. A lot of the major Texas markets can do no wrong, like there’s so much population coming into the state. So many companies moving here that they are strengthening the foundation of this economy. So it’s not going to get hurt as much as say a California market or even a Chicago market where a lot of the policies that are going to place are antibusiness and huge tax burdens on population and stuff like that. So they’re not going to be able to withstand, you know, some of the things that happen as well as a market like Dallas-Fort Worth, let’s say, okay? So it depends on the market.
So let’s talk about this market. It depends on your access to funding or cash. That’s one of the big things that happens in a down market. What drives the down market or stops driving the up market is access to capital. So when big lenders start pulling back, when banks say, “I’m sorry, I can’t lend to you anymore,” things like that, the market starts to slow down, right? For rehabbers, for builders. There’s a lot of things that start to happen. And that is really what drives the boom. So I’m going to talk about your access to cash and capital quickly here And so that’s the second thing.
The third thing I will talk about is your creativity, right, your ability to do deals with other people’s money or even seller financing to you. Things like that. Or you seller financing on to the next person. So this isn’t quite just wholesaling but there’ll be some undertones inside of here about wholesaling. So it depends on really those three things.
So let’s just kind of talk about what happens to the parties involved. So buyers, home buyers, right? People that are actually out trying to acquire properties. There will be less of them, right? Because it gets a little bit harder. It’s gotten harder in this difficult market. So a lot of them start to go away. And when cash dries up, the truth is is what’s happening in this market is there’s a lot of people way overpaying for houses.
For some of us that have been around for a long time, it doesn’t make sense. And the only reason they’re able to survive or do that is scratch out a few boxes because the market is kind of crazy, right? People are overpaying for deals. When the market starts to go down, that will go away. It will solve itself. People will get stuck with houses. They’re not going to buy anymore from those guys that are overpaying. Those guys have learned that they can overpay and scratch a few bucks out, don’t know how to buy deeper and they’re going to go away quickly. They’re like literally living day-to-day already anyway.
So the competition, some of the competition goes away. That’s good for you if you’re still in the game, right? It’ll start to get easier to buy and you’ll be able to buy at deeper prices, right, as the competition goes away.
So why is that? Well, let’s say that you’re a seller now, what happens to sellers? Well, they’re made a little bit more realistic because they didn’t get 20 offers on their house, now they have three, right? And sometimes only one, right? And now what drives some of that is the competition that we just talked about goes away.
Some of it also is the media, right? The news will start talking about . . . this has been a few months ago now. I don’t read newspapers and I try to not watch the news because it’s such a downer.
But I was in line to the Starbucks. And, you know, they have the newspaper setting up by the stand and I saw the headline of “USA Today.” It was like, “U.S. real estate market in freefall or collapsing,” or something that was like insane, really. But that is what a lot of people that are sitting around watching the all day long, which unfortunately, is a lot of people are hearing that, “Oh, the market is bad, the market is bad, the market is bad.” Now, that just resets their expectations to, “Wow, my house has increased in value so much, my taxes have gone up. And now I’m going to lose it all.” It starts people to start making different decisions because they fear a downturn.
Now in some markets, certainly California markets, coastal markets, really, they might see significant drop offs. So people that have been around for a while they remember what happened during the last cycle. So it’s this little bit of fear of what might happen if they don’t sell quickly and become a little more reasonable in their pricing.
So the media drives behavior there a little bit. There’s less competition for deals. And, you know, one of the questions that get asked all the time about real estate investing is like, you know, “Is this going to last forever? Are you going to be able to buy houses forever?” Well, the reality is, is at least me, they’re people that bought short sales, they bought at auction, stuff like that, that was never me. I always bought direct from seller.
Those are sellers that have gone through a divorce, had a death issue, an inheritance issue, problem rental properties, all those things like the market cycle, access to credit, what’s going on in the economy, what the interest rates are, all those things at a high level they really drive the retail market, if you will. In the wholesale market, just because interest rates change doesn’t mean that death is more or less likely or that any of these life issues that drive a lot about the opportunities to us as real estate investors, they don’t go away, they don’t go away. So that persists across all market cycles. People are still, unfortunately . . . we don’t wish these things as real estate investors, this is just life.
I mean, I’m actually . . . side note here, I’m literally in a parking lot about to get a physical that I haven’t had for two years and I probably should have. But, you know, this hospital people, people are still going to be dying here and having health issues and accidents and all those things in any market cycle. Real estate investing is no different.
So the truth is, is we also buy from financial difficulties. And in a down market, there probably will be more financial difficulties so they’ll be more opportunities for that and less competition. So if that makes sense.
Let’s talk about funding. So what happened during the last downturn is I had friends that were, you know, well capitalized and they would get calls from the banks and they say, “Hey, you know, effectively we’re pulling your line. We can’t lend to you anymore. We’re getting out of the real estate business,” or, “We’re pulling way back,” or whatever, that those are very real things.
And so depending on where you get your funding right now. Now, if you’re just assigning deals, obviously, you haven’t needed this. But I would encourage you to get access to funding, even if you’re used to just doing assignments.
The truth is if you’re only assigning properties, this wealth transfer that happens during down markets, you really miss opportunity to create wealth by being less transactional, keeping some rentals, getting some seller finance notes, whatever it might be. You know, that the end of the day assigning is a great tool for the right properties but it is not a way to build wealth. You’re going transaction to transaction to transaction.
So I’d encourage you, Jonathan, or anybody else that’s listening to this to, you know, keep some of the properties that you buy. You will look back and regret that if you don’t. If you’re new and you’re not doing that, you’re going to regret it, I promise you. So it’s really important to have access to credit.
Now, some of the big national lenders might go away. They might only work with their preferred customers, people that they have long standing relationships with their friendships. And so if you haven’t been spending time building those relationships in anticipation and preparation for a down market, then you need to get on that like right now. Local banks, private lenders, you need to start building those relationships right now.
And we have our FlipNerd million-dollar meeting coming up here shortly. It’s really for experienced investors here in Dallas. We have about 14 of the top real estate investors and kind of thought leaders and experts in the country coming to teach and actually we’re spending about a half a day on raising money because of this, right? It’s really, really important.
And so there’s a tremendous amount of private money out there. And in a downturn, you know, there’s a lot of people that have access to a lot of private capital that are not necessarily investing in real estate right now because they don’t quite understand it. And if you can help them kind of partner with you and have a passive role in that, there’s a tremendous amount of private funding that’s there that is not kind of driven by what happens in a downturn with the big banks. And even the national lenders because they’re all Wall Street backed is that the Fed starts to . . . you know, they start to put new rules in place or regulations or whatever. They effectively just kind of pull back on what they’re able to do.
Private investors don’t have those issues. They, in fact, you know, if the if the stock market is also going down, they’re going to be looking for a new home for that money. And a lot of people I think like the idea of keeping it closer to home if there’s somebody that’s in your market. So get access to capital now. Start building those relationships now. It’s very, very critical.
So one other thing that I would say is you can start to use more creative strategies, right? If you are in a market, like I talked about the Dallas-Fort Worth market, if you’re in a Midwestern small town market, that’s kind of rust belt or southern market that’s kind of rust belt, best days feel like it’s behind it, like population is maybe level or maybe even dropping off a little bit. The truth is sellers there has to get a little more creative because the market is not as robust. So there might be more willing to finance their houses to you.
And potentially you could wrap those notes and seller finance them, or even they might fund to fix and flip, or they might fund you long-term for rental so they can get some mailbox money themselves. So use more and more creative deal strategies. We could talk about this like all day long. So I won’t belabor that too much, maybe I have to do another show on that.
And the last thing I want to talk about is preparing for a downturn is . . . and, by the way, hopefully, you get the undertone here that there is a huge opportunity. You should be preparing for this opportunity right now. Don’t be reactive to it, like, “Oh, my God, somebody moved my cheese.” Like get ready for this opportunity. This is a good thing if you’re prepared. Most will not be prepared and that means it’s a good thing for you if you are prepared.
The last thing I want to talk about is business structure. And that is, you know, what happened during the last downturn is there a lot of folks that were overhead heavy, right, not just advertising costs, but they had big teams, fancy offices, wrapped Hummers, all sorts of stuff. And they had a lot of overhead burden on their business. And so a lot of those guys, truthfully, you know, some of these were friends of mine, they got lean and mean and then they’ve gotten sloppy over the last couple years again in some instances there. You could tell there’s a lot of overhead that they’re carrying every month or they told me that. And so, you know, you want to be lean and mean.
Now, lean and mean, I would argue does not mean being a one-man band. I know a lot of real estate investors are super small. They’re doing everything. And, you know, we don’t in my teaching and our Investor Fuel Mastermind, all those things, we don’t celebrate that. The truth is, is you have a job. And so I’m not advising that you do everything yourself so you can save money. You know, you should have some admin support. Maybe an acquisition manager. Obviously, you can’t grow if you’re doing everything yourself. It’s really hard and you have a job, by the way. But it’s important to be lean and mean. I’m not saying don’t have employees but I am saying don’t be stupid with your money. Don’t start doing stuff that doesn’t help drive your business. And so try to stay lean and mean as possible.
So, bottom line is there’s a huge opportunity. I don’t know when the downturn is coming, but I know that it’s like Black Friday. Everything is going to go on sale. The problem is, is there won’t meet as many people as on Black Friday rushing into to buy this stuff. A lot of them are knocked out of the game. And so you have a huge opportunity ahead of you in a market downturn as long as you’re prepared.
I hope you got some value out of that. If you haven’t subscribed to our show, I’d love it if you subscribed on Stitcher, Radio, iTunes, Google Play, YouTube. Our YouTube channel is blowing up actually. We have just massive amounts of millions of views and love it.
Now, by the way, if you’re watching this on social media, I’d love it if you if you’d share this with somebody else that you think would be good to hear it, maybe share it into one of the popular Facebook groups for real estate investors. I’m Mike Hambright from FlipNerd, “Real Estate Investing Secrets.” Appreciate you. See you on the next show.
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