Today’s REI Classroom Lesson
Many investors don’t use wholesaling as their main exit strategy because they fear leaving money on the table, as Danny Johnson explains.
REI Classroom Summary
While you might not make as much as you would from a rehab, you have less holding costs and involves less time than other exit strategies. You’re able to do more volume with less hassle with wholesaling deals.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Danny: Hey, everybody, this is Danny Johnson. I blog at flippingjunky.com and I’m also the founder of LeadPropeller and REI Mobile, and I’m going to be your host today for REI Classroom, and I want share with you why wholesaling isn’t just for new investors.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Danny: And it’s something that I thought for a really long time, that mostly wholesaling is for newer investors because it doesn’t typically require large sums of money to do deals. So, when you’re flipping houses, you need to have the resources to be able to buy the house, as in hold on to them, and pay for the fix-up and sell them, and not put yourself in a bind to where you’re making mistakes because you’re running out of money. It’s the last thing you want to do. It’s the quickest way to lose money and flipping is to do that.
So a lot of people talk about starting wholesaling for that very reason, because it doesn’t require a whole lot of money to do the deal. So, basically you’re putting a house under contract and either selling the contract to another investor for a fee or you’re buying the house and quickly selling it to the investor.
And so, wholesaling, there are a couple reasons, I think, why a lot of house flippers tend to want to avoid wholesaling or don’t really do a whole lot of wholesaling. And it’s something . . . these are reasons why I didn’t do it for so long, but basically one of them is the fear of leaving too much money on the table.
And when you look at what you can profit on a rehab, when you fix the house up and you can sell it retail, a lot of times you kind of ignore all the extra costs, the holding costs, the interest on the loans, the commissions to agents to sell the property afterwards. You kind of overlook all of those and you’re looking at the profit. Like, you know, if you say 70% of ARV, might be thinking 30% your profit when it’s not. There are a lot of other costs involved.
And so, when you look at that number and you compare it to maybe wholesaling the property for $10,000, so, you might be saying, “Well, I could make $35,000 if I rehab it, and if I wholesale it, I’m only going to make 10, so I don’t want to do that. I want to go ahead and rehab it.”
The other, I think, reason why a lot of house flippers tend to avoid it is that they’re worried about locking up a deal and not being able to find a buyer. And they don’t want to be put in that position where they’ve maybe agreed to pay a little bit more than they would’ve wanted to because they thought that they would be able to wholesale the house and they’d be stuck with it. So I think those are some of the reasons why.
But, I urge you to actually kind of not worry about those things and find that right now in this market, the way it is, things right now in 2017, there’s so many investors out there and you probably know, there’s a ton of competition in most places with investors struggling to find deals. And when you have a market like that, it’s the perfect time to wholesale because people are paying crazy amounts of money. And here in San Antonio, we have people that pay way more than we do and so when there’s a lot of competition for a deal, a lot of times we lose out because we’re not offering as much as what other people are.
But if we’re wholesaling and we build up a buyers list of people that we know are paying more, we can pay a little bit more and then sell that property to them and it’s a great way to do some more deals with less risk. And the reason why that we’re doing more of that this year is we want to do more volume and we want to do it with less hassle.
So, when you’re flipping a house, when you’re fixing it up and selling it, obviously you’ve got all of these hassles, these things, problems that come up with rehabbing contractor problems, selling the house, and having retail buyers, want repairs made after inspections and jumping through hoops for lenders. There’s all kind of distractions, and frustrations, and interruptions during the day when you’re doing all of those things. And it makes it so that you and your company can’t operate as quickly as possible because you’re dealing with all these fires all the time.
When you’re doing wholesaling, it’s just incredible how you can put a house under contract, call some VIP buyers that you have that maybe have bought other properties from you in the past, or send an email out to hundreds of people that you’ve put on your buyers list. And have somebody write back or call you and say they want the deal right away, and then all you’ve got to do is wait for closing and you get a check.
And so, getting that $10,000 is huge when it doesn’t require any more work than that. And so then it’s just a matter of really perfecting your marketing, getting enough leads and deals in to where you can go crazy, because that’s what you’re spending your time doing, versus handling all the rehabs and the contractors and all that kind of mess.
So I think, even if you don’t switch to wholesaling completely, I think it should be a part of every house flipper’s . . . I hate when people are talking about toolboxes, but it’s just something that you use and one of your strategies, especially for properties that maybe don’t fit what you like to do in parts of town that you would like to rehab in. So then you can cherry pick your flip deals and then wholesale the rest of them.
So that’s why wholesaling isn’t just for new investors. Some of the biggest investors I know in this country actually focus solely on wholesaling and it’s because it allows them to focus on the things and make quick money. And right now is the market can do that. It’s not always that way. If the market changes, you’ve got to be careful and probably switch to a different strategy. But for right now, that’s why I highly recommend it.
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