Often times I hear real estate investors (typically new ones) say the want to wholesale, especially after attending a house flipping rally put on by a national speaker who’s looking to cash in on Boot Camp sales. Don’t get me wrong, I’m grateful for national speakers as we all have to get bitten by the real estate bug one way or another. The difficult part for new investors to grasp is the difference between “wholesaling” and “assigning a contract”.
Typically wholesaling means that you as the buyer putting a seller under contract are going to actually purchase and close on the subject property. Then sell it to another party, whether it be 5 minutes later, 5 days later, or even 5 months later. Also the term “wholesale” implies that you would do little or no work before selling it to your buyer. This type of transaction will cost you as the buyer the most upfront because you will actually purchase the property, which hopefully means you will re-sell it for a much higher profit.
The term “contract assignment” is really what’s known a little or nothing down real estate investing and what most newbies think is “wholesaling”. In this situation, you as the investor/buyer will get a seller to agree to a price on paper, and then you actually sell that purchase contract to another buyer. All that you are out is the earnest money deposit that you agreed upon with the seller which can range from 1 cent to 100% of the purchase price. Obviously you as an investor is going to try to get the seller to take the smallest EMD (earnest money deposit) possible which lowers your risk in case you can’t “sell” that purchase contract to another buyer. As you can see in this scenario you are probably out less money upfront hence the potential profit margin is perceived to be less than if you actually close and own the property before you re-sell.
Over the last decade plus I’ve personally wholesaled well over 100 residential homes in Metro Detroit. In my experience there are times when closing and re-selling are more advantageous and there are times when just selling a contract work out great also. Here’s an example of each;
You get a bread and butter 3 bed brick ranch with a basement and garage in a strong family neighborhood under contract. The sellers never did a thing to the home since the 1950’s but the “bones” are in great shape. After comping it out you decide that with new paint and carpet similar homes are selling for $15,000 more. You decide to be a weekend warrior and repaint the home yourself and call the cheap carpet guys in. For well under $2000 you have a kinda cute starter home compared to the dirty, stinky mess that you had a week ago. You throw a sign in the yard for $15,000 more that you paid and life is good.
Now lets look at that same situation but instead of closing on the house you have an investor/landlord friend who you know would buy it for $5000 more than you can get it under contract for. All you have to do is get the seller to agree to your price, on paper of course, call your investor contact, literally sell them the contract for $5000 and let them buy it and rehab it – Yes it can be that simple.
Obviously the article above is only scratching the surface when it comes to wholesaling/assigning contracts to make thousands of dollars with little or no money down. To learn the tips, tricks, and techniques on how to find the houses, how to market the houses, and even where to get the money to buy investment real estate you need to get involved at The REIA of Macomb. Our events are always open to the public and you’ll meet like-minded folks who are doing what you want to do.
I hope to see you at a REIA of Macomb Event soon.
Making It Happen,