Wholesale Real Estate


Definition of "Wholesale real estate"

Kimberly Muncy real estate agent
Kimberly Muncy, Real Estate Agent Coldwell Banker Heritage

Suppose you’re fascinated with making “easy” money with real estate. In that case, wholesale or wholesaling real estate might be your cup of tea. But what is wholesale real estate exactly? You might have heard the term under the alias house-flipping. Right off the bat, wholesaling can grant you a solution to make a quick buck, retain your flexibility and freedom, and expand your investment portfolio

How does wholesale real estate work?

Wholesale real estate investments work in the following way. An investor purchases a property, yet not for personal use; they don’t relocate to the new residence. Ideally, they will sell the home for a higher price than they had originally invested in after a quick face-lift. Many investors pursue this blueprint to generate and maintain a steady cash flow by flipping properties. 

Wholesale real estate 101

Wholesaling, a bold real estate strategy, is a short-term action plan. The success of wholesaling real estate presumes that the buyer acquires a home at a low price. The transaction span is limited: you get in a real estate deal and leave as soon as you receive a fair offer.

How should one approach this topic when the shortage of housing options persists in the US? You may want to look into alternative and creative solutions, such as investing in turnaround properties or

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oney-making warehouses. 

Once you obtain the property title, you move fast. Then, you list your property on the market and wait for potential buyers. You might consider some creative and cost-effective renovation ideas to increase your home’s value

Why the rush, you may wonder? The longer you stay with that particular home, the more financial investments it will require. In time, assets gradually lose their initial value. As a result, they will need constant mending. In addition, your capital is tied up, and you can’t move on until you don’t sell it. The list price should be higher than the initial price plus the amount you invested in refurbishing the property. 

What can be labeled as profitable wholesale real estate?

How to wholesale real estate successfully? It all comes down to math. You have to calculate the so-called maximum allowable offer, the highest amount of investment you’re willing to pay for real estate. You have to consider seventy percent of the after-repair-value or ARV (the house’s sale price after all repairs.) Then you take away the expenses covering renovation costs. 

Suppose a property in satisfactory condition can sell for $200,000 (the ARV.) Now, it needs $20,000 for renovation. According to this formula, the highest amount you should ideally pay forsuch real estate is $120,000. First, you calculate 70 percent of the selling price, adding up to $140,000. Then, you subtract $20,000 from that sum. Thus, you get $120,000. Consequently, 30 percent of the ARV (here, it’s $60,000) defines your gain, house maintenance, and closing costs.

The pitfalls of wholesale real estate

Why aren’t any more investors trying their luck in this domain if the formula is so straightforward? Though wholesaling real estate appears smooth at first sight, many commit many mistakes. Beware that the process conceals drawbacks that might affect you where it hurts the most. 

Rookie investors might underestimate the costs of house repairs and the time spent on property overhauls. Additionally, they tend to incorrectly assess the actual state of the local real estate market trends. For instance, selling your home in a buyer’s market can backfire on you. It implies that your potential buyers enjoy the upper hand and dictate price negotiations because the demand for real estate is lower than the supply of housing options in a given area. 

Conclusion

Always expect unexpected expenses! Home inspections and property appraisals can shed light upon some inherent defects. Still, floors can crack, concrete can shrink, paints can peel off, etc. And buyers are liable to spot even the tiniest damage in design. For this purpose, house flippers must prioritize and budget crucial aspects when rehabbing a home. Under such problematic circumstances, you might ask yourself: Is house-flipping still a thing?By carefully analyzing your budget, the local market trends, and doing math smartly, you can yield revenue.

To prevent shortcomings in your wholesale real estate strategy, we recommend you contact professional local real estate agents!

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