What Is Wholesale Real Estate?

What is Wholesale Real Estate

What is wholesale real estate: By definition, a wholesaler is an entity that sells (goods) in large quantities at a low price to be retailed by others. In terms of real estate, a wholesaler contracts a home with a seller then finds a third-party investor to buy it. The house is sold to the investor at a higher price earning the wholesaler a profit. 

Other popular names for wholesalers are cash buyers and ibuyers in Houston. They use technology and experience to expedite and streamline the home selling process.

Related article on ibuyers: Ibuyer, Agents, and Local Buyers- Understanding The Differences When Selling Your House in Houston

Investors use knowledge of the market and algorithms to create an estimate based on the current and potential value of your home.

The homeowner is selling directly to the investor, a realtor is not required but used in some instances.

Homeowners need to be fully aware that cash home buyers are investors seeking to make a profit. It is a business and any business that cannot generate and sustain a profit will fail.

Wholesalers are no different from Walmart, Amazon, or Target. Where a product is purchased at a discounted price then resold at a higher margin for a profit.

This is a very important part to understand so I will restate it again. Cash home buyers are in the business of purchasing homes at a discounted price to be resold at a higher price.

Many of these homes have a common circumstance, a seller who is in distress or a property that is in distress.

A distressed homeowner is a seller that needs to sell their home urgently often to pay debts, medical expenses, or other emergencies.

A distressed home is a property in a poor state of repair or needs to be updated.

Below is a common method used to estimate profit and asking price: 


Purchase offer calculation: An offer is calculated based on a few common industry practices.

Aftermarket repair value (ARV) The ARV real estate definition is a number that helps determine the as-is price of the home compared to the value when renovated. The ARV formula is the purchase price of the home plus the value of renovations.

(purchase price) + (renovation value) = ARV

The 70% Rule is a general guideline used by wholesalers to calculate the maximum offer on a potential property.

(ARV) x (70%) – (estimated cost of repairs) = maximum purchase offer.

Note: To calculate rehab cost use the general $20 per square foot method.

Here is an example of the 70% rule in real estate investing.

ARV formula

The remaining 30% includes the potential profit and loss for the investor. The 30% gives the investor cushion against issues that will come up during rehab, taxes, and other expenditures.

Accepted offer: After the offer is accepted by the homeowner, the closing process begins. Closing should happen at a title company, lender’s office, or escrow company, depending on the state.

Do we buy houses companies pay cash? and Who is really purchasing the property? Below we will answer both questions.

Are we buy houses companies paying with cash? yes and no it depends on how you look at it.

There are two general ways to purchase a house.

  1. The company has enough cash reserves to pay for your house with its own money no loans required. (this option is great because loans carry allot of fees) The fewer fees an investor has to pay, the more they can offer for your home. This is great because the homeowner walks away with more money in their pockets.
  2. The other option is hard money or money from an investor. Both of which are loans that carry fees and interest rates on the borrowed cash. Within the industry, both options are considered cash because it is not a conventional loan.

Note: Most we buy house companies use a combination of the two.

Who is really purchasing the property? In the case of national, we buy houses companies like Zillow and Offerpad they are purchasing the property with a vested interest.

Typically, a light rehab is done on the property to increase the value then it is sold on the MLS through a realtor.

Keep in mind that these transactions come with heavy fees for the homeowner.

When it comes to smaller to medium-sized we buy houses for cash companies like Sell Your Homes Houston. The house is bought for the owners of the company or contracted to a 3rd party investor.

Here is where the cost of acquisition will vary between the company owners’ vested interests and a 3rd party investor.

The company owner who is keeping the house in its portfolio as a rental or flip will use the 70% rule as a guide to purchasing the property. Example:

(ARV $100,000) x (70%) – (estimated cost of repairs $20,000) = maximum offer $50,000

If the house is contracted to a 3rd party investor or wholesaled, the 70% rule still applies but a finder’s fee or wholesaling fee is attached. Example:

(ARV $100,000) x (70%) – (estimated cost of repairs $20,000) – (wholesaling fee $5,000) = maximum offer $45,000.

The wholesalers/ finders fee varies depending on the wholesaler and the price of the house.

Note: For wholesalers finding and acquiring a house is not an easy task. It can cost thousands of dollars in marketing and hours of work to acquire one property.

Conclusion

If you are going to sell your home to a wholesaler it’s important that you understand who they are and a general idea of how they do business. Wholesaling is a niche that is necessary for some homeowners not all.

Most homeowners will find it more beneficial to sell their home the traditional way through a realtor. For some sellers whose homes cannot be purchased with conventional financing, might find selling to an investor a useful option. 

Related article: Cons of We Buy Houses Companies 

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