Is The Real Estate Market Too High?
The current real estate market trends are that ever since the mortgage crisis ended a new round of players has come on the scene. These are the hedge funds and larger moneyed players who have raised new money or shifted it from the risky stock market. Their insatiable buying has partially caused an unprecedented rebound in many areas of the country in single family home prices.
When interviewing perspective students, I get the question all the time, “Isn’t the market too high to make any money?” The simple answer is that it depends on what area of investing they are going to do. If they want to own income properties and they pay retail prices, yes, the market is too high. You’ll get a specific income but as interest rates climb your principal value of the property will decline.
What about rehabbing and selling to a retail buyer? As long as you buy at the right price, come in on budget for costs and control carrying costs, maybe. The maybe part is you have to sell the property to make money and getting financing for an end-buyer can be tricky as interest rates rise.
So what about wholesaling? This type of investing rides what is called the “differential curve” or a very tiny increment of real estate cycles. For example, if the average real estate cycle is 8 – 10 years, the average wholesale deal lasts less than 30 days and often actually only one day at the closing. This is referred to as double closing and often the investor has no money in the deal as he can use transactional funding to pay for the original purchase. He then sells it to his end-buyer a few minutes or hours later.
So, whether the real estate market is flying, flat or falling, the wholesaler is in a deal for a very small time and he takes no market risk as do rehabbers and landlords. Well, then why doesn’t everyone wholesale? Simply put, most of the real estate community doesn’t understand wholesaling or they don’t want to take the time to learn how to do it.
The key is for the wholesaler to get a real deal on every “purchase” he makes so he can resell it to an end-buyer (rehabber or landlord) with some profit potential still in it. If he can’t find a buyer during the inspection period, he has two choices, first, to give it back to the seller before the end of the inspection period or risk his earnest money deposit (EMD) and keep trying to sell it before the closing. Here his risk is his EMD only if he doesn’t close.
For wholesalers, the best markets are falling ones because sellers are panicked to get out. Flat markets offer no advantage except that the buyers may be out in droves so investors need to build up their buyers lists to get their deals sold. In rising markets, wholesalers have a multitude of buyers but seemingly fewer sellers – again a great buyers list is also the remedy here.
In summary, it doesn’t matter to a wholesaler which way the market is going or its velocity – what matters the most is having a strong buyers list of actual people who are buying properties and can get the money to buy more. Typically you can find these real buyers in the public record by looking for LLC’s and Corporations because banks will generally not fund these entities. Therefore they are cash buyers or they have borrowed hard money to buy their properties
To your limitless success,