How to Make 5 to 6 Times the Usual Wholesale Spread
Learn about Wholesaling Real Estate
Wholesaling real estate traditionally has been used to make fast money without having to purchase properties. The property is put under contract with the longest possible inspection period so the buyer (investor) can sell the property without having to put up a deposit or actually close on the house.
When we first started in 1975 investors were few and far between. At that time, they were mostly focused on buying rental properties where eventually the rents paid off the mortgage and the houses were free and clear. The investor then had the option of continuing renting until sometime in the future when he “cashed out” all his accumulated properties and retired. The stories are legendary of 50 to 100 properties coming onto the market at one time. Other investors then bought them in bulk and resold them to individual homeowners or other investors.
The advent of the wholesaler really became prominent starting around the early 1990’s when more and more people started to realize that real estate investing was not a mystery and properties could be bought with creative financing, including no money down. The rehabbing craze started to take over and rehabbing on weekends supplemented many incomes. But still the option to “flip” properties wasn’t yet as developed as today because the communication between investors was still in its very early stages.
Wholesaling as a true “profession” began as real estate investment clubs started forming around the country and investors with different goals of rehabbing came together with “flippers” or wholesalers. The wholesaler provided the product for the end-users or rehabbers. The operative words were “It doesn’t matter how much you make, just flip a property and make money”. This was partially true but it fueled a new buyer enthusiasm that has not ended. Since the same people that were buying the “flipped” deals were gurus teaching the courses, they offered advice on how much a wholesaler should make. “Proper” or acceptable spreads for flipping properties, so as not to be ‘greedy’, were taught to be in the $1,000 – $2,000 range. As investors realized that the remaining spread could be huge, these spreads went to $5,000 –$10,000. Today they are whatever the market will allow, but seldom in excess of $15,000.
The spread is determined by the purchase price, the After Repaired Value (“ARV”), and how much work is needed to sell it at the ARV. We have been wholesaling with an overall average spread of $32,000. Some of our wholesale deals have netted us over $75,000 on a property that we paid $110,000 for. About now you should be saying “WHAT!” and rightfully so. But, these are not isolated cases as we have learned to “buy right” as sell to a pre-qualified buyers’ list. Many of these individuals we have worked with for years. If there wasn’t still plenty of profit left, they wouldn’t be buying these wholesale deals.
So what is the secret of making more money wholesaling? The first is to buy lower. That’s really simple and if you could do it you would. What if you shifted your prospecting to non-conventional methods that brought you deals before the sellers went public with their intention. These are the killer deals that happen even before the neighbors know the property has been sold. We developed over 50 ways to prospect to the secret markets where motivated sellers hadn’t yet gone public. Some of these we put under contract eight months in advance!
Secondly, how many wholesale deals have you been out to look at where you had to climb through a debris-filled yard and home of the former homeowner’s household items? If the spread for the wholesaler on one of these deals is, for example $8,000, he can easily double or triple that by hiring a cleaning crew to throw everything into a couple dumpsters.
If the cleaned-out property no longer looks so very bad, the wholesaler can paint and patch the premises and add another $10,000 to his wholesale price. But it’s not done yet because if the wholesaler works on his buyers’ list for retail buyers, he now has the option to go a little further and finish the property with a buyer in hand at a retail price. This simple strategy should make the reader an extra $5,000 minimum on any wholesale deal he does if he buys the property right in the first place.
So let’s look at the above example, the cost to clean out the property and lot is say $1,000, increasing the wholesale spread to $18,000. Patch and paint runs $2,000 (high) but adds another $10,000 to the spread for $28,000 profit minus $3,000 in repairs. The $8,000 original spread has now become $25,000. Ironically, there will be more buyers for the property in this condition than as a “Junker”. The next step is to take the property up to a retail rehab and sell it for another $20,000 more for an estimated rehab cost of say $7,000. So the end result could be as much as $38,000+.
I have heard all the objections about why it won’t work – hard money costs, investor’s time is too important, he doesn’t know how to do it, what if he can’t sell it, can’t estimate repairs (get the “Deal or No Deal” Software at www.ExcelRESoftware.com), etc. If you believe these objections, they will be true.
I have found that we average over $32,000 on wholesale deals and if we rehab them to the retail level we average over $61,000 net profit per deal. So would you rather do four (4) wholesale deals with $8,000 profits to equal one of our wholesale deals, or would you rather do eight (8) wholesale deals to make the same as one of our retail deals? This isn’t a trick question because the real answer is your decision.
To your limitless success,