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What Wholesaling And Rehabbing Has To Do With Flipping
Someone who is not into real estate investing might have absolutely no idea that a word as affectionate as “flipping” is used to describe the purchase and sale of houses quickly for profit.
But when you think about it, it actually makes perfect sense. A flip is descriptive enough and simple enough to give someone an idea of what it is all about. If you tell a friend that you are in the business of flipping houses, the odds are that he would instinctively understand what you mean as an overview.
And if you really like to niche down and really identify which segment of investors you belong to, there are actually 2 types of property flips which you can categorize flippers into. The reason why you might want to do this little exercise is because the more you are able to identify what you exactly do, the more able you will be at identifying opportunities associated with it.
The 2 types are wholesaling and rehabbing. Your friends might not understand what you are saying if you use these jargon when describing your work. But that’s OK as you are probably not doing business with them. But if you are talking through a deal or simply networking with a fellow real estate investor, you can bet that your real estate lingo with be fully appreciated and understood.
The funniest reaction I had when telling someone about real estate wholesaling was when he thought that I was describing buying houses I bulk so as to get a bulk discount. Something like a group buy. That was really very far off.
Wholesaling, or sub-sales, is simply the process of buying a house and reselling it as it is without any work done in it. It tends to be less profitable that the second type of flipping. But a transaction like this can be faster, with less work involved, and allow the investor to repeat the process quickly. So even though it can be less profitable on a per flip basis, the higher volume being completed usually means higher returns in dollar value.
The key for someone to wholesale successfully on a consistent basis is negotiation skills. Not only does he have to be a master at seeking out desperate sellers and lowballing, he has to be skilled at identifying the perfect buyer and selling it at a high price. In other words, he has to be a hard core hustler.
The lower the buying price, or the higher the selling price, results in a larger margin or spread.
Another key element that makes someone a master at wholesaling is to have in-depth knowledge of legislation concerning zoning and contracts.
Since the perfect sub-sale is to sell the option-to-purchase(OTP) before having to exercise it, a great wholesaler typically only requires a small capital outlay to secure the OTP. The longer a deal drags on, the more nervous he gets as the closing date draws nearer. Ultimately, if he has to complete the transaction to buy a property before selling it, he has failed. Now his funds are locked in until a real buyer comes to the door. He might as well rehab it.
Now even though flipping is quick and easy money(provided you know what you are doing), many real estate flippers prefer to rehab a house before selling it. It is partly due to the better margins, and partly due to the fun of it. Yes it can be hobby.
Rehabbing is the act of buying a house, renovating it or giving it a much needed facelift, then resell it on the open market. As you can see it includes an additional step compared to wholesaling. And this additional step of rehabbing can take up a huge amount of time and effort.
The art of great rehabbers is to be able to identify houses that only require cosmetic repairs for the next buyer to see enormous value in it. It represents a great coup for an investor if just basic paint jobs, roof repairs, basic remodelling, or housekeeping is required to turn a duckling into a swan.
However, tougher jobs and higher expenses are often required for structural works, sewage replacements, landscaping, etc.
This is why a critical factor for success in this type of flips is a good knowledge for renovation costs. You will also often find that the full time flipper will have his own team of contractors or a very close relationship with builders. It is from this margin provided by low cost repairs that usually cost more for the general public where rehabbers thrive.
But because of the time and attention that rehabbers have to commit to their projects, they often have less time for marketing and networking. This is why the process of prospecting for new buyers, which is one of the most important stages, is often outsourced to real estate agents who have a ready pool of buyers to pitch to.
A main drawback is that the investor will often need much more capital compared to a typical sub-sale. If no form of creative financing is involved, the investor might find himself having to use a lot of cash to buy the house outright. On top of that, unfavourable payment terms could mean that he has to fork out the money to meet payments to contractors so that the constructions can be completed before putting the house on the market.
While wholesaling is quicker and easier, it is often less profitable than rehabbing. But the latter requires more time and effort to see the project to completion. If you put the 2 types of players side-by-side, you would probably also notice that the wholesaler is more knowledgeable with market information, while the rehabber is more of an expert in repairs and replacement costing.
Many investors also like the experience of fixing up a house and reselling it at a profit. But maybe that is a choice determined by their lack of market knowledge rather than a preference for hands-on activities. On the other hand, you might argue that wholesalers d what they do because they don’t understand rehab costing. So they stick to just buy and sell.