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from Dec 2007 issue of Houston Real Estate Experts - FREE subscription

Why Do Wholesalers Take the "Whole" Profit?

by Steven Kaufman, CPA


Here is a recap of question I received from an investor regarding wholesaling:

"I have been investing for 6 months. I am considering fixing and retailing properties. My problem is that wholesalers seem to be pushing properties with no profits. After I buy a house, refurbish it, and list it for retail there's nothing left for me. Where is there any profit for me after I pay 6% to realtors and the 30% Uncle Sam wants for his tax? I was taught several years ago to use the 70% rule minus any repairs… is this outdated? I guess I still believe anything that sounds too good to be true probably is, and I have a bad, possibly ignorant, bias that there are many wolves looking to feed on the new meat in this game."

The comments are pretty interesting, and the writer is surely not alone. I think many investors, old and new, have similar concerns. Unfortunately, the reality of the situation is that most of these fears are ungrounded. I liken it to buying electronics... most people think Best Buy has the cheapest price or Sam's or Walmart, and that Office Depot or OfficeMax are too expensive, but what inevitably happens is that Office Depot will outsell/bargain nearly any retailer - if you know where and when to look for the deals. I know why you stand by your 70% LTV (loan-to-value) and support you for having some rules to play by. Too many investors just buy property willy-nilly, and it ends up really hurting them. However, there are several investors, all over the country, who find their nuggets in buying property at 90 or even 95% LTV. AND they make great money... lots of money.

On the other end of the spectrum I've seen investors who don't buy anything higher than 40% LTV. From a strictly economical perspective it is possible to make money at 70% LTV. If, and only if… your repair estimates are estimated based on market prices. If you pay 4% or less for realtor commissions (several realtors will list your property for $195, so you only have to pay the buyer's agent). If you reduce and estimate your carrying costs accurately. You can then make money because thousands of investors are doing it.

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What I might suggest to you is raising your LTV for higher priced properties and lowering the LTV for lower priced properties. Several expenses you will incur are fixed no matter what the price of the house is. So, paying $25 for yard maintenance on a $150k house is a much smaller percentage then paying it on a $65k house, yet the price doesn't change.

Regarding the various wholesalers... here is some my truly biased opinion and it does NOT represent the opinion of the majority, nor do I intend it to. There are two types of wholesalers: those who wholesale because they have to, and those who wholesale because they can. Here is what I mean. Some investors get their start in real estate investing as wholesalers because they don't have the credit, capital, or connections to do the deal themselves. These wholesalers can generate terrible leads because they don't always know what they are looking for, but when they find a "diamond of a deal" then you benefit because they will, ignorantly or not, wholesale it to you. If neither of you know what a deal looks like, i.e. neither of you can estimate repairs, carrying costs, and retail value, then this is the perfect recipe for "go broke stew" for both of you.

The other type of wholesalers can, should they choose, purchase any property they have available… otherwise known as "cherry picking". The great news is that these wholesalers get so much business from just being a conduit for other wholesalers that they can often make more money being the middle man on hundreds or thousands of deals than actually investing in properties.

The bottom line regarding wholesalers is that investors find nuggets in wholesale deals time and time again. Literally, everyday. We at Zeus Mortgage are in a unique position to see all sides of an investment deal. We provide the financing on the purchase and rehab, and we frequently perform the financing for the investor's retail buyer. So, we see the net in the end. And, investors who use wholesalers do make big profits.

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Below is a list of "rules" to help you make money on your deals, every time.

  1. Look for opportunity everywhere. Take off all your blinders and be prepared to act. Good luck is where opportunity meets preparedness. - Anonymous.
  2. Educate yourself on the difference between ARV (after-repair value) versus what price a property will actually retail (sell) for, and base your LTV% on that number when analyzing a deal.
  3. Learn how to truly estimate repairs and purchase everything you can at a discount.
  4. Properly estimate the carrying costs. Most investors who lose money on retail rehabs don't even consider the carrying costs. Trust me, you don't want to come to closing on any deal to cover the electric, landscaping, and note payment for the time you owned a property.

Steven Kaufman, CPA

Steven Kaufman, CPA, with Zeus Commercial, is the only lender specializing in First-Time commercial financing. For a FREE Instant Approval or FREE Deal Analysis, contact 800-840-1900 or visit them online at WWW.ZEUSCOMMERCIAL.COM.