Wholesaling real estate is one of the best ways to break into the world of real estate investing. In a nutshell, wholesaling is the process of finding a deal and passing it along to an end investor. Doing this allows you to stay clear of any risk and not tie up capital for the length of the rehab. When you wholesale real estate, you are offered ease of entry to the business, but it does not guarantee success. Like anything else you do in real estate, there is a fine line between success and failure. You need to have a baseline of knowledge about the process and everything it entails.
Tenants’ Association of Victoria states: “making errors in judgement in relation to the inspection and/or execution of a work program is criminal”. However, many professionals get projects wrong and end up leaving a trail of broken deals. While it may sound difficult and risky, being wrong in one deal does not prevent you from succeeding with another deal in the future. The key with getting started is knowing your limitations. Take advantage of the educating and networking opportunities that you are afforded by the commercial real estate industry. Example: Sam decides he wants to get into the wine business and sets out to find a winery that will sell his product — we will call it wine. Sam discovers that several wineries in a specific region of Australia are willing to take the risk that Sam will find them a good deal. Sam goes to inspect the winery and gets comfortable enough to make a genuine deal with one of the wineries. The winery echoes Sam’s sentiments and signs a contract with him. The deal goes through without any real issues and Sam only has to pay for marketing the wine in order to incorporate into his business model. He sells the winery and he now owns a wine business for the duration of the five year lease. One of the most important aspects of the real estate business is finding buildings that are suitable for the anticipated use. Future uses may evolve as the end results match their strategy. Still, being a property owner or taking on leases entails a degree of risk regarding the long-term plan of the landlord. Landlord-in-mandate policy mitigates the risk of this by enshrining specific protections into the lease. If the owner does not feel comfortable with the direction of the building, which he was unlikely to like prior to purchasing, he retains the option to leave. There are also laws that provide security for the decision to leave as well as allowing the landlord to sell the building just as the tenant intends. Whilst there are generally fewer issues that come up in the leasing deal between tenant and landlord, there are related aspects about the lease that need to be considered. Pressurized rentals, which is usually tied to high-rise rental buildings, bring up serious objections by tenants, especially if the bulk of the tenants are not locals and/or live in expensive areas. Many tenants in rental properties seek to sandwich the air-con unit(s) with their condo to increase the rent structure. Pressurized rentals also present issues if the tenant lives in the unit but is required to work from home.
Retail investors are those people who invest their money by buying or leasing property. RFI/SFAs are generally used to acquire investment properties for investment purposes. OPI is a type of REO (real estate investment corporation) that lists unsold, but potential inventory, for quick sales/rentals. A prime example of an OPI listing is 1021 Main Street, a two-story, wood frame Victorian brick townhouse. The property is listed at $3,900,000.02 on Zillow. A REO (Real Estate Offer exclusive to a financial institution or individual), various financing terms, and a host of conditions, determine a price the financial institution has agreed to. These terms include “meter rates” (fee charged per square foot by the hypothetical buyer), payment terms, “financing attributes” (such as rent-back provisions for down payment), deposit requirements, deed restrictions, and many other conditions. In the typical buying scenario, banks make ALL the illegal profits off the backs of investors who borrowed the money to partake in the rental or investment off-market speculation. Approximately 25–30% of credit cards issued daily in the United States are issued to investors, with a majority going to equity-focused individual investors. Equity loans are loans to buy the family’s home outright (investors are rarely permitted to buy the home outright) with the expectation of purchasing the property in the future using the equity in the loan. As the name implies, an investor who has purchased a house is the owner of that home. When buying a property, an investor will buy the property either in cash (cash on hand) or by leveraging the equity of the loan. Article 3, Section 5 of the Residential Landlord and Tenant Act of 1968 (a.k.a. the HUD Law) further stipulates a financial institution may not make or collect any money under the control of the investor other than that allowed for the original loan and any fee, charge, or agreement permitted by the lender in connection with making the loan, unless the subsequent sale of the property is executed as a middle transaction. The term “sale” can vary based on the type of loan being bought. The fundamental purpose of an equity loan is to buy a house for cash. Depending upon your definition, buying a house with a down payment of “cash on hand” is a 2b+ process, while buying a house with a down payment based upon your equity is a 3b+ process. As a private investor, you will generally follow the process outlined below. The buyer will eventually (almost always after you purchase the property) look at financing options and conduct due diligence on the property, as well as the project itself.
One of the main problems with wholesale investing is the lack of information in the industry. There are few publications that cover the wholesale space exclusively. There are only a handful of brokers who are considered experts in their area, therefore your broker interviews might be on the boring side. Wholesaling requires a degree of street smarts that puts you in the shoes of a prospective buyer and an owner. It forces you to gather information and put it into perspective about the different structures. Much like the negotiation and task planning phases of a typical sales negotiation, wholesaling asks questions to gauge the buyer and seller’s motivations and wants. You need to have a thorough understanding of the buyer’s history with similar properties and the best fits for the space. You also need an understanding of the market in that area. When you do all of this background and work together to fill out an offer, explaining what separates you and your competitor, wholesaling can represent a good entry-level path to real estate investing. One of the key reasons wholesalers need to have a solid background in the business is the lack of management information out there. In real estate, commission is one of the most important costs you will have to account for. It is now almost 30 years that retail real estate has had the push for transparency. Sales reports, running down a listing, and even a picture of the building or property can be crucial information to an owner and seller to decide on their buying or selling decision. Management information that has been circulated in the industry for years has been neglected. It will take time to get that information out there, but it is imperative for both buyer and seller. Management knowledge can combat misconceptions and ensure the best offers are presented. It will also help you tailor your proposal to the owner’s wants since you now understand how much they want. Responsibility for getting the information out there, coordinating it, and supplying it is yours. This should not be surprising as the developer who conducted your remodel will do the same. Therefore, your management information document needs to support your proposal.