What’s with these “We Buy Houses for Cash” signs?
You’ve no doubt seen those “We Buy Houses for Cash” signs planted around medians and near high traffic areas. These are posted by “Wholesale Real Estate” companies.
Homes, on the other hand, tend to be more unique due to factors like location, landscaping, updates, etc. The sad truth is that some homes just aren’t that special, primarily when they have not been maintained, fallen into disrepair or have been neglected.
Unfortunately, there are homeowners that find themselves in circumstances that don’t allow them to sell their home for what we would call retail price. These are situations where the seller is in crisis, they may have lost a job or developed health issues. Their home has fallen into disrepair and they don’t have the money or ability to make the necessary repairs. In many cases, they are no longer able to make the payments and they are just looking to get out.
This is where the wholesaler comes in. The wholesaler guarantees a fast cash sale for the property at a deeply discounted price. This private cash sale also circumvents issues that would arise from inspections and appraisals. VA and FHA have certain standards and distressed properties usually don’t meet their minimum guidelines.
The wholesaler depends on a number of sources to find these distressed homeowners. Everything from roadside bandit “We Buy Houses for Cash” signs that offer fast sales for cash to direct mail and even plain old door knocking in targeted neighborhoods.
How Wholesale Real Estate Works
When a home seller is facing stress on multiple fronts, the promise of a fast cash sale can very appealing. But is it the best option? Let’s take a look at how wholesaling works in order to understand why it’s different than a retail sale.
Wholesaling is an umbrella term for an entire category of property transactions. The wholesale landscape consists primarily of wholesalers and investors. You can certainly be both an investor and a wholesaler but this is not generally the case.
A “wholesaler” is often someone trying to break into the real estate investing world. This individual generally has more time than money. The established investor, on the other hand, doesn’t have the kind of time to track down wholesale deals. This doesn’t mean they can’t or won’t, it’s just not the highest and best use of their time.
The wholesaler is essentially looking for deals in order to raise capital to fund their own real estate investments. Additionally, as they gain capital and experience, they may also be looking for properties to add to their own rental portfolio.
In its purest form, a wholesaler locates a homeowner looking to get out of their house quickly for cash. They negotiate a price and then execute a contract. The contract is transferable and will generally close quickly in twenty to thirty days.
This window of time gives the wholesaler a chance to find an investor to ultimately purchase the property. Remember, the investor has cash but not the time to find these kinds of deals.
Let’s say the wholesaler finds a property that in good condition would sell for $250,000 (retail). The repairs required to get the retail price would be $50,000.
The wholesaler agrees with the homeowner to buy the property for $175,000. The wholesaler would then take this deal to a couple of different investors. They would most likely end up selling the house for $180,000 to the investor pocketing the additional $5,000.
At this point the wholesaler would assign the contract to the investor, take their money and start searching for their next deal.
Is Wholesale Real Estate Legal?
The short answer is yes, there is nothing illegal about selling your property to another individual, even if it’s at a discounted rate. Things can get complicated and a little shady (think loan fraud) if there is an existing mortgage, especially if the homeowner owes more than the wholesaler is willing to pay.
If there is a mortgage, the homeowner has an agreement with the lender to pay off the loan either by making all of the payments or initiating a payoff at the time of sale or transfer of the property. If there isn’t enough equity in the property, this payoff can’t happen, unless of course the lender agrees to a short sale and depending on the condition of the market, this may be unlikely.
Another obstacle would be a second mortgage or lien. Any creditors that have a lien on the property must be satisfied before conveying clear title. The best candidate for a wholesale transaction is a single owner with a lot of equity, no liens and no way to get to that cash, besides selling the home.
There are certain organizations out there intended to help underwater homeowners avoid foreclosure. The lender doesn’t want to see the property go into foreclosure. Most lenders have programs or at least take part and bigger National programs set up to save troubled homeowners. Here is a list of such programs.
- https://apps.hud.gov/offices/hsg/sfh/hcc/hcs.cfm– HUD Approved Housing Counseling Agencies
Retail Pricing of Homes
Retail pricing and sales, on the other hand, are much more common. This is what most real estate transactions look like. Home Sellers looking to get the most money possible from the sale of their home, they take the time to declutter, make repairs and even stage the home prior to sale.
These sellers choose Realtors with strong marketing programs, they invest in professional photographs, put together 3D Virtual tours and spread the word that their home is for sale through the MLS system as well as a wide range of online real estate portals.
The distressed home seller could certainly benefit from the same level of service as the retail home seller but there is a multitude of reasons they choose the alternative wholesale route.
Selling your home for top dollar is a major commitment, there are times when personal issues and the stress of just getting by making the thought of enduring the home selling process intolerable. These examples are certainly rare but common enough to explain the existence and success of wholesaling.
At the end of the day, wholesaling is just an alternative method of executing a real estate transaction. The ultimate goal is usually to rehab the property and of course, end up selling it at a retail price.
If you are considering using a wholesaler to sell your property, you owe it to yourself to at least talk to an established Realtor. The best course of action may end up being the wholesale route but until you exhaust all of your retail options, you may be giving away the farm.
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