What's a fair profit when you put a house under contract and flip it to an investor that will either rehab it or sell it to an end buyer? When you put a property under a purchase option for $500 with a purchase price of $65,000 and a retail value of $100,000 after rehab, is it ethical to flip it to a rehabber for a 10%, 15%, or 20% profit? As a wholesaler there is more to consider than your profit margin alone. The marketplace for rehabbers buying from wholesalers is very limited. You need to think about long term relationships even more than profit margins.
I'm aware of a recent deal where a house was wholesaled three times before a rehabber actually wrote a purchase offer to close on the house. Fortunately for the rehabber but unfortunately for the seller, the deal never closed. Each wholesaler in the transaction walked away with their profit. However, when the rehabber saw the HUD-1 statement at the closing table, the newbie rehabber had enough intelligence to walk away from the deal. He was out $4,500 that he paid to the third wholesaler but it was clear there was no meat left on the bone for him. Had the rehabber done a more thorough due diligence and relied less on the wholesaler's numbers, this wholesale disaster would have been avoided.
In the end, all three wholesalers in the transaction got a black eye. Not only with the rehabber that got burned but also throughout the local wholesaling and rehabbing industry. In such a close-knit industry, word spreads fast when piranhas get greedy. It's very unlikely any experienced rehabbers in the local marketplace will ever take a phone call or reply to an email from these wholesalers again. If these wholesalers try to stay in the marketplace, they'll be limited to new rehabbers that are unaware of their earned reputation.
As a wholesaler, you're essentially an assistant to rehabbers. Rehabbers are busy managing contractors that are renovating one or more properties that they are preparing to sell to end buyers. They are also marketing houses they have brought back on the market. As a wholesaler, your responsibility is keeping the pipeline full for the rehabber.
When determining a profit margin, the wholesaler has a lot of variables to consider:
Your costs as a wholesaler can vary greatly. Generally, as you gain experience, you will lower your costs as you reduce your need to include others in the transaction. As in most professions, that's how you increase your profits over time, by doing more of the work yourself. In the beginning, if you're selling to a rehabber for 7% or 8% more than you put the house under contract for, your profit margin is going to be slim. Your goal is getting into the game at this point, not burning bridges behind you.
Considering the example this article started with, there is one strong recommendation wholesalers should heed. Always stay in full control of your deals because your reputation is on the line. Never get in the habit of selling to another wholesaler that is going to take another cut out of the deal. Always make sure your buyer is going to close the deal. It's key to having repeat rehab buyers.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.