When you buy from the wholesale market, you don't need to sell at retail to make a profit. You can sell to someone else that buys wholesale and still make a decent profit. The real estate wholesale market is not unlike any other wholesale market. In the supply chain, from manufacturing to retail there are several wholesale transactions where each wholesaler makes a profit and leaves enough money in the deal for the next person in the chain.
In the consumer product supply chain, the manufacturer creates the product and sells it to a national distributor that transports it to major distribution points across the country. The regional distributor sells wholesale to major retail stores and to other smaller business. Companies such as Costco and Sam's Club often buy from regional distributors and sell wholesale to other business that finally sell the products at the retail price. It's not unusual for there to be four wholesale transactions before the product is sold at the retail level.
The Real Estate Wholesale Chain
There aren't typically four wholesale transactions in the local real estate market but there can easily be three. A wholesale birddog earnestly scouts the market for the best deals. The birddog puts a house under contract with no intention of making any repairs or improvements to the property. Nor does he or she intent to hold it or rent it. They want to turn around and sell it to a rehabber or landlord. Preferably, without putting any of their own money into the deal. They want to purchase an option to buy from the distressed seller at the very lowest cost in the wholesale chain - no earnest money, no obligation to buy. Then they want to assign their interest to another buyer.
Some wholesalers try to move the property directly to the retail market but that has several complications. First, the property has to be marketed as retail - costly and time consuming. Second, most retail buyers don't understand complex real estate deals where the title is not coming from the person they are buying from. You could easily go through four or five willing buyers that back out when they see the complexity of the deal.
Other Wholesale Buyers Need Meat on the Bone
A quick sale not involving the investment of cash is more likely if it is purchased by another wholesale buyer that understands complex sales. That's where rehabbers and landlords or another investor wanting to hold the property for a retail sale comes in. This is why a wholesaler needs a network of other wholesalers. Just as a national distributor sells again and again to the same regional distributors, the first person in the real estate wholesale chain sells to the same wholesale buyers again and again.
As a birddog, you leave profit in the deal for the next person in the supply chain. The key is that each person in the chain needs to add value. The first wholesaler in the chain adds value by bird-dogging the best deals for sale. That becomes their specialty. The rehabber is busy working on or overseeing multiple remodeling projects and misses many of the opportunities that come and go on the market every day. And the landlord is busy dealing with tenants and doing maintenance work. It's the birddog that hunts out the best deals.
Just like the national distribution model, each segment of the real estate wholesaling handles a different volume of deals. The bird dog needs to close on five or six deals each month, passing them into the network, and taking a small cut on each. A good rehabber might be able to take one deal each month and a landlord probably will only take on one additional property every year or two. The wholesale birddog needs a network to sell volume to.
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.