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What Is Reverse Wholesaling?

Nov 27, 2020 by Laura Agadoni
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Reverse wholesaling, like regular real estate wholesaling, is a real estate investment strategy that allows real estate wholesalers to make money in real estate without buying or selling property. To know what reverse wholesaling is, you first need to know what regular wholesaling is: Reverse wholesaling is the same type of transaction as wholesaling, only the order of the process is reversed.

What is wholesaling?

Wholesaling houses happens when a person (a wholesaler) finds a distressed property and gets the owner to sell that property for a deep discount. The wholesaler writes up a contract (rather than a traditional purchase agreement), which the wholesaler then tries to sell to a third-party buyer at a higher price than what the wholesaler negotiated with the owner.

Technically, only real estate agents and brokers can make money by representing a buyer or seller in a real estate transaction, which is the reason wholesalers typically sell the assignable contract, not the property. The wholesaler keeps the difference between the price they negotiated with the owner and the price at which they sell the wholesale contract. This price difference is usually referred to as an "assignment fee."

Note that some states aren't on board with this assignment business, considering it semantics. Those states require a wholesaler to be a licensed real estate agent when conducting real estate transactions like these, so before you wholesale yourself or get involved with a wholesaler, make sure you follow your state's law.

A risk with wholesaling is that the wholesaler, after going under contract, is on a time limit to find a buyer/investor, usually 30 to 45 days. The wholesaler might not be able to find a potential buyer within the time frame specified in the contract. And that's where reverse wholesaling comes in.

What is reverse wholesaling?

Reverse wholesaling uses the same concept of a wholesaler acting as a middleman between a seller and an end buyer. But instead of needing to find an end buyer after the real estate deal is struck, with reverse wholesaling, the wholesaler has the investor lined up before they even look for a property.

What should investors know about this strategy?

You as an investor might be wondering why a wholesaler is necessary. After all, investors -- whether they're looking for distressed properties to use as a flip or a rental property (after bringing the property up to code) -- can find properties themselves. The operative word here, though, is "can." Although investors can and often do find properties themselves, they might not have the time or interest to do so and would prefer that someone find the properties for them.

Investors who want to use a wholesaler need to decide how much they're willing to pay for the convenience, keeping in mind that the wholesaler wants to make the biggest spread possible between the price they agree to pay the owner and the price they ultimately get from the investor. Most wholesalers won't do this for less than $5,000, but they often make much more than that.

Sometimes investors know how much the wholesaler makes, and sometimes they don't. It depends on how the closing is structured. One way is for the wholesaler to sell the contract to the end buyer, and the end buyer closes on the deal. This way, the investor knows how much the wholesaler makes. The other way is through a double closing (or a simultaneous closing) where the wholesaler buys the property from the owner, and the end buyer immediately buys the property from the wholesaler. With the double closing, the end buyer would not know how much the wholesaler earned on the wholesale deal.

Why might reverse wholesaling be advantageous over normal wholesaling?

Reverse wholesaling is mainly advantageous to the wholesaler since they aren't under a time crunch to find an end buyer; they already have one. If they don't, depending on what sort of deal is struck, the wholesaler might be able to walk away from the real estate deal if they can't find an end buyer, or they might be on the hook to buy the property -- neither of which is a good option.

Reverse wholesaling can be advantageous to the end buyer as well since the end buyer would be more likely to get the type of investment that suits their particular needs.

Steps of the reverse wholesaling process

  1. The wholesaler tries to find a buyer, often a cash buyer, and makes a buyer's list. Wholesalers usually do this by networking, typically through real estate investment groups in the area. These groups often attract people who are new to real estate investing, and wholesalers can explain their process to them and how they can partner to make money investing in real estate.
  2. The wholesaler looks for a suitable property from a motivated seller. Since there is already a buyer, the wholesaler can find out whether the buyer has a preference regarding property type. Some buyers do have a preference, and others might leave this up to the wholesaler, with maybe a price range and end goal for the property as the only parameters.
  3. The wholesaler puts the property under contract.
  4. The closing is scheduled. The decision on whether the wholesaler sells the contract to the end buyer or participates in a double closing is between the wholesaler and end buyer. Note that if a double closing is chosen, the wholesaler will need to have funds available to close on the house before selling it to the end buyer. Wholesalers typically get funding from private or hard-money lenders who can offer quick cash.

Maximize ROI through reverse wholesaling

The key to winning at the wholesaling game is to get properties for as little money as possible. The wholesaler makes a profit as soon as they sell to the end buyer, but if the wholesaler ever wants to do business with the end buyer again (or anyone else the end buyer might know), the end buyer needs to make money too.

The Millionacres bottom line

Wholesalers are middlemen who help end buyers get investment property, and reverse wholesaling means the wholesaler finds a buyer before looking for properties. Unless the wholesaler can bring a great deal to a real estate investor, the investor might wish to buy an investment property on their own.

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