By William Bronchick, ESQ.
Real estate attorney and wholesale expert
People are constantly looking for reasons why something won’t work in real estate investing. The good news is: Wholesaling — buying low and selling high — works. Wholesaling will work in our market, your market, and every other market. However, you need to learn your market and adapt the proper techniques in order to be successful.
There are several types of real estate markets. In any of these, to survive and profit as a flipper, you must buy at an appropriate discount, and then sell the property for a profit. Real estate markets are subject to fluctuations, but these fluctuations typically do not greatly influence the ability for the informed wholesaler to make a profit.
In fact, wholesaling can be the least risky way for a beginning investor to make a profit. This is simply because of the relatively short amount of time he or she will own the property. Unlike the stock and commodities markets, real estate markets don’t rise and fall rapidly. You need to understand how to market for potential wholesale deals because that is a big part of the equation.
So, is there an Ideal Market for the Wholesale Process? In a word — no. That being said, you may find it more difficult to locate bargains in rising markets. That’s because if the market keeps rising, the probability of selling the property quickly for large profit increases. In contrast, when property values are falling, more so-called bargains become available. You need to assess the true value of these properties based on when you expect to sell the property. Thus, your purchase must be made at a steep discount to allow for a profitable sale later.
Some basic strategies can be used successfully in virtually all market conditions in wholesaling properties to other investors.
First, become educated in your local market first by understanding how this process works. Learn about target neighborhoods. Enlist the aid of successful real estate professionals along the way. These professionals will help interpret market indicators, such as the average length of time houses are sitting on the market this month versus last month or last year. Armed with this type of information, you will be able to make good decisions.
How Do Rising Markets Affect Wholesaling? Many would-be wholesalers complain about the current high-priced, limited-supply markets that typically favor sellers. These markets can provide certain challenges to acquiring properties at below-market prices. However, once a property is secured at an attractive price, you have a great chance of success to sell it at a healthy profit. Inventory, defined as the number of properties offered for sale, is a good indicator of current market trends. If inventory is low because of building restrictions, market factors, or geography, then stable to high demand will lead to rising prices.
Be aware that there are also seasonal fluctuations in inventory. There are normally fewer listed properties in the winter months than in summer and a surge of listings in the spring. Some areas, such as resort destinations, follow strong seasonal trends. Generally, seasonal drops in inventory reflect the trend to market properties more aggressively in spring and summer months. These are when real estate markets are more active. But remember: Properties sell year-round if it as an attractive price to your end buyer.
What about Falling Markets? This type of market offers a great opportunity to the savvy wholesale investor. When property values are falling, inventory often rises. Then many sellers become highly motivated when their properties fail to sell quickly. Motivated sellers will do whatever it takes to sell their property. Whether sellers need to move from the area, are struggling financially or have other pressing reasons to sell, they may well accept a below-market offer.
Investors know that a weak market can offer extraordinary deals, although wholesalers need to proceed with caution. In a falling market, even a few months’ delay can turn a sound deal into a headache. It always pays to know the market and purchase the property at a price low enough to net an eventual profit, even if the market continues to fall. The common myth is that you can’t make money by flipping properties in a bad real estate market. In a bad real estate market, you can often buy “junker”.
In addition, sellers’ attitudes and situations can change over several weeks or months of trying unsuccessfully to sell their properties. Eventually, reality may set in and these sellers will be forced to discount their prices. When it comes time to market a wholesale property in a weak market, yours will need to stand out in its price range. The property can still sell quickly, but investor buyers will have a larger selection of homes to choose from, so you need to do several things to assure success. First, your budget must allow for a longer time for them to buy, fix up and sell. Second, the finished product must be better than the other properties being offered, in appearance, potential, and price. Third, you must present a good marketing plan, ideally with multiple exit strategies. Fourth, you should develop good negotiating skills.
How About Balanced Markets? Real estate markets are usually closer to being balanced than they are to being at either extreme. In a balanced market, prices are rising at or just above the pace of national inflation. Houses within the median price range for the metropolitan area will sell, on average, within 45- 60 days. While markets are constantly changing due to circumstances beyond anyone’s control, an equalizing effect exists in a free market economy. Within a particular market, houses will be selling better or worse in some pockets than in the metropolitan area as a whole. There is profit to be made in a balanced market, for a wholesale, following the buy-low/sell-high premise.
Remember, as soon as you have the market figured out, it will change. Experienced investors may have an advantage in seeing trends, but no one can foretell the future, and short turnaround deals usually involve the lowest amount of risk.
Finally, Have Multiple Exit Strategies. Sometimes, for a variety of reasons a wholesale property just won’t sell, so it makes sense to have a few other exit strategies. Could you rehab it yourself or bring in a partner to help you do so? Could you hire a contractor and add just a little fix-up and rent it out? Knowing how to market your property will increase your chances substantially. Having a trusted associate or better yet, a mentor in your corner will greatly increase your chances of success.