The Pros and Cons of Real Estate Wholesaling

When you have a property under contract, you have a marketable interest in that property: the contract. You can sell that contract in most states, but you can't sell the property until you own it. Talk to your lawyer.

I designed this infographic of the wholesale cycle way in the future. Too bad I don’t have it now.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-21.

Many "experts" recommend real estate wholesaling as a quick, inexpensive, and easy way into the business. While it may be the lease expensive way to start out, wholesaling isn't all that easy. For a complete explanation of what wholesaling is, see "What Is Real Estate Wholesaling?"

Pros

You can raise money fairly quickly.

Because you use very little of your own money and you collect on your investment quickly, it is possible to raise money very quickly. The amount of money you can raise depends primarily on your skill as a negotiator. How cheaply can you put the property under contract? How little of your money can you tie up in the process?

Risk is lower than renovating or buy and hold.

Again, because you use very little of your own money, you risk very little of your own money. But there are other risks.

Cons

It is not without risk.

Wholesaling can be very close to practicing real estate agency. You have to be very careful of your practices and wording to avoid this risk. Further, you will probably have at least a little of your own money at risk. And you risk your credibility with your peers if you don't perform a fair amount of due diligence before marketing your contract.

It takes a significant amount of effort.

Wholesaling requires more effort than just about any other kind of real estate investing and sales. It is a full-time marketing gig with very little repeat business. No seller will ever sell you more than one house. How would that sound? "Hey, Lee. You bought my house when it was being foreclosed on a few years ago. Guess what?"

You have to be willing to invest in marketing.

Because wholesaling is lead-driven, you have to generate a lot of leads for every deal that comes along. This part really isn't any different than other parts of the investing game, but it is something you have to be aware of. That means you have to be prepared to spend money and effort to generate those leads.

You can't do it on the MLS.

I see a lot of novice wholesalers trying to re-market a house they found on the Multiple Listing Service (MLS)—or from one of the big real estate sales websites like Realtor.com. The honest truth is, if it's on MLS, it's probably a very thin deal—usually too thin—for any investor already. By the time you add in a wholesaling fee, it probably isn't a deal any longer—if it ever was.

The point of this post isn't to try to scare you away from wholesaling. I want you to wholesale. We buy a good chunk of our deals from wholesalers. My business would be much smaller without reputable, reliable wholesalers.

The point is for you to understand what wholesaling is, what you're getting yourself into. You can make good money wholesaling, if you work at it and maintain good relationships with your buyers. But you will get much more out of it if you understand the needs of the people you buy from and figure out how to satisfy those needs.

I’d Rather Be…

Worse weather has passed, but more is coming. No trip to San Antonio today.

Okay. This picture is from a week in the future (when the post published on this site). The Walker’s Creek bank is normally on the other side of those trees. The fence going up from the left is our property line.

This post originated on the Hermit Haus Redevelopment blog on 2016-05-19.

In one of her songs, Mary Chapin Carpenter says, “Sometimes you’re the windshield; sometimes you’re the bug.” And while I don’t relish the idea of being the windshield, I work very hard not to be the bug. Very hard, indeed.

So despite my previous statement about redevelopment and wimps, I’m wimping out. Larry and I decided to cancel our trip to San Antonio to review progress on St. John’s house. Even the GC who lives there said traveling hundreds of miles under a flash flood advisory was not a good idea. I’m staying dry and (hopefully) safe in Round Rock today, and Larry is doing the same in Cameron.

We’ll go to San Antonio another day, and you’ll get to see more pictures then. Until then, I’m going to parrot Paul Simon: “I’d rather be….”

A Joint Venture in San Antonio?

Yes, there are two dumpsters in front of the house. The GC for this project actually filled and hauled off three dumpsters before she could safely start work.

A successful joint venture is a win-win.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-05-17.

Yes, we work anywhere we can find the right deal. Even as far away as San Antonio—where the newest deal brought to us by our friend and joint venturer Larry is located.

St. John’s house isn’t really a hoarder house. It’s just been very neglected for a very long time. It may be the dirtiest house we’ve attempted to redevelop to date. I’m glad Larry is taking the lead on this one.

I should have more pictures later this week when I go to see it first hand for the first time.

This house is in an area that is undergoing substantial gentrification. Several houses with a few blocks and on the same street have been bulldozed to make room for McMansions. We won’t go that far with this house, but the house won’t be recognizably the same when we’re done.

So What Is a Joint Venture Any Way?

Simply put, a joint venture is a contractual arrangement between two or more entities (people, corporations, or some combination) to undertake a specific project through a Joint Venture Agreement (JVA). The JVA specifies how much each entity is responsible for the project in terms of money, time, or effort. In real estate redevelopment or construction, joint ventures often enable the venturers to pursue more or different deals than they could on their own.

In this case, the joint venture is between Hermit Haus Redevelopment, LLC and Andress & Three, LLC.

When Hermit Haus enters into a joint venture with another company, we always spell out who is responsible for managing the project and who is responsible for managing the money. Since there is considerable overlap between these two responsibilities, we end up with some level of checks and balances.

We split the costs and rewards evenly between the venturers. The JVA states that the money manager has to publish state of the venture reports at least once a month. That way the venturers all have an opportunity to see where the money is going and with more eyes, the project, hopefully, has a better chance of success.

Is joint venturing with other investors the way to go for you? Maybe. There are a lot of considerations, and only you can decide for you. And as with any legally binding contract, have your own lawyer look over the contracts before signing.

Ash House Update

Front of the house, repainted and slightly landscaped. Mismatched chimney cleverly disguised by a tree.

Here you can see the three colors we are using. All from a Frank Lloyd Wright collection.

Back view, showing new doors, sparing you the sight of the actual yard.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-05-16.

A group of us went by the Buffalo Trail house to check on the renovation work on Saturday. We even braved a flash flood warning to do so. Rehabbing is not for wimps.

All-in-all, I’m pleased with the progress the contractors are making on the place. They have the yard mostly cleaned up. That makes a tremendous difference when you consider how jungle-like the house was at purchase. If my kids were still kids, I’d no longer be afraid to let them play in the front yard. The back yard is still another matter.

Mowing the lawn did show how little grass grows under the dense canopy. So even cleaned up, the yard is still a little foreboding. We may have to put more effort into thinning the forest that we had originally anticipated.

The exterior brick has been power washed and painted—mostly. Thanks to the weather, the painter missed the chimney cap. The rains kicked in again about the time they finished painting the body of the house. So we have this reddish-brown chimney sticking out of a white roof on a gray house. Details. But the painter assures me it’s “on his list.”