The wholesale strategy is Dead
Over the course of the last 10 years, Real Estate investors have seen a huge influx of wholesale transactions. When I refer to wholesale transactions what is being discussed is the act of selling a contract for an assignment fee. Wholesaling has the only term associated with accepting an “assignment fee” for the contract. If you close on the deal and sell it cheap your spread is a profit, not an assignment fee. Even if you use transactional funds (overnight funds) to consummate the deal and sell to another buyer this would be considered a flip due to the spread and the seller is not receiving an “assignment fee” as in a wholesale deal.
Wholesaling is a great strategy if you have no money but have an excellent real estate deal. You simply lock in the property with a contract then sell that contract to an investor for a fee. fees can range from anywhere from 3k to 100+k. Its a great fast and easy way to generate an instant profit with no out of pocket expense (maybe earnest money deposit).
The current problem with this strategy today in 2020 is that the market has been inundated with these “wholesalers”. Investors are seeing daisy chains of wholesalers, stripping away much of the profits for end buyers. Currently, home prices have reached all-time highs and rehabbers are seeing minimum rewards for the amount of risk and exposure due to the high holding costs.
Another problem is that only cash buyers can buy these wholesale deals as it is very difficult to get a lender to pay an “assignment fee” at closing. Not very many people have that kind of cash and may have to go with a “hard money” lender.
While interest rates are at an all-time low, hard money lenders can charge as much as 15% interest and ask borrowers to pay 5 (5% fee) points at closing. Money for borrowing has become so cheap and easy, but the market will begin to see a correction in the coming years. If inventory becomes more abundant this strategy may not work so well unless its an exceptional deal.
Emerging technologies like blockchain will make strategies like wholesaling more difficult to implement. Buyers will be verified along with their funds in order to participate in any transactions on the blockchain. And this will hamper many wholesalers today who use fake proof of funds letters to secure their transactions.
If your a Real Estate investor begin to diversify your strategy portfolio and begin to learn other acquisition techniques like “subject to”, sandwich lease options, short sale flips, and any other strategies available and applicable to the current market conditions.
Good luck and happy investing!
