What is a "Wholesale Purchase" Profit Model and How Does it Work?

     A "Wholesale Purchase" transaction occurs when you acquire control of a property at a deeply discounted price but actually finance it at or near full retail. For a transaction to be considered a solid "wholesale", you would typically acquire the house for less than 70% of appraised value. Some wholesalers may go as high as 80%, but their exit strategy is more or less limited to selling the property to a retail buyer, with minor cosmetic upgrades. In a traditional Wholesale Purchase, you would make money from the difference between what you acquired the property for and the sale price to a third-party buyer, less all closing costs.

     However, the pre-foreclosure Profit Model version of the Wholesale Purchase should not be confused with a traditional Wholesale Purchase (for traditional wholesaling, see the Contract Assignment). This version of the Wholesale Purchase should really be thought of as a hybrid Wholesale and Retail transaction (“whole-tail”). Reason being that with this profit model, you get control of the property at a Wholesale Value, but you buy it at full, or near full retail. Using specific legal and financial instruments, you draw your fee (net cash) out of the financing. The net cash available to you at closing will be determined by the net purchase price less the net wholesale value.

MATRIX RATING: High Risk for Traditional all cash deal, Lower risk with private financing. Low Complexity.

INVESTOR LEVEL: Beginner, with at least a deal or two under your belt.

WHAT'S REQUIRED: Need lot's of cash if purchasing property traditionally; hard or private money financing to get cash out at closing.

WHAT'S OPTIONAL: Credit - only if you are financing purchases with equity lines or credit cards. Bank will not lend against "distressed" properties.

WHAT'S ADVISABLE: Know your exit strategy before you put up a lot of cash to purchase a property - no matter how good a deal you think it is. Are you going to rehab it and sell it retail, flip it to a rehabber or hold it long term and rent it out? Have your exit strategy mapped out in detail before committing to buy Wholesale.

ASSESSMENT: Wholesale deals are conceptually simple in that the strategy is to just buy low and sell high. In a Wholesale deal, the seller and/or the property are typically distressed; sellers are motivated, and have sufficient equity to let their properties go for far less than the retail appraised value. Wholesale deals differ from Contract Assignments and Power Flips, in that the investor-buyer actually, closes the purchase (title transfer) and takes possession. Traditional wholesale deals are usually done by cash-heavy investors who are looking for somewhere to get better returns and tax write-off's. Cash-heavy investors are also attracted by the perception of increased safety of their capital (as opposed to paper investments) due to the collateralization offered by real property.

BENEFITS: Strong cash buyer's can acquire properties far below market value and have several liquidation options available to them. They can rent the property out for cash flow and tax advantages, they can rehab and resell it for a quick profit, or they can find an investor and assign the contract to a third party. With tools such as the Contract Assignment and Power Flip, it’s hard to imagine why a dealer-type investor would want take on the liability of purchasing the property outright and taking ownership. Traditional Wholesale deals make sense for cash heavy investors who need somewhere to put their money long-term in exchange for beneficial tax write-off's and cash flow from rental income.

CHALLENGES: Properties that are bought and sold wholesale are typically in  physical distress. If the property is appraised as anything less than 'good' condition, banks and other traditional lending institutions will not make mortgage loans or extend lines of credit. Traditional Wholesaling is therefore mostly a cash business, so both buyer's and sellers must rely on their own cash or be prepared to use more costly hard money lenders. If the property is in average or better condition, the Wholesaling model can still be used. More cash can be liberated from the equity at closing based on the higher valuation and higher financing Loan-to-Value (LTV) possible.