August 4, 2010

Costs of Starting a Wholesaling Business

There are a lot of things to be responsible for when starting a wholesaling business. You’ll be in charge of finding the leads, finding the buyers, bringing them together, finding a good title company and even drawing up appropriate contracts. Once you get the know-how of house flipping basics, these responsibilities become quick and easy. Yet, when you are starting off, it’s a lot to take in.

No one wants to further muck-up the process with worry about unpaid bills and trying to finance these wholesaling efforts. Yet, there are a few costs to be aware of when starting a wholesaling business.

House Flipping Basics and Wholesaling Basics

When involved in wholesaling there are two levels of cost. The first is the cost associated with house flipping. The second is the cost associated with wholesaling. These are two separate, but closely related enterprises.

You’ll have to decide as a real estate investor whether you’ll be flipping a house or just wholesaling it. This will determine your costs.

Wholesaling Costs

The costs of starting a wholesaling business are really minimal. You’ll be focused on selling that house before the agreement to sell the house reaches its closing date.

As soon as you get a client to sign the agreement to sell their house you should be out the door or on the phone looking for potential buyers. These buyers are usually other investors who like to buy houses cheaply and fix them up for rental or the traditional real estate market. They may even be hard money lenders who are looking to expand their business into new areas.

You won’t be spending money to fix up the house, on insurance or even placing the property with a realtor if you can help it. Yet, you’ll also usually be responsible for closing costs and even a referral bonus if someone referred the property lead to you.

Basic Wholesaling Property Costs:

Loan costs or closing fee

You may be responsible for one set of closing fees when you buy the house and sell it to your buyer. This depends on how you set up the sale. Most likely the title company will just deduct the closing costs from your profits before cutting you a check.

Referrals

Property wholesalers sometimes offer referral bonuses to people who provide them with property leads. This is usually about $500 to $1000.

Advertising

You’ve got to get your name out there. Advertising doesn’t need to cost much, just as much as a ream of paper and some printing ink or as much as a radio spot and classified ads in the local paper. This is up to you.

Appraisal Costs

Depending on where you are and how you close the deal you may need to hire an appraiser to look over the house and give you an estimate of its market value.

Home inspection

Wholesaling property buyers aren’t usually nervous about buying a home that needs some work, but they may want to know what kind of work needs to be done before purchase. So, you’ll have to get a property inspector out there to evaluate the damage so you can present the information to your buyer.

House Flipping Costs

When you decide to start house flipping as an investor your costs will include all of the above and more. House flippers often fix up the property they are trying to flip first and will even place it with a real estate agent to try and sell the property for top dollar.

Basic House Flipping Costs:

Loan or Mortgage

House flippers can also buy the house they intend to flip. This can mean a mortgage in your name or at least cash out of pocket that you’ll have to make back on the sale of the property.

Insurance

Since the property will be in your name house flipping basics says you’ve got to cover it! It can be difficult to get homeowner’s insurance for a wholesale property. Your best bet may be to pick up Builder’s Risk Insurance. This is insurance that’s intended for properties being built or in the process of being remodeled.

Carrying Costs

These are the basic costs of owning a home. You won’t have to worry about them when starting a wholesaling business, but if you intend to be a house flipper this is what you’ll be responsible for:

Utilities
Monthly Mortgage Payment
Property Taxes
Regular Maintenance

House flipping basics says; the longer you hold that property in your name, the more carrying costs you’ll have. The more cost you have, the more you have to sell the property for just to break even.

Remodeling and Repair

House Flippers will want to repair any damage to the cheap property they’ve just purchased. So you’ll be responsible for remodeling costs and repair costs to the contractors you hire.

Realtor Commission

When the house actually sells on the market, you’ll probably have a realtor’s commission to pay. However, this usually comes out of the profits from the sale of the real estate property. This is usually about 6% of the selling price.

As you can see, house flipping costs are much higher than the basic costs for wholesaling a property. Yet, there are benefits to both options. Starting a wholesaling business costs very little for the investor, and involves wholesaling a lot of houses for an average of $3,000 to $5,000. House flipping costs a lot of money initially, but promises a bigger payoff on one house. Some flippers claim to make anywhere from $50,000 profit per sale all the way up to a whopping half a million dollars (in rare cases when the housing market was explosive!)

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