Wednesday, August 09, 2006

Strategy #3 - Wholesaling vs. "Flipping"...

Strategy #3 is Wholesaling and quite honestly is one of my favorites, personally. It is the strategy we used to avoid financial disaster in 2001, when the events of 9/11 caused the collapse of my aviation business.

Wholesaling is when you get a property under control and assign your interests to another investor at a marked-up price.

And if it appears that I have chosen my words very carefully, you are correct!

Two things you MUST know before we go any further:

1 - It is a well established principal of contract law that EITHER party can assign a contract, unless the contract itself says otherwise. There is a lot of confusion in the marketplace about this - often times the source of the confusion are well meaning, but ill informed real estate agents and real estate brokers. Again - YOU CAN assign any contract (assuming you are a valid party to the contract) unless the contract says otherwise;

2 - Anyone can sell their own property without a real estate license. O.k., so what is property? Property is any tangible thing in which you have some from of ownership interest, including a fully ratified sales contract.

O.k., so before I get in trouble for practicing law, understand this, what I have just said, and will continue to emphasize is that this is about BUSINESS Advice, specifically in the area of real estate investing. NOT legal advice. If there is anything I have written that is confusing, or you are not quite sure about, you need to go speak with YOUR attorney and get her blessing before proceeding. And since everyone has "Pre-paid" Legal, or an attorney available to them, then this will not be an issue. Dudes, Dudettes, if you are investing in anything, or for that matter living in the US, you need an attorney. Someone to look over your shoulder. If you refuse to have a team of advisors, including an attorney, you really do need to turn off the computer right now and go back to watching re-runs of Gilligan's Island cause you're never going to get rich with a DIY (do It yourself) mentality.

We move on...

So wholesaling is the act of getting a property under agreement (contract, letter of intent, memorandum of understanding) and then assigning your interests to another investor. This is the theory, for the actual mechanics of how it works you are going to invest a little more time than simply reading a blog post. Something for you to now ask about when you attend the next REIA meeting or National Real Estate Investor Conference.

Wholesaling is great because it works in ANY market. When you have low interest rates, like we have seen over the past three years, and most of the "end-buyers" are rehabbers and first time home owners, you can wholesale to them. And when you get into a higher interest rate environment (like now) and the "buy/hold" investors start coming back into the market, you can wholesale your deals to this group.

However, what I like best about Wholesaling is that it GIVES YOU AN EXCUSE! That is an excuse to get to know more experienced investors. How? By agreeing to wholesale deals to them and in exchange for doing so, you get to know what they know.

Unfortunately, there is not enough space here to go into all the details of advanced wholesaling strategies, but I will come back to this in future posts. What I do want to touch on now is the need to stop confusing Wholesaling with "Flipping" - they are not the same. Or, more accurately, they do not mean the same thing in all circles.

The term "Flipping" comes from the world of Commercial real estate, where wholesale deals occur ALL THE TIME. On any given day in Washington, DC, or Baltimore, or any major city in America, smart and savvy investors are putting small pieces of property under contract (and making millions) with absolutely no interest in closing on the deals themselves. These street-savvy investors fully intend to take their contracts and assign them to investment groups with much deeper pockets who are in the process of "assembling" a city block to build a huge office building. The larger investors often times encourage the smaller investors to do this because if the property owner really knew XYZ Corp wanted their property, the price would quadruple. A few years ago, the term "flipping" slid into the language of the folks doing single family deals. "Flipping" originally meant to "flip" ones contract.

However today "Flipping" means many things, including "going to jail". HUH???

Yes, in 2003, the Federal Government (HUD) issued a ruling that broadly labeled "Flipping" as illegal. This ruling has to do with collusion and other bad stuff that resulted in a number of mortgages (which were insured by the Government) going into default. This HUD ruling has absolutely NOTHING to do with wholesaling, but most people do not care about details. They hear the words "illegal" and "flipping" in the same sentence and go no further.

In addition to the HUD ruling, HGTV started producing a television show called "...Flipping...". Again, this show has nothing to do with wholesaling. In the HGTV show (which is a knock-off of a British Show called Property Ladder), the participants buy, rehab and then sell houses. If you have ever watched this show, you would know it is probably something you will never want to do, unless you want to drain your savings account and end up in divorce court.

Unfortunately, whether it is a Federal Ruling, or a TV show, the term "Flipping" has come to mean different things to different people. Therefore, it is probably best to not even use the term.

Wholesaling will make you money. "Flipping" may, or may not get you into trouble - depending upon what type of "Flipping" you are doing.

Again, in a future post (after I get through the other strategies) we'll come back and discuss the various ways to make money wholesaling. For now understand this: Wholesaling works in ALL real estate markets, regardless of interest rates, or the economy.

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