Wholesaling vs Flipping
We have seen a lot of information out there that suggests that wholesaling and flipping are the same thing. We have looked into it and come to a different conclusion. Wikipedia (not the authority by any stretch of the imagination) has some definitions that seem to tally with what most of the experts we have found say.
Wiki defines flipping as
Profits from flipping real estate come from either buying low and selling high (often in a rapidly rising market), or buying a house that needs repair and fixing it up before reselling it for a profit (“fix and flip”).
Under the “fix and flip” scenario, an investor or flipper will purchase a house at price often deeply discounted from the house’s market value. The discount may be due to the house’s condition (e.g., the house needs major renovations and/or repairs which the owner either does not want, or cannot afford, to do) or the owner(s) needing to sell a house quickly (e.g., relocation, divorce, pending foreclosure). The investor will then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a higher price (closer to or maybe a bit above market value). The “fix and flip” scenario is profitable to investors because the average home buyer lacks the time and funds to repair and update the house, so they seek out a move-in ready home instead, even if it is a little above market price.
Wiki goes into a little more detail on wholesaling:
Wholesalers make a profit by signing a contract to purchase a property from a seller and then entering into an agreement with a third party to resell the same property at a higher price for a profit. All rights to the original purchase contract are assigned to the new buyer and the new buyer pays an “assignment fee” to the wholesaler in order to gain all rights to purchase the property at the original purchase price. The original purchase contract usually has an “inspection period” which allows the original buyer to back out of the contract and not close on it if they do not find a buyer to assign their contract to. Many wholesalers have no intention of actually purchasing the property and simply use wholesaling as a tool to locate properties for other investors. Wholesalers that are able to identify good investment opportunities for other investors can make a good living by locating these properties and then assigning the rights to them to these buyers.
In many cases, if another buyer is not found prior to the end of the inspection period, the wholesaler cancels the original purchase contract relying on the cancellation for inspection clause in the original contract which allows the contract to be cancelled and their deposit to be returned to them. Wholesaling requires little or no money to be secured in escrow, and in most cases the wholesaler never intends to actually purchase the property. The practice of wholesaling is often advertised as “No Money Down and No Risk” by many real estate coaching companies and infomercials since the actual deposit can be as little as $10 and in effect even the deposit can be returned if the wholesaler cancels the contract prior to the end of the inspection period.
Some people are of the opinion that wholesaling is fraudulent misrepresentation since the wholesaler does not actually intend to close on the property themselves. However in the United States wholesaling is perfectly legal and every real estate contract allows the buyer an inspection period and any amount of deposit that buyer and seller agree to. The concept of wholesaling a property is no different than a wholesaler in any other industry that signs a contract to purchase goods with the hope of reselling those goods at a profit to a third party. In a successful transaction the seller is often unaware that original buyer is not purchasing the property. In some cases, wholesalers actually purchase the property for cash and then resell the property to their end buyer in a second closing. This practice is considered more costly since the buyer is paying closing costs to purchase the property and to resell the property. However many people consider double closing to be more ethical since the original seller sold the property to the buyer and then the buyer entered into a new transaction to resell the property to a new buyer. In cases where there are substantial profits from reselling it often makes sense for the wholesaler to pay for two closing costs (double closing) in order to not have to request a large assignment fee from their buyer.
Bank owned properties and short sales cannot be purchased using an assignment of contract so the double closing method must be utilized. In order for wholesalers to pay for the property before they can resell it they need to have access to cash or borrow “transactional funding” from a private lender so that they can pay for the property before they resell it.
Bigger Pockets forum participates seem to make the same distinction: In most cases, the investor who is wholesaling never actually buys the property but controls the contract to buy. Flipping the property involves the purchase of the property (and usually – but not always – involves rehabbing).
Wholesaling could be confused with flipping houses because you “flip” the contract – we think. Not definitive but at least a start.