The term “wholesaling” has gotten a lot of attention in the last 15 years. Those that dream of striking it right in real estate investing but struggle to find the capital necessary to take their turn at the plate often turn to wholesaling in order to get into the game. What is “wholesaling” and what role to wholesalers play in the marketplace? Let’s also discuss the A to B, B to C transaction.
Wholesalers are marketers that are great at knocking on doors and turning over rocks to find people that are willing to sell their property, but haven’t listed it publicly for sale. The wholesaler will enter into a real estate contract to purchase the property from the seller, but they will use an “assignable” contract to do so. Most standard real estate contracts have a box to check that says something like “this contract is assignable.” This allows to the wholesaler to assign his or her right to purchase the property to another party. In such a case, the wholesaler is paid an assignment fee by the investor that they assign the property to and then the go off in search of more properties to wholesale to well-funded investors.
What if the contract can not be assigned? That’s where the A to B, B to C transaction comes in. Party “A” represents the seller of the property. Party “B” is the wholesaler that enters into a contract to purchase the property from Party A. Unfortunately, they don’t have the money to close on the transaction. At this point, they go out in search of Party “C”, an investor that would love to purchase the property. Good wholesalers not only search for property, but they also build a stable of willing investors to take good deals to. B, the wholesaler, enters into a second contract with C to sell the property for more than what they are buying the property for from A. They get a sizable, not refundable deposit from party C for the “B to C” transaction and have it placed in escrow at the closing agent, usually the same agent that is doing the A to B transaction. They then take that contract to a fourth party called a transactional funder. This entity will provide a very short-term loan to Party B in order to complete the first A to B transaction with the idea that they will immediately be paid off by from the B to C transaction. Transactional funding isn’t cheap, but it gets the deal done. In most cases, the A to B and the B to C transactions occur within a day or two of each other…many times they occur on the same day.
The whole process is nerve-racking, but it is certainly a way for someone with little or no money to join the lucrative real estate market.