By definition, supply chain is the process by which a person or company (wholesaler) buys products from a factory (source) in large quantities at highly discounted prices and then sells the products to another person or company (distributor) for a profit. The distributor adds value to the products and then sells the final products to end consumers (retail buyers). This process represents the steps that it takes to get the products from the source all the way down to the retail buyer. Most businesses follow a similar process, and real estate is no exception.
In real estate a distributor is the equivalent to a rehabber who typically sources its products from a real estate wholesaler. One could argue that the rehabber would benefit from buying properties directly from the source, he (she) would save the monies that the wholesaler would otherwise realize as profit, and there is nothing wrong with doing that.
Real estate wholesaling, however, is a full time business that requires dedication and money. Its core activities include: marketing for deals, determining market values, estimating repair costs, negotiating, contracting, marketing for buyers, getting deals closed. All of these activities must be done consistently day in and day out for the wholesaler to have sufficient deals in the pipeline for the business to be profitable.
Let us take a closer look at some of these activities:
Marketing for deals is the foundation of a real estate wholesaling business and doing it in a continual basis is a must. The success of a wholesaler depends largely on the effectiveness of his marketing. Although there are numerous marketing strategies, some of the most common and effective strategies include:
- a) Direct Mailing: This activity entails mailing out letters consistently to targeted prospects in hopes that those motivated to sell will respond. It requires hundreds or thousands of letters to be mailed regularly.
- b) Cold Calling: This activity involves calling a list of targeted prospects and asking to buy their houses, it is time consuming, and it requires calling a large number of prospects for it to be effective.
- c) Bandit Signs: This activity requires driving around a targeted area and planting signs in strategic places prompting for motivated home sellers to respond.
All of these activities require proper and consistent follow up since it takes, on average, 7-10 interactions with a prospect before he (she) would commit to sell.
Real estate is a people business and dealing with people requires a unique set of skills. Getting good deals requires good negotiating skills, but getting great deals requires developing abilities to best understand people and their needs. Wholesalers have the opportunity to enhance their negotiating abilities on every call they make or on every visit to see a prospect.
When negotiating the purchase of properties, savvy wholesalers keep rehabbers in mind, they understand that the deals need to make sense not only to them (wholesalers), but most importantly, the deals need to leave enough room to profit the rehabbers who will be taking bigger risks.
Once a deal has been negotiated and price and terms have been agreed upon with the seller, contracting the deal is the next step. Writing up contracts requires skills, it needs to include the proper language to protect the interests of all involved: the seller, the wholesaler and the ultimate buyer, the rehabber. Once contracting is done, these are sent to a title company for title work to begin. Anything can happen at this point that can kill a deal, and the wholesaler needs to follow up closely in order to help resolve any issues that may pop up.
Indeed, real estate wholesaling does require dedication and expertise in different areas, and we all know that developing expertise takes time.
Expertise in these areas alone, however, does not make a business profitable. To increase profitability, businesses must eliminate inefficiencies by focusing on their core processes. Activities that do not correspond to the nature of a business eat away resources that negatively affect its bottom line.
Real estate rehabbing businesses that source their own deals may think that bypassing the wholesaler to pay less for deals will increase their profits. The opposite is true long term. The time that rehabbers spend finding their own deals could be spent managing their rehabbing projects in order to deliver them on budget and on schedule. Also, focusing on their core activities allows rehabbers to do more projects in a same period of time.
For those real estate rehabbers looking for great deals, add a few wholesalers to your team. They are not your competition, they provide a service that adds value to your business. Savvy rehabbers understand the value of wholesalers, they typically work with more than one and that helps to keep the rehabbers busy. Treat real estate wholesalers as your partners and you will see your business grow.