You’ve no doubt heard of wholesalers in the retail sector. But what about the real estate sector?
Yes, wholesaling does happen in the real estate world, and its proponents hail it as an investment alternative, as long as it’s done ethically and correctly. However, controversy, legal uncertainty and criticism dog the practice of wholesaling. So, as with any type of real estate investing, do your homework before you head down the wholesaling path.
Typically, real estate wholesaling involves putting a distressed house under contract, then assigning that contract to another buyer. The wholesaler doesn’t upgrade the home. Instead, he or she acts as sort of a middleman, scooping up an inexpensive property, marketing it to potential buyers and making money on the flip.
David Lecko, CEO of DealMachine, whose app helps wholesalers unearth and sell distressed properties, says wholesaling can also apply to commercial real estate assets. As examples, he cites small apartment complexes and small shopping centers that aren’t already on the market.
“I got started with the app in 2016 when I was looking for my first real estate property, and I had a follow-through problem,” Lecko says. “I would go drive around and find houses, but then I wouldn’t follow through with sending mail … and wouldn’t follow up three or four weeks later, which is very necessary for this type of marketing. I made the app for myself in about a weekend to do those basic tasks.”
Today, the app serves about 5,000 active users. After you snap a photo of an off-market property or enter its address into the app, you can find out who owns it, along with other key information, and then contact the owner by direct mail, email or phone.
We chatted with Lesko about how high-net-worth investors in commercial real estate might leverage wholesaling.
This Q&A has been edited for length, style and clarity.
NREI: How does wholesaling work?
David Lecko: Wholesaling is a way to make a lot of money in real estate without using any of your cash or credit because you end up getting paid for finding great deals. In wholesaling, you use several methods to find properties that you can purchase that will allow for a profit when it’s time for you to sell it. This means you’ll probably look for abandoned or broken-down properties. Residential real estate and commercial real estate can both be wholesaled.
NREI: What kinds of commercial real estate assets are typically bought and sold through wholesaling? What makes them suitable for wholesaling?
David Lecko: Wholesaling typically involves single-family homes. They are the most liquid type of real estate, so they’re the fastest to find a buyer for so you can quickly collect your finder’s fee check.
You can also do multifamily. Two- and four-unit properties are typically bought by mom-and-pop investors who may get tired of owning them, or the properties end up being run down after being owned for 20 to 30 years, so the owners need to sell. Wholesaling also works on larger commercial buildings, such as strip malls.
NREI: Why might high-net-worth investors in commercial real estate want to get into real estate wholesaling versus other strategies? How does this strategy differ from more traditional approaches?
David Lecko: A lot of high-net-worth investors stick with wholesaling, and the reason is that you get your cash—a lot of cash—very quickly.
To put it in perspective, if you have a rental property that rents for $1,000 a month and the monthly operating expenses are $500, you’re left with $500 a month. That’s great. But with wholesaling, you might be able to get $10,000 on that property within two weeks.
A lot of commercial or residential investors turn to wholesaling to get a lot of cash quickly and then use that cash to buy more rental properties or commercial properties themselves. A huge reason why we see high-net-worth investors turn to wholesaling is to build up their cash fast.
NREI: Technology obviously is playing a bigger part in real estate investing. What can you say to high-net-worth investors that might help them overcome any reluctance they have about tech-driven investing?
David Lecko: I urge you to look into using technology to scale techniques that previously were only used by hustlers, not business owners. It used to be that these hustlers, who were just starting out and doing two deals a month, would use technology and automation to help, but anyone can use these methods to scale up and save time and money.
Instead of spending $30,000 to find a homerun commercial deal, you can bring that cost down to $10,000. Think about the properties you could get under contract for much less.
The way we do that is called “driving for dollars” or “driving for deals.” You’re looking for properties that look visually rundown, and you’re sourcing those properties yourself using technology that automates the process. So, instead of downloading the same prospect list that every other investor is using to send mass mailings, you’re finding exclusive deals, even if you’re not the one who’s physically finding the properties.
You then can send direct mail to those property owners. They are on your prospect list now because you saw their properties were rundown. And the property owners are not getting hammered with everyone else’s direct mail pieces generated from the same list everyone else bought. That’s how your costs go way down when you’re using technology to scale manual processes like “driving for dollars.”