Do real estate wholesalers need access to more deals, or just better deals?
In order to hit your financial goals in real estate, is the key having more wholesale property inventory, or simply having better quality deals to offer?
Whether you aim to wholesale real estate part-time or automate a business so that you can travel and generate passive income, you just aspire to doing a handful of deals a month, or want to do hundreds of deals a year, a lot relies on your inventory. So, if you are not hitting your money goals yet, do you need to be focusing on quantity or quality?
Quantity vs. Quality
Wholesaling as a business model in general operates on both volume and profit margins. The idea of wholesaling is to buy low and create attractive spreads. Yet, wholesale in general is also traditionally a volume business. What’s nice about wholesaling real estate is that is it extremely flexible and customizable. You can choose your sweet spot between volume and per deal profit.
You can flip more deals faster and on thinner margins. Or you can demand fatter spreads, and worry less about volume. Some may be happy turning one deal a month for $5,000. Others might be looking to flip 10 a month at a $100,000 to gross $1,000,000 per month. According to the end of year house flipping report from RealtyTrac, last year 126,256 individuals and companies collectively flipped 193,009 houses and condos. That’s about 1.5 deals each, though some are turning hundreds. There are certainly some investors who are doing the minimum, and are making very minimal profits. Yet, at the top of the scale the same report says that the average gross house flipping profit in San Jose, CA was $145,750 last year, with East Stroudsburg, PA taking the top spot for flipping ROI at 241.5%.
The Risks of More Inventory
If you are just breezing through your inventory, selling out as fast as you get it, or are even reverse wholesaling, then more volume may be the key to increasing your income. However, those that aren’t seeing deals getting sold may want to fix their model before trying to scale.
More inventory can mean more work and time demands. You don’t want to just be busy. You don’t just want a great top line revenue. You want the most net profit. Just look at Snapchat who recently went IPO. It might be ‘valued’ at $25B on paper, but the company is still losing money. Would you rather do 200 deals and lose money, or do 20 deals, have more free time, and put $2M net cash in your pocket?
Another volume trap is that having more on the shelf doesn’t always lead to more sales. Recent consumer tests have actually showed that while a greater line up of products may get more people to stop by, it was having fewer items for sale that actually led to more real sales. This is way wholesaling giant Costco offers so few options in its products. Most investors don’t just want window shoppers, they want closings.
It’s also vital to remember that lack of quality is the number one pet peeve of end buyers. Those that just get involved in long wholesale chains with endless markups or who are throwing everything they can on their website and in emails, without paying attention to the quality of deals they are offering are going to find they quickly turnoff real buyers. It doesn’t matter if you have a million listings if they are overpriced and no one wants them. You are going to sabotage your most valuable asset and that is your reputation and the attention of good buyers.
A lot of this all comes down to your marketing. If you are marketing your deals well, and are marketing for deals well, then you should be able to maintain a good flow of closings, on good profit margins, without risking your reputation.
There are 3 keys to success here:
You may need more inventory to hit your volume and income goals. Scaling is great, and you should shoot for your maximum potential. Just be wary of sacrificing the long term and big picture for short term feel good metrics. Get your wholesaling system right first. Optimize it for your time and net profit, and preserving your reputation. Then grow with great marketing messages to sellers and buyers, without compromising quality.
Kent Clothier is President and CEO of Real Estate Worldwide (REWW), a highly sought-after speaker, the owner of three multi-million dollar a year Internet marketed brands, and proud husband and father. Kent is motivated by his love of family and freedom, creating products that enable people to live their lives the way they choose.