To the outside observer, real estate investing may look fairly black-and-white. But it’s actually more complicated than that.
There is a gray zone that both constitutes the reason real estate investors exist and is the area in which those investors provide their greatest value.
Let me explain what I mean, by examining a common question that would-be or beginning real estate investors often ask themselves, or are asked by family, friends, peers and colleagues: “Why would anyone sell his or her house at a discount?” That can prompt a lot of head-scratching, as these investors wonder, “How does that work? Why does it work? And how can I succeed?”
Not all situations fit the traditional mold
What you need to understand is that the reasons, the objectives and the circumstances for a seller selling his or her house are not always black-and-white, or crystal-clear. Some situations do not fit the mold of “hire a Realtor, list the house on the MLS and then sell for market or retail value.” Sure, that is what we are used to as the norm, and that is the way most residential real estate transactions in the United States happen.
But there also is a gray area that is more of what we call a wholesale market for residential real estate. This is where you are going to find unconventional selling situations and people who are willing to sell their houses at a discount.
And that is where real estate investors provide a purpose, value and a solution for sellers and success for themselves.
The key differentiators between the two markets—the black-and-white retail market, or the gray wholesale market—are the reasons, circumstances and the objectives of the seller.
The retail market is relatively black and white
At the risk of oversimplifying, the best way to look at the retail residential real estate market is as the place where the seller names the price and the buyer names the terms.
Here is what I mean by that: The seller lists his or her house on the retail market—that marketplace being the Multiple Listings Service or the MLS—with the help of a Realtor and together, they name the price. They take the pictures and they write the listing with the price clearly defined in that listing and the property is marketed with that price. That’s typically what we refer to as the retail value or the market value of that property. The seller is seeking to get that price. That Realtor will go to work and that seller will wait until getting that price—or something acceptably close to it.
On the flipside, the buyer names the terms. In other words, even though the seller has defined a price, the buyer can come along and say, “OK, I will give you that price or something very close to it, but I am going to name the close date and I am going to define how I am going to pay for your house”—meaning the buyer can choose to use a conventional loan, FHA loan, VA loan or whatever type of financing fits his or her needs. The buyer also says, “We are going to share the closing costs on this; we’ll each pay our fair share. And, oh by the way, Mr. Seller, I want you to provide me with a home warranty” or “I want you to perform these different repairs.”
These are all examples of how a seller names the price in the retail market and the buyer names the terms. And these two conditions—seller naming price and buyer naming terms—is the best way to characterize the “black-and-white” of the retail market. This is typically where a real estate broker or agent provides the value and solutions and finds success. This is a necessary market. It plays an important role in our real estate game in the United States.
Gray is where the real estate investors play
Now let’s contrast that with the wholesale market, or that gray area where we as real estate investors play. In this scenario, the buyer (or real estate investor) names the price, and the seller names the terms. It is the exact opposite of how I described the retail market.
This wholesale market is where a real estate investor gets that discounted price that we talked about earlier. This is where the investor serves a purpose and provides a value and finds his or her success. And here is why the buyer gets to name the price: because the seller names the terms.
These sellers have unique circumstances, reasons and objectives for wanting—or needing—to sell their property. Typically there is some form of distress—financial distress, personal distress, whatever. They name the terms, meaning they’ll say something like, “I have to close quick, Mr. Buyer. I want to close within 10 days.” Or, “Mr. Buyer, I don’t have time for you to go get a loan, I want cash so we can close now and eliminate all financing risks or delays. “ That’s naming a term. Or, “Mr. Buyer, I want you to pay all closing costs.” That’s also naming a term. “Mr. Buyer, I am offering you no seller paid concessions. I am not going to pay any of your closing costs. I am not going to give you a warranty and I am not going to do any repairs.” Once again, here is where the seller is naming the terms, and in exchange for that, the buyer names the price.
This is the exact opposite of the retail market, where the buyer names the terms in exchange for the seller naming the price.
It sounds uncommon, but it’s not
Now if you are listening to this contrast between the retail market and the wholesale market and wondering and thinking, “Gosh, that sounds unique, uncommon, untraditional or unconventional.” Think about it; it’s really not that unique, different, untraditional or unconventional.
Here is an example: I venture to say that many of you have purchased a new automobile, using your existing vehicle as a trade-in. Whether you realize it or not, you made a decision to sell that existing automobile on the equivalent of a wholesale market versus a retail market, like we have just distinguished here.
What I mean is that you are the seller of your existing automobile in the trade-in scenario with the dealership where you are purchasing your new automobile. You have just named the terms of how you want to sell that existing automobile. You are essentially telling the dealer, “I want to sell it right now. I want to sell it for cash in the form of a reduction in the purchase price of my new car. I want to sell it as-is, meaning I am not going to make a single repair to this automobile. I am not even going to wash that car.” You are naming the terms of that transaction much like our seller named the terms in our wholesale market.
In exchange, the car dealer is going to name the price: “OK, if those are the terms you are naming for the sale or trade-in of your automobile, here is what we are willing to pay. Here is the price. “ And that price is typically lower than what you would get if you were to take that existing car home with you, wash it, put new tires on it, put a sign on it, put an ad at the corner grocery store and sell it yourself. You would be closer to the retail market and you would get more, but you are willing to accept the discount for the sale of that existing vehicle because you got your terms. A quick, as-is, cash sale—no repairs, no effort, no work, no risk and no headache.
The point is: This wholesale versus retail market that exists in real estate is not that uncommon. It is in fact very common in real estate as it is in many other areas of everyday business. It is a fine example of where a retail and a wholesale market work, and many consumers are in that market on a regular basis.
So to simplify: The retail market serves a purpose, it satisfies buyers and sellers, it’s more black-and-white, and it’s where real estate brokers and agents play. Then you have the wholesale market that also serves a purpose, satisfying buyers and sellers. It’s a little more gray, and it is where real estate investors play. As an investor you are going to find your success, and you are going to find you can add value, when you play in the gray in that wholesale market. That is your sweet spot.
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About the Author
Kevin Guz is a Dallas, Texas-based residential real estate investor with more than 10 years of investing experience. He owns a HomeVestors (or “We Buy Ugly Houses”) franchise as well as the Clear Key companies, which focus on residential real estate wholesaling, rental property management and self-storage leasing. He also is a licensed real estate agent in the state of Texas. He enjoys sharing his ongoing personal experiences, perspectives and learnings from his start as a part-time or “weekend investor” and full-time corporate professional through his ultimate transition to a full-time real estate investor and business owner.