January 25, 2014
Whole Tailing is a relatively new aspect of the real estate investment market; it’s basically a method of procuring large inventories of distressed property usually upwards of 50 homes at a time from a bank foreclosure listing through a wholesale purchase.
There is an art to wholesale purchasing of distressed properties. There is a risk since you essentially purchase the property sight unseen and don’t know the possible damages that a property might contain, and have no concrete way to assess how much repairs will cost. But generally as a rule of thumb the documentation would serve to provide a good idea of what the situation is.
Generally homes that go into foreclosure during a divorce are generally better kept other kind of homes. Another good bet is homes that went into foreclosure due to death there is a good chance the property might be in a reasonable good condition. Conversely, homes that have gone through bankruptcy are more likely in poorer condition.
The best way to go about this is after procurement of the properties from the bank, make a list of your inventory and calculate the few with the most potential vs. the trivial many. In terms of strategic management, we call that the parieto analysis method.
What you do is you get each of your properties inspected, and categorize your properties into properties that pass inspection, meaning that properties in overall reasonable condition: homes that can be rehabbed and sold for around or equal to retail after flipping, and those that don’t pass inspection; meaning that those properties that might cost more to renovate and provide less of a profit margin.
Once you have done your initial analysis, source your private lenders for funding and start rehabbing the properties you got that passed your inspection. Second, list those properties that didn’t pass inspection for sale at a slightly higher price than your purchase price to clear those from your inventory and generate some profit. (Although it is recommended to do minor repairs overall to increase value)
Since the properties are purchased in wholesale, the cost of purchase can be even lower than purchase of an individual rehab property. If you plan correctly, and have multiple lenders that you can negotiate financing with simultaneously, you can initiate multiple rehab projects and invest a greater amount to get your properties rehabilitated to the point of being able to charge full retail.
The process of being able to charge full retail from properties you purchase in wholesale is the actual core concept of whole-tailing, a combination of wholesale and retail.
It’s one of the better investment strategies out there, instead of being stuck with a single item on your inventory, you end up with a complete set of properties with a large range for your potential buyers to focus on. You can even choose to put properties up for rental out of some of the projects that you Rehab if you are looking to diversify your project portfolio.
Keeping a large inventory is beneficial because it increases the likelihood you will make a sales each month, realizing profits consistently and being able to reinvest the increased cash flow to realize better profits.
Yes it does take a lot of juggling to manage a large inventory but remember you’re in this to make money and if you build a good team you are not in it alone.