What is Whole-tailing? Is That the Same as Wholesaling?

What is Whole-tailing? Is That the Same as Wholesaling?

Whole-tail is a fairly new term – a combination of “wholesale” and “retail.” It’s not the same as a wholesale deal.

A wholesale deal is an A to B to C transaction. In a wholesale deal, a person called a wholesaler (person B) goes under contract to buy a property from a seller (person A). However, the wholesaler does not intend to buy the property. Instead, they intend to shop the deal to others, typically a cash buyer like a landlord or flipper. The ultimate buyer (person C) agrees to pay a wholesale fee (also known as an assignment fee) to the wholesaler so they can take over the contract to buy the property. In other words, seller “A” is under contract with wholesaler “B” yet buyer “C” buys directly from “A” after paying “B” for the contractual right to do so.

Wholesale steps:

  1. Seller A agrees to sell their house to Wholesaler B for $200,000.
  2. Wholesaler B shows Buyer C the house and says that they can have it for $230,000.
  3. Buyer C agrees and pays a $30,000 assignment fee to Wholesaler B, who signs over their rights in the contract to Buyer C.
  4. Buyer C goes to the closing and purchases the house from Seller A for $200,000.

Why would a wholesaler do this? Well, usually it’s because they don’t have the money to actually buy the property! Even if they did, it may be faster, simpler, and/or more profitable to take an assignment fee. After all, the wholesaler won’t have to pay closing costs (twice), insurance fees, or loan fees.

Now, on to whole-tailing. That is more like flipping than wholesaling. A whole-tail deal is an A to B transaction, followed later by a separate B to C transaction. A whole-tailer goes under contract to buy a property and actually buys it! Then they quickly sell it to another party, like a landlord, flipper, or move-in homebuyer. The whole-tailer might own the property for an hour, a day, or a month. They typically do little more than cleaning, junk removal, and paint touchups. (A full-scale fix-and-flip project generally takes longer and is more involved. A flip project targets a move-in homebuyer, not a landlord or flipper.)

Whole-tail steps:

  1. Seller A agrees to seller their house to Whole-tailer B for $200,000.
  2. Whole-tailer B purchases the house for $200,000.
  3. Whole-tailer B cleans the house and removes debris. They put it on the market for $240,000.
  4. After a little negotiation, Buyer C purchases the property from Whole-tailer B for $235,000.

Why would a person whole-tail instead of wholesale? Here are the reasons:

  • The whole-tailer might not want the Seller A to be upset when they discover how much the assignment fee is. After all, the seller might feel that they should have gotten more money! By actually buying the house, the whole-tailer gets the seller out of the equation.
  • The whole-tailer might believe that they can make more money with a little cleaning and painting. In a wholesale transaction, the wholesaler doesn’t own the property and therefore cannot control its appearance. With a whole-tail deal, the whole-tailer owns and controls the appearance of the property so they can make it look more appealing.
  • Whereas a wholesaler cannot put a house on the Multiple Listing Service since they do not own it, a whole-tailer can advertise the property much more broadly as the owner. A wider pool of potential buyers means that the whole-tailer would likely sell for more.
  • An end-buyer might object to a large assignment fee. They might feel that the wholesaler is greedy.
  • A large assignment fee, which usually is paid in cash, might be too much for many end-buyers. In a whole-tail deal, a buyer could simply make their down payment and borrow money via a mortgage loan. They do not have to worry about coming to the closing table with a down payment plus an assignment fee.

I was involved in over 100 wholesale and whole-tail deals in my younger days. When I had little to no money, wholesaling allowed me to make money simply by being a good dealmaker. When I had more access to capital, I found that whole-tailing made transactions a little simpler even though I had to pay closing costs on the purchase and the sale.

Sometimes when I was wholesaling, the seller wondered why I was showing the house even though I was under contract to buy it. Other times the investor I was trying to wholesale the house to would object to the amount of my assignment fee. Title companies, attorneys for the parties, and lenders would become confused. I found it easier to whole-tail when possible. There were even whole-tail transactions in which I bought a house and sold it an hour later.

Today, my wife and I simply buy properties and rent them out. We like the idea of building wealth over time. I don’t like to sell assets because there are capital gains taxes and because I miss out on long-term cash-flow and appreciation. But I get it if you want to wholesale or whole-tail. There is money to be made when you find a great deal.

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.

No Comments

Post A Comment