There are two primary pricing models in the note business commonly referred to as wholesale and retail. These terms differentiate what party will be paying the costs and may also refer to who is handling the processing.
Selling Notes Wholesale
A wholesale transaction generally means the seller or the note broker will be paying all costs related to closing, title, recording, and appraisal. Since the investor is not at risk for any upfront costs or costs at closing, they will generally provide a higher offer under the wholesale program.
A few investors will pay for the property evaluation under the wholesale program, passing on all remaining hard costs to the seller or consultant at closing. There are also investors that will ONLY quote wholesale.
Selling Notes Retail
A retail transaction generally means the investor will pay all costs related to processing and closing a transaction, with the exception of extraordinary costs such as deed tax on a contract. A retail quote should be a net offer to the seller or consultant.
Since the investor is picking up the tab for closing, recording, title, appraisal, and other related costs, the price is usually lower.
So which is best, wholesale or retail?
Typically, the wholesale option will be more profitable for an experienced note trader as it provides access to a lower cost of funds. Most of the risk for upfront costs is a result of the property evaluation or appraisal. Provided there is confidence in the property value, it can be a worthwhile endeavor. This risk can often be mitigated by performing sufficient research on the property through public records prior to ordering the appraisal.
If you are the current note holder, then it should be safe to assume you would generally have confidence in the transaction. You may also have an existing mortgagee’s title policy or other cost-saving items in your file.
If you are new to the business, unfamiliar with the property or process, or unable to afford the loss of any out of pocket expenses, the retail process will be preferable. If the investor does not offer a retail program, you might be able to work through a master consultant who will assume those costs, in effect pricing it retail.
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