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Newbie Wholesalers: READ THIS!

by J Scott on February 23, 2011 · 9 comments

  
real estate wholesaler deals

I get a lot of emails and phone calls from newbie wholesalers who are looking to do their first deal (and very few that are actually experienced). Most of the time, they want to run a deal past me that is too thin or for some other reason just doesn’t fit my style of investing.

But, every once in a while, I get a pitch from a wholesaler that just blows me away! Here is a recent example of that…

I received the following email from a wholesaler in my area (the “deal” was also posted on one of the BiggerPockets forums, btw):

I have a great investment home in [CITY REMOVED] that needs minor repairs..
Here are the details:

[ADDRESS REMOVED]
3/2
asking -51,000
est repairs- 5000
ARV-90000

Thanks and let me know if you’re interested
[SIGNATURE REMOVED]

As I normally do when I get an email like this, I jumped on the MLS to see if the property was listed. About 80% of the time, the wholesaler is trying to sell me a property right off the MLS which, if it’s in my area, I’ve likely already seen, and if I was interested, likely already put an offer on.

Generally, the wholesaler has the property under contract for about $5-10K under the list price on the MLS, and is trying to sell it to me for a couple thousand dollar profit to himself, still below the MLS list price. But this one was different…

Here is my email response which should provide some details:

Hi [NAME REMOVED],

Here is some feedback on this deal:

- First, I have access to the MLS and originally viewed this property back in November. I know that it’s listed for $28,600, so you probably have it under contract for about $23K (or maybe even less). At your sale price of $51K, you’d be making about $30K in profit. While I’m always happy for wholesalers to make a decent profit, this is a little ridiculous, and basically tells me that you’re not looking to build a relationship with buyers, but instead are just looking for one big payday.

- Second, even if your numbers were accurate ($51K purchase, $15K rehab, $90K ARV), it’s not a good deal. The typical investor would spend $10-12K in fixed costs (commissions, fees, concessions, holding costs, etc) on this deal, so the all-in cost would be about $78K. At $90K sale price, the profit would be about $12K. I don’t know many investors who would buy a deal where the maximum upside is $12K.

- I have no idea where you got your ARV. If you do a search for comps within 1 mile and going back 8 months, you find exactly one property that has sold for more than $90K, and that one isn’t a great comp. My guess is that even if a rehabber could get this particular property under contract for $90K or more, he couldn’t get it appraised for that much in that location.

- In terms of your rehab estimate, for a property to sell in that area in this market ([CITY REMOVED] is a REALLY tough market these days), you’d need to do a full remodel of the house. Given what I remember of it, my estimate was $45-50K in rehab work. With that level of rehab, you could probably get the property under contract for between $100-105K, but again, it would be hard to get an appraisal for that much.

Given all that, I’m obviously not interested in this deal, but hopefully my feedback was useful for when you deal with other investors who may approach you for more information…

Btw, if you want a chance to move this property to an investor, I would recommend trying to sell it for at-most $30K. But, keep in mind that it’s been listed on the MLS for 3 months, so any serious investor would likely have found it by now. Your very best bet to sell this house would be if you got it under contract well below the list price, and could offer it to an investor for *LESS* than what it’s listed on the MLS for. At least in this way, investors would see you adding some value…

Thanks,
J

Photo: Gene Hunt

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{ 9 comments… read them below or add one }

don hines February 24, 2011 at 6:37 am

I wish them well. But in two years of studying REI, I have never seen a good deal from a wholesaler. There is one here in Little Rock that I hope really makes it. She is a hard worker. I tell her to find me a deal I can’t find on my own. For the most part, all of the deals that are brought to me, don’t justify hiring Dirty Harry to monitor the crack heads in the area.
Don

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Joshua Dorkin February 24, 2011 at 7:57 am

But I just took this awesome course with so and so and this is the strategy that they taught me! You mean, that’s not how to make money as a wholesaler?? You’re wrong! I paid so and so $5,000 for his bootcamp and I know he knows better than you do!

:)

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Rachel Aka Mobile Home Gurl February 24, 2011 at 6:12 pm

Wow, thanks for sharing! I agree, many of the calls that I’ve received in the past from “wholesalers” end up with skewed numbers. Back when I was wholesaling, I kind of kept to a small list of buyers who continually kept buying. I find the good ones usually just tend to keep to their preferred list of buyers. Good article, I enjoyed reading it! :)

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Ericka McGriff March 31, 2011 at 2:36 pm

Hi, I agree that this was a good article also. The thing that I don’t like is how people down play wholesalers. A lot of times their just starting out and choose wholesaling because it’s a good way to begin in real estate. I feel like instead of criticizing them help them. Tell them what a good deal look like and how to find them, especially if it’s someone you know is trying hard to make it. Everyone deserves a chance.

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Dennis July 31, 2011 at 6:26 pm

I agree with Ericka, and the is why I tell the wholesaler what area, condition, and price will make me buy. They fit my criteria and I will buy the property. However when I have sold wholesale in the past I was graced with a few suckers. These were usually folks who just paid so, and so too much money to learn just about nothing about REI, they just wanted to do their first deal to start on the path to millions falling out of the sky.

One such wholesale deal was actually not for sale, I had just bought the place. The “For Sale” sign had fallen out of the window only “For Sale” was able to be seen. The newbie investor had asked a neighbor to call him if the place looked as if some one was about the place.
I resold the property bought for $2k for $15k with no out of pocket repairs.

Sad to say at settlement the buyer brought in a Realtor to make sure everything went ok. The Realtor charged the buyer a flat $6k fee to do absolutely nothing except pat him on the back and to point to where the title clerk had checked for him to sign. If I had only known the guy would have paid such a fee I would have brought in a lawyer paid him $500 and pocketed the extra $5500. The investor is still rehabbing the property over a year later, this is a low income area, I would have just fixed, cleaned, and painted the place and rented it out, maybe $15k max in repairs.

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Roxy November 7, 2011 at 12:15 pm

I’m so happy that I have found/joined this site and this post in particular. I’m new to wholesaling and I’m kind of bummed out that wholesalers are getting a bad rep out there. I’m learning more and more that a lot of wholesalers are just out to make a quick dollar and not into really finding the best deal for investors. How do I, as a newbie, overcome this stereotype? I know how to find good comps, I’ve been doing BPO’s for over 4 years now and have my real estate license. So, how do I put myself above the “slackers”, so to speak? Any help from you seasoned wholesalers/investors is GREATLY appreciated. Every “wholesale”, “investing” and “real estate” program I come across costs thousands of dollars….and if I had thousands of dollars, I wouldn’t be doing wholesaling, I would be investing! LOL

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Aaron Munoz March 12, 2013 at 1:57 pm

Hi Investor Pros,
I am in need of serious advice. I dont know how to approach this. I have in front of me a buyer that has found a REO home on their own and has placed two offers on the home butr ended up declined with no second counter offer. The buyer is qualified for the 203k Full loan with 3.5% down and really wants this house to rehab on their own. They are willing to pay $145, 000 for it. Anything made before the $145, 000 is mine to keep. The bank is asking $188,400. Work needed to bring it up to its very own market standards is estimated at $98, 000. This home should go for a cash offer at between $100-130, 000. I do not have any cash to buy it from the bank myself. Do I find hard money? What do I do, How do I approach this? I would appreciate if someone can help me or at least help them. II can give more details about the property as needed. Please contact me asap.
Kindly
Aaron Munoz

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Jonathan Jimenez December 16, 2013 at 4:06 pm

Great post! As an individual that has no experience in RE and really no large pool of money to pull from, I feel as though wholesaling may be my best option to generate the cash I need to do other types of investments. I certainly want to make a profit but not at the expense of reputation. I’m glad I found this through the beginner emails I’m receiving from signing up with Biggerpockets. Not only are the posts great information but the feedback and comments are extremely helpful.

I will definitely bookmark refer back to this post.

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Mark Updegraff February 23, 2014 at 9:03 am

Great Post J! Even that ‘value add’ is pretty thin though… Like you said, any interested investor would have been competing for the discount when it was listed…

Nice post!
Mark

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