I was surfing through the BiggerPockets forums today and I stumbled across one discussion regarding wholesalers. In a nutshell, the discussion was about a flipper being brought a deal from a wholesaler where the wholesaler greatly exaggerated the key numbers (ARV and rehab cost). Not a rare encounter to read about, but it reminded me of an encounter (or should I say “multiple encounters”?) I had with a real estate wholesaler.
Unless you want to tarnish your reputation as a wholesaler, DO NOT follow this strategy. Whether or not it was done on purpose or out of being a rookie/naive, it doesn’t matter, because both ways create the same perception: being shady.
A Real World Scenario
As I would encourage all real estate investors to do, particularly flippers/buy-and-hold investors, I believe it is a good idea to get yourself on as many buyer’s lists as you can. Whether I’m surfing Craigslist or calling “We Buy Houes” signs, I’m always looking to get myself on buyer’s lists. It’s basic math – the more lists I’m on, the higher the probability that I can land myself a deal.
One thing I didn’t expect was that it would expose some real bizarre and not well thought out business strategies. Here’s a look at several emails that show just what I’m talking about.
An email showed up in my inbox where the wholesaler was offering a deal for $7,500 (give or take a few hundred, I don’t remember the exact numbers as it was awhile ago). I looked through a couple pictures (note to wholesalers – the more pictures the better!!!), and I thought there may be some profit to be had. I called up a real estate buddy and asked his thoughts (he has much more experience than me), and he told me he had checked out the property months ago and it was a disaster — not only from a rehab perspective, but it had code violations on it from the city. The straw that broke the camel’s back . . . it wasn’t in the best part of town either.
At $7,500 it MAY have still allowed for a profit to be made; however, way too many risks to justify MAYBE getting a reward.
A few days go by and an email shows up from the same wholesaler. The same property is now available for $6,000. Nothing shady here. He wasn’t getting any bites at his previous price, so he lowered it. Can’t fault anyone here.
An email shows up a couple days later regarding the same property; however, there are two differences. First, it is from a different wholesaler. Second, it is listed at $10,000.
Ummmmm??? I don’t know this for a fact, but my logical conclusion is, Wholesaler A networks with Wholesaler B who says they will try to sell it at $10,000 so that it is a “win-win” for the two of them (they both make the profits they want).
A friendly hint: DO NOT do this if you care about your reputation.
You may think I’m making this up, but this is truly how things unfolded. A week goes by, and I get another email regarding the property. We now have Wholesaler C sending out the property, and now it is listed for $15,000!!!
Who knows how this transpired, but I’m sure you are reading this thinking the same way I was: shady!
Another friendly hint: DO NOT do this if you care about your reputation
Lessons to Be Learned
There are a couple lessons to be learned for both wholesalers and other investors, although, hopefully the lesson is abundantly obvious.
If you don’t want to appear as a shady character, don’t take another wholesaler’s listing and bump up the price. ESPECIALLY, if all you are going to do is email it to your buyer’s list and re-market it. There is nothing wrong with sending it to your list, but the obvious problem comes in by raising the price on what the market has already said is an overpriced piece of property.
Not only does it A) not make any sense, but even worse, B) it makes you look bad!
A solution? Tell the original wholesaler you will send it out at the same price, but it will just need to be a case of him making a bit less on the spread since he will need to split it with you. Sure, you both may not make as much, but you will be gaining/building something that is priceless – a solid reputation among your buyer’s list.
Flippers & Buy-and-Holders
Be extra careful out there. Make sure you are not paying an over inflated price that has been marked up, and then marked up, and who knows, maybe marked up again. I suppose it could be argued that it doesn’t matter how much it is marked up if, at the end of the day, it is still a smokin’ hot deal for the end buyer, but I’m a cheapskate, so I want things as cheap as I can get them!
My solution? Like I noted, get on as many buyer’s lists as you can.
To wrap up my story, out of curiosity, I emailed the original wholesaler after seeing the $15,000 price tag from Wholesaler C. I asked Wholesaler A if the property was still available at $6,000? Their answer, “Yes, it is. Do you want to meet me there to check it out?”
Funny and sad all at the same time.
Photo: Mene Tekel