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Real Estate Wholesalers: Tarnish Your Reputation by Using This Strategy

by Clay Huber on November 10, 2012 · 33 comments

  
crooked strategy

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.

EMail #1

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.

EMail #2

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.

EMail #3

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.

EMail #4

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.

Wholesalers

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

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{ 33 comments… read them below or add one }

Abdul Rasheed November 10, 2012 at 8:40 am

Thank you Clay for this awesome post. I am getting started in wholesaling and I learnt one more today!. This tip is very valuable to me. Keep posting and continue the good work. Thanks.

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Clay November 12, 2012 at 6:04 am

Thanks Abdul.

Just be straight-forward with anyone you are working with, and you will already be way ahead of some of your competition.

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Alex Craig November 10, 2012 at 10:54 am

I have seen this same practice several times; when I do, I simply “spam” that wholesaler from my email list. My other thought is that when I see a property that cheap, I assume it is in a terrible part of town and I deleted the email. I try to avoid dealing with the low end wholesaler simply b/c they typically only cared about getting paid and will fudge the ARV, rehab and great exaggerate the area descriptions..

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Clay November 12, 2012 at 6:06 am

Alex – you’re right, odds are, the property probably is in a rough area of town when they’re super cheap; however, you know what they say about ASSuming, so I will at least pull up a map real quick to see exactly ‘where’ it is.

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Jason Grote November 10, 2012 at 7:42 pm

This is good advice! Another thing to avoid I learned from a wholesaler in my town that competed with me on a property. The sellers took the contract from this wholesaler to find out that he wrote in a 45-day option period at no cost to the buyer… Needless to say the seller dropped that wholesaler like a bad habit and called us!

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Clay November 12, 2012 at 6:09 am

45 days? Eeeek! Those sorts of things are what gives real estate investing a bad image.

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Jason November 11, 2012 at 7:56 am

Clay,

Great post. Ive yet to find a good wholesalers, that has profitable deals in my area. ARV to high and repair estimated to low seem to be the mantra. I know good wholesalers exist in Denver, but them seem to be an illusion at the moment.

Jason

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Clay November 12, 2012 at 6:11 am

Jason, they’re out there for sure, but from my experience, whenever you meet someone claiming to be a wholesaler, odds are, you will never do a deal with them.

I think that’s exactly ‘why’ the true wholesalers on this site do so well. They are looked at like “gold” by their contacts, and rightfully so.

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Wendy Forsyth November 11, 2012 at 1:52 pm

I’ll tell you exactly how that deal happened. More likely than not Wholesaler #1 pawned it off on some poor, hapless newbie and convinced them to wholesale it out and make a profit. Literally enough newbies out there for the same thing to have happened with newbie #3. Not sure exactly, but seems like a likely scenario to me.

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Clay November 12, 2012 at 6:15 am

I don’t think so Wendy because when I contacted Wholesaler 1, they were still selling it at their original price.

I do do think Wholesaler 1 just asked Wholesaler 2 (and 3) to “help him” sell this. But their business conclusion was to just mark up the property even more so that everyone made the profits they wanted to make.

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Shaun November 17, 2012 at 9:27 am

I wouldn’t be surprised if the original guy didn’t even know.
I was wholesaling a deal last year that I saw at least 2 other guys marking up on Craigslist.
They were vague on location (probably since they didn’t know the address! ) and some other details.
I knew it was my house though since they just used my pics, including the one where my father-inlaw walked into the shot! :)

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Clay November 17, 2012 at 12:14 pm

Shaun, you could very well be right; however, it still makes me look at the original wholesaler with a skeptical eye, which unfair as that may be if he didn’t know, I still would.

Perhaps another lesson to be learned, monitor like a hawk if this happens to one of your properties, and if it does, immediately send out an email to your list that you have NOT approved of the action.

Ned Carey November 21, 2012 at 4:00 pm

Shaun, Clay,

The same has happened to me. I got my own deal back from another wholesaler. He hadn’t contacted me first and it was at the same price I offered. I wonder how he though he would make money?

Shaun November 21, 2012 at 4:06 pm

@Ned Carey I will guess that the guy’s plan was to see if he could get someone interested then see if you would split your fee with him if he could get you a buyer.

Seems backasswards to me but I have heard of people doing that.

Clay Huber November 21, 2012 at 4:41 pm

Ned – maybe he would have taken Monopoly money to make up the difference? That goes to show just how much that wholesaler did NOT think things through…. good grief!

Alex Musulin November 11, 2012 at 2:41 pm

I agree with your assessment. However, it should also be noted that this and that “wholesaler” may not really know the true value of the property. Reading into pricing action is premature, unless one truly understands the market and a reasonably accurate ARV. Relying on a wholesaler’s numbers only makes sense when backed up by third party reports, whether those are board certified repair estimates, actual sales comps of similar, nearby properties, appraisals, etc. Opinions on price are just that, and hold little water. Realtors may or may not give you an honest opinion because their interest is in commission and a lower valuation of ARV will affect their income by 6%, whereas, they will affect an investors income by 94%.

My point in all of the above is that due diligence is the responsibility of the investor and that to protect one’s bottom line, one must do the necessary work to verify EVERYTHING.

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Clay November 12, 2012 at 6:17 am

Alex – agree with you 110% if you are “speaking in general”.

In regards to this specific deal that the article is about, I am a licensed Realtor (I got licensed for the purpose of MLS data) and Wholesaler 1 had it priced even too high. Hard to imagine, but combing the ARV’s in that neighborhood with the amount of work it needed, would be hard to make a deal out of.

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Frank November 11, 2012 at 6:10 pm

Interesting read as this is definitely a problem in our market. As a regular wholesaler AND rehabber, I can safely say there are a lot of ways these things can go. Seeing a property marked up a few bucks does not tend to be a huge issue as long as it is just that. A few bucks. 1-3k seems to be typical. It is definitely best if it is not marked up but that isn’t always the case. (although I have seen my own deal marketed back to me for 22k more and yes, that is a bit much to say the least). I believe the bigger issue in our market is not really the markup as much as it is the other wholesalers saying it is ‘their deal’. Especially when someone says your deal is actually theirs. Doesn’t go over real well. I am all for co-wholesale deals but once the daisy chain starts, it usually always goes south. There are exceptions but they are not the norm.

I find that this happens too often for two reasons. One, the courses talking about how ‘easy’ it is to wholesale just don’t have the depth to get into the ‘people’ side of the business and the ‘work’ involved to do it right. I find the lack of focus on these three words, ‘easy, people, and work’ by most courses to create much grief for the new as well as the seasoned. And so most wholesalers are here today, gone tomorrow relatively speaking leaving a wake of bad names and publicity in their wake. I could not agree with you more that this tarnishes not just a wholesalers reputation but investors in general.

The other reason, which is speculation on my part but I have a feeling there is some truth to it, is that when a wholesaler comes across an investor who knows better to what’s going on, as opposed to just a couple of minutes educating the wholesaler, the Buyer is just turned off to what is going on and that’s the end of it. I have found that taking a few minutes to educate someone can go a long way. And it can get a deal done. So spending a brief amount of time could make the difference between hanging up the phone and making money. It is happened more than once to me.

No matter what, the end Buyer must do their due diligence and if there is a deal to be made, more often than not with a little effort, it can be put together somehow!

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Clay November 12, 2012 at 6:23 am

Great comments Frank. I agree with all.

As I briefly noted in the article, I don’t mind “mark-ups” in a broad swoop of the term. Theoretically, a property could be marked up 100 times, but if the 100th wholesaler marking it up is STILL presenting a solid deal where the end buyer can make profit on it, who cares? It is “marking up” properties that are either A) already extremely narrow on profit margins for the end buyer or B) not even a deal to start out with.

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Jason November 12, 2012 at 7:28 am

Clay, I agree 100%. I really don’t care what a wholesaler makes, as long as the deal works for me. Unfortunately, many wholesalers burn through buyers, because the deals are to narrow and that client won’t be coming back.

Jason

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Frank November 17, 2012 at 12:26 pm

Very true on A & B for sure. I wish e-mail had a ‘prevent this one from being marked up’ button so you could choose but guess technology is not there yet. :-D

It is a fun business!

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Terry November 13, 2012 at 4:21 pm

Clay,

Thanks for sharing that story about the bouncing asking price for that “wholesale” property.

That would make me very suspicious as well.

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Clay November 14, 2012 at 6:36 am

The scary part is, had I not been signed up for those other lists, I might have paid more than what I actually “could” have gotten it for.

So again, a huge lesson to be learned: you can NEVER be on too many buyer’s lists.

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Brad Friesen November 13, 2012 at 8:30 pm

Great article Clay! I 100% agree with you. I absolutely believe that if you plan on buying from wholesalers, you should try to connect with as many as you can. Get on their buyers lists and see what kind of deals they send you. Watch for identical properties that appear in your mailbox from different wholesalers. That will tell you who can potentially get you the better deals.

I had the same scenario this past week happen to me that you describe. It’s not the first time and I’m sure it won’t be the last. A wholesaler who I have done business with in the past sends me a deal priced at $47,000. Looks like a good deal too. A day later, I get another “wholesaler” sending me the same deal for $49,000. Then a while later, I get another email with the same property listed for $58,100! Hmmm…which one would you rather buy from?

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Clay November 14, 2012 at 6:38 am

Brad, no doubt I’d rather buy it from the $47k wholesaler!

Out of curiosity, was it still a good deal at $58k?

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Brad Friesen November 14, 2012 at 8:00 am

I guess that all depends on what the buyer feels is a good deal. This particular deal went from a 13% cap to a 10.5% cap.

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Clay November 14, 2012 at 8:04 am

Those 3 percentage points hurt; however, in my case, the latter of the deals was a for sure LOSS for the buyer.

I’m all with you though, I’d want to buy from the $47k wholesaler. No doubt!

Corey January 9, 2014 at 2:44 am

That looks like a golden opportunity to me. If A’s pushing an already decent lower price than B and C, then simply present his lower price to B and C and ask if they are ready to do one better. I could only hope that I catch people forcing themselves into a pricing war like this. So, why not force the issue and systematically pit them against each other until you get the price you want to pay for the property?

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Brodrick Smith January 22, 2013 at 10:41 pm

A great read Clay! Looks like they had built a quick little daisy chain there. LOL!

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Clay Huber January 23, 2013 at 6:40 am

Exactly Broderick.

Who knows, maybe there was a wholesaler out there whose list I was not on who had it for sell for triple what any of the other wholesalers did?

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Brian Gibbons January 27, 2013 at 2:13 pm

ne·far·i·ous
Adjective (of an action or activity)
Wicked or criminal: “the nefarious activities of the organized-crime syndicates”. Synonyms wicked – villainous – vile – infamous – mean – evil

Synonym for some wholesalers? yuck! The seller gets screwed with these jerks. No wonder agents hate alot of wholesalers (yes, I know, not all)

What about some an article for dishonest flippers? That screw neophyte wholesalers? I’d like to see that.

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Clay January 28, 2013 at 8:50 am

Brian, thanks for the comment.

Not sure how a flipper could screw over a wholesaler. I mean it is up to the wholesaler to sell it to the flipper with enough profit in it for themselves.

Not really sure how a wholesaler screws over a seller either. Unless they have a gun to their head and FORCE them to sign papers, it’s the seller’s choice on whether to sell or not.

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Kevin January 15, 2014 at 10:18 pm

I know this is old, but I just stumbled across it. To label all wholesalers as evil is a bit much. Wholesaling is easier to get into because you don’t have the long term process like rehabbing so I get that some people think they can just walk through a house, guess on the price and rehab costs and then try to pass off crap. But they aren’t forcing you to accept. If you got a bad deal, it’s YOUR fault as a buyer. You should always be doing your due diligence. Even the best wholesaler could miss something. Go through the comps. Make sure you do a good walk through. Make sure the financials make sense for you to make a profit. And then there is always the unknown. Sometimes things just don’t go well.

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