{"id":131557,"date":"2020-11-13T16:04:32","date_gmt":"2020-11-13T23:04:32","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=131557"},"modified":"2023-04-03T14:21:57","modified_gmt":"2023-04-03T20:21:57","slug":"i-will-never-trust-real-estate-wholesalers","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/i-will-never-trust-real-estate-wholesalers","title":{"rendered":"Opinion: I Don&#8217;t Trust Anyone Who Wholesales\u2014Here&#8217;s Why"},"content":{"rendered":"<p><iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC5966567721&#038;light=true\" width=\"100%\"><\/iframe><\/p>\n<p>I\u2019ve been investing in real estate for more than 20 years. No matter where we are in the market cycle, people are always looking for a deal. I\u2019ve been asked on a consistent basis if I know any good wholesalers. And every time I hear that question I wince.<\/p>\n<p>My response to pretty much anyone who&#8217;s asked me is the same. Over and over again, I say, \u201cI have not met a single person in the NYC area who\u2019s worthwhile as a wholesaler.&#8221;<\/p>\n<p>I explain further that in my opinion:<\/p>\n<ul>\n<li>They can be greedy.<\/li>\n<li>They can\u2019t calculate repair costs.<\/li>\n<li>They sometimes cherry-pick comps that show the properties in the best light and disregard less-than-flattering comps (many of which appraisers <em>would<\/em> use).<\/li>\n<\/ul>\n<p>And that\u2019s just the beginning of the story.<\/p>\n<h2>IMO, Wholesaling Isn&#8217;t the Way to Go<\/h2>\n<p>My opinion is that many who wholesale on a regular basis dabble in gray areas in terms of the law. In my area, I see bandit signs all the time offering people \u201ccash for their property.\u201d I also get calls and text messages from wholesalers asking me if I want to sell one of our rentals. The majority of the time, what most people don\u2019t realize is that person putting up the signs or calling and texting you has zero intention of actually purchasing the property themselves. So, from the get-go, there\u2019s a dishonest motive to their actions.<\/p>\n<p>What I realized is, in the end, there are wholesalers who are only in it for themselves and no one else. Despite what some of them think, they aren&#8217;t out there providing a good service for real estate investors.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/2016-08-04-what-is-real-estate-wholesaling\" target=\"_blank\" rel=\"noopener noreferrer\">What Exactly is Real Estate Wholesaling (&amp; What Does a Wholesaler Do Every Day)?<\/a><\/em><\/p>\n<p>As real estate agents and members of the National Association of Realtors (NAR), we take an oath which binds us to act as a fiduciary for our clients, who are buyers and sellers. I\u2019m not going to claim that <em>all<\/em> Realtors actually live up to this oath\u2014unfortunately, they don\u2019t. There are a number in the industry (of more than 1.3M) who are only concerned with themselves, too.<\/p>\n<p>However, I do think they are the minority. And there is a difference between someone who\u2019s a licensed agent and those who are members of the NAR: members take the oath, while licensed agents do not. But non-members still have to do business based upon state laws, which restrict their actions. In most states, net listing a property is clearly illegal.<\/p>\n<p>You might be thinking: <em>Wait a second, Darren. I thought you were talking about wholesaling a property?<\/em><\/p>\n<p>Yes, I am 100%. But to understand wholesaling, you also need to understand net listings. So, let\u2019s dive in and look at both through a fictional example.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-120674\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/overgrown-yard.jpg\" alt=\"Front vew of unmowed lawn of an abandoned foreclosed Cape Cod style house in suburban Maryland, USA.\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/overgrown-yard.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/overgrown-yard-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/ultimate-beginners-guide-real-estate-wholesaling\" target=\"_blank\" rel=\"noopener noreferrer\">The Ultimate Beginner\u2019s Guide to Real Estate Wholesaling<\/a><\/em><\/p>\n<h2>What Is a Net Listing in Real Estate?<\/h2>\n<p>Susan is an elderly homeowner. She&#8217;s been in her home for more than 25 years and has not been able to keep up all the typical homeowning duties. So, there&#8217;s a lot of deferred maintenance (to say the least).<\/p>\n<p>Susan wants to move to a place where the cost of living is less or where she can be closer to her children and grandkids. She calls up Allen Southgarden, who\u2019s the most famous local real estate agent she knows. Allen comes to Susan\u2019s home and sees that it\u2019s ripe for a remodel in today\u2019s tight inventory. He sees an opportunity here to profit, so he asks Susan all the standard questions: (i.e., where she&#8217;d like to move, when, etc.). Then, Allen asks her what she thinks her home is worth.<\/p>\n<p>Susan replies she thinks it\u2019s worth $260,000. Allen asks if she would be happy if he was able to net her $260K for the home, and she confirms she would. So, Allen guarantees her she\u2019s going to receive $260K for the home (outside of any legal fees and taxes associated with the sale).<\/p>\n<p>Susan is happy. Allen, being the sharp agent he is, knows that Susan\u2019s home is worth at least $410,000 in the current market. With an investment of $75,000 in repairs, the home could be worth at least $650,000 based upon the comps he knows of. So, Allen shops the property to his list of investors and cash buyers who can close quickly and shows the home to those interested.<\/p>\n<p>More than one jump on the opportunity Allen has presented. The home gets bid up to $428,000. Meanwhile, Susan is completely unaware. All she knows is that she\u2019s getting a buyer to pay her $260,000, and she can move closer to her grandkids.<\/p>\n<p>At the closing table, Susan is shocked. She was completely oblivious to the fact that Allen was actually selling the house for $428,000, equating to a payday of $168,000 for him. She\u2019s furious\u2014and rightfully so.<\/p>\n<p>Allen was not acting as a fiduciary for Susan. He was acting in his own best interest. This is an example of a real estate agent doing a net listing. You can see why it\u2019s against the law in most states.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/wholesaling-newbies-pitfalls\" target=\"_blank\">5 Costly Pitfalls That Catch Wholesaling Newbies Off Guard<\/a><\/em><\/p>\n<h2>What Is Wholesaling in Real Estate?<\/h2>\n<p>So, what if Allen was a wholesaler and not a real estate agent? Here\u2019s how that scenario would look.<\/p>\n<p>Allen purchases a list of homeowners who\u2019ve been in their home greater than X number of years. Susan is in the same scenario described above: sitting in her home with lots of deferred maintenance. She gets a call from Allen. He says he\u2019s interested in purchasing her home all-cash. He\u2019s been looking to find a place to live in the area. Would she consider selling to him directly?<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-96479\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/02\/all-cash.jpg\" alt=\"cash-flow\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/02\/all-cash.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/02\/all-cash-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p>Susan, as mentioned, wants to live closer to her grandkids, so she says yes. Allen comes over and does a walkthrough. On the spot, knowing the home&#8217;s potential, he asks Susan what she wants for the home. She tells him $260,000. Allen agrees to buy it for that amount.<\/p>\n<p>Allen has Susan sign a contract to sell her home. However, he tells her that he\u2019s not sure how he wants to close on the home. He may want to close in an LLC to protect his privacy or purchase it with some friends or family members if he can\u2019t get a mortgage on his own. So, he makes sure that the contract is assignable to another entity. Susan agrees.<\/p>\n<p>Allen also explains to Susan that he\u2019s going to need to take some photos and have his contractors walk through the home on several occasions. He&#8217;d also like to walk through with some of his \u201cstudents\u201d in the housing industry. That way, he can teach them what he plans to do with the home. Again, Susan agrees to let those things happen and locks herself into a binding contract she\u2019s now beholden to.<\/p>\n<p>Then, Allen gets to it. He creates an estimate of the repairs necessary: only $48,000. He scours Zillow and Trulia to look at sales of homes in the area, decides to ignore some of the sales that actually took place on Susan\u2019s block, and determines that the after-repair value of the home would be $710,000.<\/p>\n<p>Allen prices the property at $450,000 and creates a marketing sheet with all the numbers and photos of the property. He uploads them to Dropbox so that they\u2019re easily accessible to anyone. He reaches out to his cash buyers and those who can close quickly with hard money.<\/p>\n<p>Due to the limited inventory available at the time, demand from the list is high (especially with the numbers he put out). He sets a date for the walkthrough. Allen lets Susan know that he\u2019s going to have his \u201cstudents\u201d come on the following Saturday, and she agrees. He asks if it would be possible for her to not be there; she says she can find something else to do at that time.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/think-twice-about-wholesaling\" target=\"_blank\" rel=\"noopener noreferrer\">5 Compelling Reasons You Should Think Twice Before Wholesaling Properties<\/a><\/em><\/p>\n<p>Allen has more than 20 parties show up, and he parades them around the home. Many are interested. He winds up getting multiple offers but none are near his asking price. It seems they were aware of the actual average price of recent home sales on this specific block\u2014only $650,000. He agrees to work with a buyer he\u2019s done business with in the past; the offer price is $418,000.<\/p>\n<p>The buyer wants to do a home inspection on the house, so Allen lets Susan know he\u2019s \u201csending his contractors through the home.\u201d Upon inspection, there is some structural work needed. The buyer wants a credit of $10,000 to take care of the necessary repairs.<\/p>\n<p>Allen goes back to Susan, letting her know that he\u2019s now unable to give her the $260,000 because he wasn\u2019t aware of the issue. He can only give her $250,000. She reluctantly agrees because she wants out of the home.<\/p>\n<p>Come closing day, Susan goes to the title company and is greeted by more people than anticipated. She quickly learns Allen decided not to purchase her home directly\u2014someone else is through the LLC that Allen set up. Allen is just there to collect a check made out to him for $168,000.<\/p>\n<p>Susan is furious, and there\u2019s nothing she can do. She\u2019s in a binding contract.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-114044 size-main-slider\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/should-i-or-should-i-not-702x336.jpg\" alt=\"Pensive afro american handsome professional writer of popular articles in blog dressed in trendy outfit and glasses thinking over new story proofreading his script from notebook sitting in cafe\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<h2>What&#8217;s the Difference Between Net Listing and Wholesaling?<\/h2>\n<p>So, what\u2019s the difference between the two situations? Both resulted in a $168,000 payday. However, one is against the law in almost every state, and the other is not.<\/p>\n<p>Personally, I see no difference between the two ethically and morally. Yet I will admit that the prospect of making that type of cash from a transaction\u2014or even half or a quarter of that amount\u2014is quite alluring. But in my opinion, both are taking advantage of someone else.<\/p>\n<p>Whether a seller is completely unaware this is going on or a seller is in a tough situation financially that they need to get out of, Allen isn&#8217;t doing what&#8217;s best for them. In both cases, he was only thinking about himself and his payday.<\/p>\n<p>How is it that <a href=\"https:\/\/www.biggerpockets.com\/blog\/2015-03-27-real-estate-wholesaling-illegal\" target=\"_blank\" rel=\"noopener noreferrer\">one is legal to do and the other is not<\/a>?<\/p>\n<p>My opinion is it\u2019s a mere technicality. In each instance, Allen didn\u2019t take possession of the property, and the net effect was the same. It seems that the state of Illinois has recently caught onto this fact and put measures in place to reduce this practice by requiring wholesalers to now have real estate licenses if executing more than one transaction a year.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/wholesaling-lies\" target=\"_blank\" rel=\"noopener noreferrer\">The 8 Most Common Lies Newbies Believe About Wholesaling<\/a><\/em><\/p>\n<p>But I don&#8217;t think that&#8217;s going nearly far enough. At some point, I believe all states should make the practice of wholesaling illegal. Sure, there\u2019s a big difference if one wanted to purchase a property then suddenly could not and they were trying to salvage a deal somehow. But the systematic approach of doing what Allen did over and over should be outlawed\u2014at least, I think so!<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-72598\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2015\/04\/no_condo_investing.jpg\" alt=\"no_condo_investing\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2015\/04\/no_condo_investing.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2015\/04\/no_condo_investing-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>Wholesaling Tactics I Personally Am Not OK With<\/h2>\n<p>Wholesalers, unlike real estate agents, can say or do whatever they like to get you interested in a property.<\/p>\n<p>It\u2019s funny\u2014I even got an email from a wholesaler as I was writing this. In it, they describe the property as such: \u201cThis project is ideal for an investor looking for a medium level of renovation on a project in the desirable XXXX market! Properties are selling quickly and values continue to rise as investor activity grows in the area.\u201d<\/p>\n<p>Well, the data that I can see tell a different story. Prices over the last 12 months are down, not up. What gives?<\/p>\n<p>A licensed agent is not allowed to mislead. We can get sued. Every brokerage is required to carry something called E&amp;O insurance, which stands for errors and omissions. That right\u2014real estate brokers get sued often enough that we\u2019re required to carry this insurance as agents. In fact, many agents don\u2019t start their own brokerages because of E&amp;O risk. Existing brokerages do whatever they can to reduce the E&amp;O risk by making sure that all required documentation is signed off on by buyers and sellers.<\/p>\n<p>This is also why most brokerages don\u2019t allow agents to wholesale. Wholesaling is the Wild West of real estate transactions. Agents who do it put the brokerage at incredible risk. Those brokerages that allow it, I actually question where their heads are at.<\/p>\n<p>You also can\u2019t rate wholesalers on Zillow, Trulia, or any major real estate website or app. Google, Facebook, or other possible ways\u2014yes. But who\u2019s rating them there? If someone is, it&#8217;s most likely their favorite investors who \u201cgot a deal\u201d from them and not the property owner as most likely would be the case on Zillow or Trulia. People can\u2019t track the performance of the wholesaler and read reviews written by who matters most: the person whose property was exchanged.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/wholesaling-with-real-estate-license\" target=\"_blank\">The Pros and Cons of Wholesaling With a Real Estate License<\/a><\/em><\/p>\n<p>As licensed agents, our deals are scrutinized daily. Wholesalers can be here one day and gone the next. They can operate in any state and not have any knowledge about the area. I believe many are simply trying to make the largest spread they possibly can on every deal they put out.<\/p>\n<p>Real estate agents are (in most cases) required to sit in classes to get licensed. It can take anywhere from 70 up to 150 hours. We\u2019re fingerprinted and have to do continuing education every 2 years, which always, always, always includes classes on ethics.<\/p>\n<p>With the advent of the SupraKey we get tracked on every home we key into so it\u2019s known who goes in and out of every residence. And since the advent of the COVID crisis, we have additional forms here in New Jersey that we need to have buyers and sellers sign.<\/p>\n<p>Wholesalers? They don\u2019t have to do anything. Zero. They report to no one. Anyone can get into wholesaling today and be gone tomorrow.<\/p>\n<p>Maybe you don&#8217;t feel how I do: <em>But Darren, there are some good wholesalers out there that do provide a good service to others. They\u2019ve helped a number of homeowners get out of a tough situation and move forward with their lives. And they actually tell the homeowner what they\u2019re doing ahead of time, when they first meet them.<\/em><\/p>\n<p>That may very well be the case. My opinion is similar to what I said earlier about Realtors who act outside the oath they make. Wholesalers who actually conduct their business in good faith with respect to the seller are among the vast minority.<\/p>\n<p>To the wholesalers: why not get your license and do exactly what you\u2019re doing in a way that\u2019s responsible?<\/p>\n<p>I think those who aren&#8217;t willing perhaps feel that the commission rates\u2014which average 5%,6%, 7% for agents\u2014are just not enough for them. Plus, they\u2019d have to do more as an agent to earn the same amount to boot. And they\u2019d have to report to someone else. All this means they&#8217;d need to be accountable to their state finance boards and their clients, and there are some who just don\u2019t want any part of that.<\/p>\n<p>So, as the saying goes, &#8220;caveat emptor&#8221; to all of you who think you\u2019re getting a deal from a wholesaler. And more importantly, &#8220;caveat venditor!&#8221; Seller, beware.<\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/webinars\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-91217\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01.jpg\" alt=\"\" width=\"700\" height=\"85\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01-300x36.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<p><em>What&#8217;s your take?\u00a0<\/em><\/p>\n<p><strong>Join the discussion below.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>To me, wholesaling is the Wild West of real estate transactions. Wholesalers are not held to any standards and don\u2019t necessarily have to be licensed, leaving lots of room for bad behavior.<\/p>\n","protected":false},"author":1668,"featured_media":117289,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5526,7119],"tags":[],"class_list":["post-131557","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-wholesaling","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/131557","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1668"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=131557"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/131557\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/117289"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=131557"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=131557"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=131557"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}