Recently, another investor that I have done tons of business with over the years called me because he came across a house that he knew I would like. Up and coming neighborhood that I knew really well, multi family that needed work. Fit exactly what I like to buy, fix, and keep. He and I meet the seller who lives in the property, and we negotiate the price. $75k. This investor tells me that he will assign to me for $10K which we have done a number of times together.
Because I have the absolute worst luck of all time, 2 other houses that were bank deals that I had been working on for months finally call and say that we need to close in 30 days. These other houses are in a city where I can get the same rents, but a better tax rate. Only thing, this up and coming neighborhood as wildly appreciating values. So, I make the hard decision to get a piece of something instead of all of nothing. It really killed me not to keep this property, but the handshake agreement that my buddy and I had became an assignment where I cut him a check for $10K, and now he was out of the deal.
I then contacted an agent that I work with extensively and told her to create some buzz about this property and that we were looking to wholesale it and fast. She couldn't legally list it, but she could talk to contacts and let them know what was coming available. Once we had enough interest, I had every single investor show up at the house at the same time and told them the property was for sale for $50,000 and that they had to close in 10 days. Make your highest and best, because if we need to close on this thing, they can fight over it like a piece of meat once it hits the MLS.
Long story short. Very profitable bidding war. I Signed the second assignment for $120,000 and let the end buyer close on the property. Walked with $35,000 and that funded a large chunk of my rehab on one of the other two properties that I later closed on.
No, it's not really a win-win-win, it's more of a "we really put it to the seller/owner" most likely. I don't know what the seller was led to believe but beating them down on their equity is simply a form of theft. If it can sell that quickly for that much of a difference, the seller was not informed or mislead or a real idiot and taken advantage of.
The value the wholesaler brought in facilitating the deal is grossly over priced at that market value, it appears to be predatory dealing, not a home run.
Sorry to break it to you all like this, but you might start by learning real estate before treating real estate like some commodity. The Fair Trade and Services Act that the wholesale gurus never point out sets fair pricing for all services in commerce. All you do in wholesaling is facilitate a sale, just as a Realtor does, you don't add any more value to what is already established in the industry for that type of service.
This is also how law suits get started!
The real money in wholesaling is made a dime at a time with volume, not a killing on one transaction that either takes equity from an unsuspecting owner or overpricing to an end buyer, without touching the property.
Not saying anyone is a bad guy, saying there is a real lack of understanding real estate. Real estate is unique and unlike any other commodity in our society, need to learn that.
You make money by adding value in the "DUST" of real estate, look that up. You do not low ball sellers and set arbitrary prices as you might with a truck load of shoes.
It's a lack of knowledge, hopefully it's not intentional predatory attitudes, if you want to deal honestly, ethically and legally in real estate, you need to understand real estate, the basics, not just how to pull of some transaction. :)
@Bill Gulley , while I appreciate your opinion and commentary, I do not believe that it applies to me or that there is a lack of knowledge or a predatory manner in which I do business. I certainly respect your opinion in regards to this deal, but must politely disagree. I have done my fair share of deals over the years in this area, and I have built up a steady business and a reputation of reliability. I am forthcoming in every deal that I do on a purchase, a sale, or dealing with my tenants. I take pride in this business, and I don't feel guilty for the years of hard work that it took to get to this point. Yes, I am in this business to make money. Yes, I negotiate with people, and they agree to the terms. There is no flowery language, nothing ambiguous. My sales contract is one page, large text, double spaced, and reads as easy as a bill of sale for a car in a private party sale. Everyone is made aware that I invest in real estate, and that my end goal is to make a profit. If someone negotiates money off of the price of a car at a dealership in order to get a better deal, is that wrong also?
Also, it wasn't like these people wanted 200k for their house and we paid them $75k, they were in the ball park and were realistic about the condition of their house. I didn't hunt them down, they approached us to do this deal, and they were represented by their own attorney. Now, having said that, we listed this house at $50k. How would we know that a bidding war would jack up the price as high as it did? I would have been happy to get 95k or 100k for the house. We never expected this type of demand, especially with 3 feet of snow on the ground at the time. The purchaser after me had to invest 85k into this house after he bought it. There was 1 floor of the 3 with working heat at the time. 1 tenant was using her stove to heat her unit. The house was covered in lead paint, needed 46 windows, and the list goes on, but the house was a major project to say the least.
To follow up the story, we negotiated 7 months rent free for the original sellers prior to them moving. Where did they move after 7 months? You guessed it, they are tenants of mine today and are very happy. They live in a safe, clean, single family house that they rent below market value, and they have a pile of cash in the bank that they never had because of me. They even give me rental referrals to this day, and they know all of the circumstances surrounding that house. They are so happy in fact, that they sent me a birthday card. I certainly do not think they feel taken advantage of.
Doesn't sound like the story of what was described in your post. While you are entitled to your opinion, I do ask that you at least ask further questions before drawing conclusions about my knowledge base, ethics, or business practices. If you ask those questions, then you will not lack the knowledge of the details surrounding the deal and can make a more informed comment. I absolutely do understand the thought behind your post, and would like to think that it was not directed in a malicious or accusatory manner, especially now knowing how it played out after the fact. Thank you.
I will ask this question of everyone here that has commented. @Ronald Perich , @Marc Murphy , and @Bill Gulley . I just closed today on a single family house where the family owes @50k. They originally CONTACTED ME about purchasing the house. My intentions were to purchase, build out, and resell. This family flip flopped on their number for months. They called a real estate agent who advised them to list at a particular price with her, they tried to sell it on their own, and this all went on while I was involved in the deal before they signed with me. I offered them $105,000 for this house. This house was completely full with clutter, cat urine, you name it. 2 people in one week asked me if I had a single family house that they could buy at wholesale from me, so I threw a number at them that made it worth my while for me not to close on my own and do the build out. My buyer purchased the property for $130,000. Is this wrong? Is this any different than the deal above rally? It is in the same ball park profit wise. I am genuinely curious as to all of your opinions.
Bill has a lot of experience in real estate and is not unafraid to share his experience with others. I respect his opinions in this area.
The challenge I have with being so anti-wholsale is that many professional real estate agents will never touch the house you described. And so a lot of these folks will do nothing or will FSBO. And they likely wouldn't get as much as you offered.
Anyway, you asked for comments by sharing your post. And I'd say you got them...
You should really ask @Karl Krentzel for his opinion... :)
If he and Bill debated on CSPAN, I'm pretty sure the ratings would be higher than anything CNN or FoxNews would get this election season!
No Brandon, I was not trying to make a personal statement as to your personal integrity! I must say that your follow up posts have given me much better insight as to your dealings on a more positive note. Thank you for that, as most just run away and that is never my intention.
In my nearly 6 years, I think, on BP I have never said anything like this;
Look to my profile, actually it is brief, it should scream conservative businessman. Retired Army Officer, Bank Examiner, Commissioner of a large PHA, Board of Directors of community non-profits, Real Estate Broker. All of these activities are in service to the public, they all require the highest ethical conduct and professionalism possible.
The Army shaped me into a "tell it like it is" kind of guy, errors or mistakes there can get people killed. An FDIC Bank Examiner is a special agent of a federal agency, not just bean counters but the agency has police powers, so again, this is another "tell it like it is" position requiring the highest degree of integrity. Decisions there could change people's lives.
The other positions mentioned also directly impact people's lives, in all of these areas I have had to apply fairness and equality in reaching solutions. When I am charged with the public's trust I hold that above everything else, including any personal gain or benefit.
These attitudes have served me very, very well in my business career. These are personal ethics and sometimes they get in the way of business decisions and at that point I look to professional ethics, what is acceptable practice, what is fair dealing, and a question I always ask myself before I put my hand to any document, "what would a judge say"? I certainly look to what is legal!
I'm a businessman and an investor, I'm also pretty creative and I'm profit motivated as well. While I'm not some bleeding heart, empathetic push over, I do understand the bigger picture in dealing with the public.
I know money and wealth, the most important thing I can leave with all of you on BP is that you will never really be successful without being ethical. There is a direct relationship in being ethical, fair dealing, honest and in compliance with the law to being successful in life and in obtaining wealth. You don't make money in anything, you earn it and in real estate all the money comes from the public, it's their money until you earn it!
We are not entitled to anything in dealing with the public and the law reflects that. There is no service of any kind in real estate that cannot be valued to comparable services. There are numerous federal laws concerning pricing of goods and services in an open market environment. These basic business laws pertain to all transactions, including real estate.
Real estate falls under the financial services sector and is considered an industry itself. I've written many times that real estate is unique unlike any other business or industry. Real estate is a function of our economic system, the only function of land, labor, capital and entrepreneurship that cannot be replaced, land is always a basic function.
This also means that real estate is not treated like any other business, that is due to the economic, social and legal aspects that must be addressed. A car is not a necessity nor is any other single commodity. Land or a place for people to live is considered a necessity, it is the only tangible item in our economy that is a requirement for our society. Everything you wear, eat or use has come from real estate, it's good old mother earth!
So, investors and operators, you need to command a little more respect for what you walk on than you do as if you were dealing in a car, or a train loan of shoes or furniture or soy bean futures. Dealing in real estate carries social responsibilities, like it or not.
Since the 13th Century, as the "Allodial" system of land ownership was adopted, title to land is our most cherished right, next only to life and liberty. There is nothing more sacred in our economy than land owner's rights.
This is why a seller's position is favored over a buyer in law, the rights of the owner are paramount to those of a buyer. That is not to say a buyer doesn't have any rights but legal protections will first fall toward the owner. This should be clearly understood by investors and operators.
Another business principle is the one who has the most at risk is entitled to the greatest reward. Values of real estate are not arbitrary neither are the values of services provided.
If you make a contract and assign the contract, never adding value to the property, regardless of what your abilities might be, you are facilitating a sale transaction. The value for that is well established in real estate and is reflected by commissions paid to Realtors, functionally, you're doing the same thing. Unless you add value to the "DUST" in real estate (look that up) you are then limited to the usual and customary pricing of your services legally. Predatory dealing includes taking excess amounts of equity from a property owner.
When you become the owner of a property, you are then entitled to the fruits of the land, these pricing limitations fade away and your price is determined by the market.
This is too long already, sorry, I'll contribute to justified values later on, but those justifications have little to do with your personal involvement.
As to the above transactions, it appears the buyer made additional concessions, no rent, low rents, I assume cleaning up the place, these are things above and beyond simply facilitating a transaction and that carries value. I'm not sure it carries that much value but the whole transaction must be viewed as the big picture, and so long as the buyer and seller are fully informed, having full and comparable knowledge, each acting without duress, then we are fine. (But, that usually doesn't seem to be the case listening to how investors, especially new investors, have been dealing in wholesaling.)
Hope that sheds more light on my comments, opinions and attitudes and that you can see where I'm coming from with any critical remark. They are not meant personally, hate the sin not the sinner type thing. Good luck! :)
@Bill Gulley , I must thank you for your clarification, and you certainly do seem very squared away and knowledgeable. As I previously said, I certainly do respect your post, and I am glad that my follow up post provided you with more insight into the transaction and to the manner in which I conduct business. Good luck to you also, and thank you again. I do very much so appreciate the clarification as well as the insight that you provided.
First of all I had a business in E Providence RI and am a great fan of RI and MA D1 Hockey and Lacrosse.
@Bill Gulley knows what he is talking about re: regulations and ethics.
Wholesaling is in 2 distinct camps IMO on BiggerPockets.
Camp 1: It is the wild west. You can write up an offer and screw the seller, say what ever you want, tell the seller
"My Money Partners will buy this in 10 days if the price is right" and you don't even have a buyer's list yet.
Its OK to tie the property up for 3-4 months from May to August, prime selling homes season, with an option contract, record it, cloud the title, and fail to close, who cares if the seller wasted some time? Agents do that all the time, RIGHT?
Re: marketing properties you come off like you own the property and do not state you "just have a contract to sell" (assign). IMHO You can not sell something you do not own and can not lie about ownership.
Camp 2: Wholesaling (writing an option and selling the option) is brokering and you need to be licensed. CA, FL, and OH all say this. If you do this and are unlicensed, you get a "cease and desist" against your name from the State Authorities, which could prevent you from getting a future license in that state or any other state.
Wholesaling fees should be in line with commissions, like 3 to 5%, not 10 to 30% of appraised value.
That doesn't mean you can't buy it for 60 cents, get on title, and sell it for 90 cents. That is not brokering-wholesaling. That is legal flipping.
And look into Transactional Funding.
I hope that summarizes things.
Best wishes to you on BP
cc: @Wayne Brooks
It's Simple Math Really...
Disclosure to all parties+Cash on Distressed Property+End Use Buyer = Profit To Wholesaler.
Have a POWERFUL Sales Day!
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