Wholesaling Caution Not The Great Deal You Thought

79 Replies

I wish there was a State or Federal license required to wholesale and pitch wholesale deals.  I see countless "deals" that are not deals, or even close to being a deal. Many of these wholesalers have no real estate experience and have never had any formal training in how appraisals are done in the appraisal world.  They follow whatever set of guidelines give them the value to make it a "deal", or just create a value to justify the deal. 

If you are a newbie be very very careful of deals that are sent to you by wholesalers. The two most common areas are "stretching" the ARV (coming up with an after repaired value that is not realistic with true comps). This is easy to do when workking with newbie investors who do not themselves know how to comp to current appraisal guidelines of FNMA and FHA. Things like using outdated comps, that do not reflect the current value or market conditions. Using comps that are obviously nicer or have nicer amenities than the subject property.

The second area of concern is "stretching" how cheaply rehab work can be done, or completely leaving out work that needs to be done.  I see this all the time, here on this site and in my own business.  Be very careful when someone tells you a house can be rehabbed for a specific price.  Get your own bids, from several contractors, and ask them to "bid" their work to be equal to similar comps in the area. Yes, a contractor may be able to do the work for $20,000, but it may be work and amenities that is significantly inferior to the high valued homes in the area.  

It is amazing how fast a $40,000 or $60,000 profit can disappear when these numbers are misrepresented, or when someone without the proper knowledge unknowningly gives inaccurate numbers.

I would love to hear from others about your experiences using wholesalers, and who may be really good and very accurate with wholesaling. I have yet to find anyone in the Sacramento area who is consistent at doing their homework, and putting deals out that are solid.  I see about 5% to 10% of deals from wholesalers are actually good deals.

Another thing that my wife and I always laugh at is when wholesalers want to use the shady title company that will just push anything through and close whatever or hide how much the wholesaler is making. The wholesaler never even takes title to the property..  so why the hell would they care if the property has clean title?  They don't. So when we buy from wholesalers we require them to use our title company, which they don't like, but hey...  who ever has the cash makes the rules.  

We have about a handful of wholesalers in our market that we get deals from on a repeat basis. So we do have good ones here that "get it".  But the wholesaling game has ALOT of people that are just getting into real estate AND are just starting there first entrepreneurial venture.  So lots of newbs.  Lots of part timers, and lots of desperate attempts at making a quick buck. 

Honestly, when I get a deal sent to me from any wholesaler (or broker for that matter) I don't even read the projections. I don't give 2 craps what someone else thinks the rehab is going to be, what the house is worth, and what it will rent for.  Those decisions /judgement calls fall on the investor.  All I want to see is the address and the price.  Then I go see for myself how much work it needs, look up the real tax info, etc..   Buying houses at auction, for example, forces you to be able to do research and make decisions on buying a property in a matter of a few minutes.  

Oh, and when its a new wholesaler that we haven't worked with before, I don't even take there word on them even having it under contract!  Because half the time they don't!  

End Rant.  

P.s. I love all wholesalers, please bring me good deals :) 

As a wholesaler and investor I agree with your statements.....honestly those remarks are something I wanted to post not that long ago. It is very frustrating that so many people just jump into this business without the proper experience, but let's face it most people don't realize that wholesaling is no different than running any other business. Both Sales and Marketing are 2 critical skills that not everyone has.....so just like with anything else people will be in and out of the game especially when they hear and read about all these "no cash needed" podcasts and articles regarding REI. It's inevitable these things will happen. But I assure you that if you do find someone reputable in your market they can be a great value add to your business. I've also found that some of the best wholesalers are also investors themselves, such as myself ;-)

But I do share in your frustrations.......

For years I have called all "I buy houses signs" I see and ask to be on their buyers list, I have been offered less than 5 deals that were not even close to being deals, Is wholesaling even being successfully done in the Sacramento area? I'm a cash buyer, buying several houses per year.

@Ryan Mullin I laughed when I read your last line about loving wholesalers please bring me a deal !  You are right about so many wholesalers being new.  It's the easiest part of RE investing to get into, and you don;t even need a RE license, or any capital. 

@David Bokman It's great to see a wholesaler who also gets the frustration. I had to write this post. I literally had a wholesaler the other day send me a "deal" with an ARV of $650,000. I mean on a paper it looked great, with a $200,000 profit. Then, I realized it was an area I knew very well, so I went into MLS (I am a licensed RE broker) and ran my own comps. I immediately found there was not a single comp over $450,000! In other words, this was a ZERO profit deal, assuming you got lucky and didn;t actually lose money! When I asked the wholesaler about their "proof" of value, they used comps miles away, that were much nicer, and sold over a year ago when demand was better. Unfortunately, some newbie investor is going to bite on the prospect of making $200K and will buy this and get burned.

@Dave Boswell There is some wholesaling being done in Sacramento, only because I have a few wholesalers in my real estate investing meetup group, and I know them well.  However, I see very few that are vanilla flips, most require heavy work, or adding to square footage etc...  I am now using a litte different approach, and that is looking for homes that I can get under-market, due to circumstance, and then re-selling it to an investor seeking a decent deal for buy and hold.  I am going to focus primarily on this strategy for 2016.

@David Oldenburg I get the occasional wholesale deal in my inbox or through BP (probably not nearly the volume you see). I don't think I've EVER seen a wholesale deal in the greater Sacramento area where I thought the wholesaler's ARV was justified...I'm a licensed RE agent and have MLS access.

Would love to meet a Sacramento wholesaler with legit deals, partly just to prove that they exist!

I have received wholesale deals from people where the house is actually listed on mls. All the person did was offer a slightly lower price and they are now offering it to the end investor. I think the Sacramento market is tough for new wholesaler to break into just because of the very low response rate when doing direct mail marketing. I have had a few calls from my We buy homes in Sacramento website and in every circumstance they received another offer from another investor. I could have offered higher but then it would not have left enough profit for the end buyer. I know a guy wholesaling in Sacramento but he lives down by San Diego. He mails to many different homeowners in order to find his deals.

Margins are pretty thin in Sacramento on properties without issues. I don't think it would be possible for a wholesaler to consistently source great deals on a monthly basis for one investor much less feed a bunch of us. You may run into an investor that sources their own deals and hits their capacity so they will lay something off or JV but I have not seen any full time wholesalers that appear to be finding deals.

@David Oldenburg Excuse if I go off on a tangent, but want to add some color to the conversation and add my own experience as a wholesaler.

I am from Sacramento ('89-'09) and just started learning about real estate investing Jan of 2010. It seemed everyone and their brother, mother, sister, and uncle were starting wholesaling. 

I learned through one of the gurus in the business (D.G.) and sadly, but not surprisingly, they are all the same. They entice these suckers to invest tens of thousands in their program, give you enough information to be dangerous, and let their students loose on society. Unfortunately, most do not have any clue about real estate, have no money, credit, and may barely have a job. I know some that were even in foreclosure. So it's no surprise that these desperate people are doing what they've been taught as a way to invest in real estate with no money and no credit. It's easy to fall prey for the weary.

I AGREE WHOLEHEARTEDLY that most wholesalers are newbs, some are sharks looking to make an easy buck, and the remainder are quickly sifted out of business before they even get started. That's if they even had a business. Most still live the pipe dream.

In 2015, I started my own real estate investment business (LLC), paid for DM campaigns and other startup business costs and systems, networked with buyers and other wholesalers, and generally looking for any partnership where I'm a vital partner that I could start generating income to build capital to become and investor myself. I do this while working a full-time career. My hope is that I can make enough income to start working for myself.

My reputation is all I have. To me, it's all about building relationships. That's my legacy. It's nice to be successful, make a great income, and continue to work in a business you have a passion for. I've only really started due to having a career and as a contractor (IT PM) moved from State to State since 2010. I decided to plant my feet in Jacksonville, FL, start a business and do something...anything...in real estate. I wanted to start doing fix and flips, but without experience and ten of thousands of $$ available, I couldn't get the funding. I tried for years with family and friends, but to no avail. 

I started looking around the current wholesale deals being presented and constantly SMH at the "offerings", if you could call them that. I thought, how hard can it be to actually find a deal? It's hard, but I am starting to like the challenge. I find a deal, or get one through a wholesale partner, negotiate with the seller at a price that works, then notify all buyers where it fits their criteria. My goal is simple. 70% ARV minus rehab = MAO. Of course, there are other costs (closing, holding, selling) and impacts (rents, comps, taxes) that could affect a sale. Not to mention location, location, location.

Then, there is knowing your market. This, above all else, a wholesaler SHOULD know. Absolutely! What is trending? What is going to attract buyers to buy YOUR deals? Do you have a vast list of buyers to sell full rehabs to turn key? 

I think it's easy to spot a newbie by talking to them on the phone. Even before you look at any offers, especially if they're new to you. Once you have some warm and fuzzies, look at their deal. DO YOUR OWN DUE DILIGENCE! This is key for any buyer or investor. Never take anything at face value. Always do your own homework. Even as a wholesaler, I cannot just take the word of a seller that the rehab is only cosmetic, or the title is clear, or there is no mortgage or liens. I have to do that work myself before I even attempt to pass it along. Not to mention if it's truly off-market if getting it from another wholesaler.

I hope this helped the understanding of where these wholesalers are coming from and what their motivation and mindset is. It's not pretty and it's no always smooth sailing, but there are those that take it very serious. Like someone mentioned earlier, having these people on your team are priceless. Here is to all you investors who still have faith to find the diamond in the rough.

Another opportunity to bash wholesalers.....LOL

It's almost a sport!

There are two types, the unaware and the scammer.

I see the unaware as victims, they took the bait from the gurus, they believe and simply want to get into real estate. They aren't prepared, the hurry'er they go the behind'er they get. 

These victims have two choices, learn real estate and straighten up their act or continue as the gurus and the scammers tell them. 

If the victim chooses to continue, then they join the scammers, a liar is a liar and a thief is a thief, pretty simple.

As for the scammers, instead of ignoring them, it's better to get them off the street. They hurt the reputation of honest dealers and are a menace to the public. Just turn their butts in to the RE Commission and let them teach them. People choose the life they want in this industry, if they insist on doing things wrong, trying to screw over others, then they can live their life getting screwed as well. Pretty simple. 

They have the opportunity to learn, it's their choice!  :) 

Are you really concerned about newbie rehabbers getting burned by wholesalers with bad numbers? Really? IMO that's the RE equivalent of trying to protect the general public from Nigerian email scams.

What's the real cause for your concern? Is it because the deals being offered look good and then due diligence shows that they aren't? Is it because you wasted time on the due diligence? 

I can never figure out what the frustration with bad wholesale deals that aren't deals is all about. We have SO many such threads here on BP. Every day the MLS is filled with listings that aren't deals for anyone. Every day there are agents giving assessments of values and repairs that are ridiculously inaccurate. Every day there are FSBO ads on craigslist that will never sell. Yet, with those we just roll our eyes and ignore them. The only thing the wholesaler has of value is a supposed contractual right to buy. You either want to buy what they have or you don't. Nobody who knows what they are doing uses the seller's value or repair or rent assessments to inform their due diligence.

@John Hamilton Hi, thanks for your input.  Yes, there are a few wholesalers who are legit, but the vast majority suffer any cedibility for the reasons you mentioned.  You are right... it is VERY hard to find really good deals, where there is a serious 20%+ return in the current market, by just fixing up and reselling.  

Originally posted by @Bill Gulley :

Another opportunity to bash wholesalers.....LOL

It's almost a sport!

There are two types, the unaware and the scammer.

I see the unaware as victims, they took the bait from the gurus, they believe and simply want to get into real estate. They aren't prepared, the hurry'er they go the behind'er they get. 

These victims have two choices, learn real estate and straighten up their act or continue as the gurus and the scammers tell them. 

If the victim chooses to continue, then they join the scammers, a liar is a liar and a thief is a thief, pretty simple.

As for the scammers, instead of ignoring them, it's better to get them off the street. They hurt the reputation of honest dealers and are a menace to the public. Just turn their butts in to the RE Commission and let them teach them. People choose the life they want in this industry, if they insist on doing things wrong, trying to screw over others, then they can live their life getting screwed as well. Pretty simple. 

They have the opportunity to learn, it's their choice!  :) 

 I disagree with your assessment Bill. There is a 3rd party you forgot to mention, "The actual wholesalers that do perform ethically and do their best to bring an actual deal to the investors". Not everyone is a scammer or unaware. It sounds like you have a vendetta against ALL wholesalers, no matter who they are. Did you get burned?

I did vote for your post because I liked the "It's almost a sport" comment. After reading your post, I wish I could not only take my vote back, but devote beyond that.

I think you may need to get some counseling...seriously. I think wholesalers, bad or good, are here for the duration. Sure, the real bad ones need to be stopped. Would you like to line them up against the wall? Maybe you'd like to add them all to the firing line?

@Bill Gulley  I think you bring up a good point, that many of the wholesalers are victims themselves.  I run a decent sized real estate investing meetup group, now over 400 members, and I see the wholesale victims all the time.   They are so motivated to find a good deal for a flipper, so they can make some money.  I applaud those people for their hard work,

Unfortunately, when they realize it is not easy to find great deals, they get desperate, and begin to "manipulate" numbers on deals to make them appear to be a good deal.  I hope that every newbie here reads posts like this and others before they invest their dollars into a deal where they make nothing, or lose money.  I hope they do a little more homework on the deal and get more information before they invest.  

I see so many investors fall for deals that are not deals.  There are those people who believe that it should be "investor beware" and you deserve what you get, but I am not that way.  I have found that a lot of investors are older people who have some money and they are just looking for a little better return, and they are too trusting of others.  Some of these people are in their 80's and using retirement dollars, like a deal I saw not too long ago.  Good luck with your investing!

Just to add to my original comments above:

Just because someone is trying to wholesale a house or property doesn't make them a wholesaler......just like with anything else in life there are amateurs and professionals. Just because someone plays football on the weekends for fun doesn't make them a pro football player. We need to realize who real wholesalers are and who are the new people starting out....

So, once again. When dealing with these "newbies" let's NOT consider them wholesalers but instead "newbies".....because that's what they are.  Some will learn and get better while the vast majority will fail and move on just like with everything else in life. 

And I do agree that regardless of who is presenting you a deal....it is your responsibility to do the numbers....you can't leave that up to anyone, regardless of who you are working with..newbie or not.

Originally posted by @David Oldenburg :

@K. Marie P. I welcome your opinion, but your words are like mine, just an opinion :-) 

I am not confused that my words are anything but opinions.  My question remains:  what's your real frustration with bad wholesale offerings? Why do you not just ignore them? If you wanted to protect newbies, the bulk of bad deals don't come from wholesalers, but rather agents, the mls, and trustee's sales. Due diligence will always be where it's at, regardless of lead or deal source. 

Originally posted by @Account Closed :

Are you really concerned about newbie rehabbers getting burned by wholesalers with bad numbers? Really? IMO that's the RE equivalent of trying to protect the general public from Nigerian email scams.

What's the real cause for your concern? Is it because the deals being offered look good and then due diligence shows that they aren't? Is it because you wasted time on the due diligence? 

I can never figure out what the frustration with bad wholesale deals that aren't deals is all about. We have SO many such threads here on BP. Every day the MLS is filled with listings that aren't deals for anyone. Every day there are agents giving assessments of values and repairs that are ridiculously inaccurate. Every day there are FSBO ads on craigslist that will never sell. Yet, with those we just roll our eyes and ignore them. The only thing the wholesaler has of value is a supposed contractual right to buy. You either want to buy what they have or you don't. Nobody who knows what they are doing uses the seller's value or repair or rent assessments to inform their due diligence.

 Amen. 

@Bill Gulley It does seem to be a sport around here. 

Seriously if someone can't run their own number, have their contractor give them a quote, and decide if its a deal or not... They have no business being in this industry.

Originally posted by @John Hamilton :
Originally posted by @Bill Gulley:

Another opportunity to bash wholesalers.....LOL

It's almost a sport!

There are two types, the unaware and the scammer.

I see the unaware as victims, they took the bait from the gurus, they believe and simply want to get into real estate. They aren't prepared, the hurry'er they go the behind'er they get. 

These victims have two choices, learn real estate and straighten up their act or continue as the gurus and the scammers tell them. 

If the victim chooses to continue, then they join the scammers, a liar is a liar and a thief is a thief, pretty simple.

As for the scammers, instead of ignoring them, it's better to get them off the street. They hurt the reputation of honest dealers and are a menace to the public. Just turn their butts in to the RE Commission and let them teach them. People choose the life they want in this industry, if they insist on doing things wrong, trying to screw over others, then they can live their life getting screwed as well. Pretty simple. 

They have the opportunity to learn, it's their choice!  :) 

 I disagree with your assessment Bill. There is a 3rd party you forgot to mention, "The actual wholesalers that do perform ethically and do their best to bring an actual deal to the investors". Not everyone is a scammer or unaware. It sounds like you have a vendetta against ALL wholesalers, no matter who they are. Did you get burned?

I did vote for your post because I liked the "It's almost a sport" comment. After reading your post, I wish I could not only take my vote back, but devote beyond that.

I think you may need to get some counseling...seriously. I think wholesalers, bad or good, are here for the duration. Sure, the real bad ones need to be stopped. Would you like to line them up against the wall? Maybe you'd like to add them all to the firing line?

 LOL, not that drastic! Usually what they get is a slap on the hand, cease and desist order, might be barred fro obtaining a license for awhile, might get a small fine. I'd say they do make sure the punishment fits the crime, if they find other bad deeds or that the bad ones have a long list of offenses I'd bet they get it a bit harder.

As to the good ones, do you mean more skilled, the ones who can value and estimate deals, that don't leave sellers hanging, those kind of good ones? Well, they are much better and I do understand the value they bring to other dealers/investors.

Just as I understand the value of rum runners during prohibition to owners of those speak easy's, better said, I understand the value of an illegal distributor to a retailer, where the retailer is compliant with the law.

In other words, in all states, facilitating real estate sales without a license is an illegal activity, or can be, regardless of how well they do it. All states have licensing laws. So, you're saying you can be a good operator while breaking the law.......I don't go there.

Now, if a licensee is putting distressed property/seller deals together with investors, so long as they do so legally and ethically, not a problem, but I call them agents, not wholesalers. 

However, I did miss another group, the bulk wholesaler who really doesn't deal with maw and paw owners, buying through hedge funds or taking bulk REO and peeling them off to investors........most likely they have someone in that office that has a license too.

It's pretty black and white, either you follow the rules and laws or you don't. Assigning A contract is fine, assigning as a business model is probably in violation of law, and doing so without the intent to buy is still scamming a seller, regardless of how good they are. 

Sorry about your misspent vote, I can't give it back to you. How you can get it back in a way is the next time you see one of my informative posts, don't vote for it! If you'd like to take back another one, don't vote for two of my posts, then you can feel like it's even again. :) 

Ryan, I agree, it is up to the buyer to perform their own due diligence, my concerns are not with the buyers as much, assuming they know what they are doing, it is with the sellers these newbies get a hold of. If you think they only stick it to buyers I have ocean beach front property in Oklahoma you need to buy. :)

@David Oldenburg ,

Educating yourself to avoid bad wholesale deals is a great idea.

But your wish for Federal or state licensing of wholesalers is a horrible idea. I realize you're from the Land of Regulation, but y'all's economy is in the crapper for that very reason. Every new regulation a government entity passes reduces overall economic opportunity for people.

If an investor association wants to offer a "Wholesaler Certification" so a potential buyer can check up on someone they're thinking of doing business with - akin to a BBB rating, a Microsoft certiication, or any other industry credential - that's great. We don't need the government involved deciding who's qualified to assess an ARV or not.

Originally posted by @Bill Gulley :
Sorry about your misspent vote, I can't give it back to you. How you can get it back in a way is the next time you see one of my informative posts, don't vote for it! If you'd like to take back another one, don't vote for two of my posts, then you can feel like it's even again. :) 

 LOL. That actually made me laugh out loud. 

I've said this before, in that I don't really think much of the idea of wholesaling. That said, and despite my socialist bent (Go Bernie!), every "investor" who bites on a bad deal is one less competitor that I have to compete with when a good deal is on the market, and for me that can't be a bad thing. I feel as bad for new investors as I feel for people buying cars $5 grand over the MSRP off of new car lots. Meaning I don't care at all how someone else spends their money as long as it doesn't generally harm me or the greater good. Some of the people who get burned will learn from it - it may be expensive, but hey, education usually is - and get better, and the others will just be Darwinized and thinned from the herd. It works out either way.