Good Wholesalers & Bad Wholesalers: Whats the difference?
Good Wholesalers & Bad Wholesalers: Whats the difference?
A wholesale transaction is buying something or buying the rights to something and turning around and selling it to another party, right? Synonymous to broker or middleman, this concept is prevalent throughout many facets of business. Stocks and bonds, medical equipment, food and grocery, pretty much any retail item, cars, clothes, real estate... they all have their middlemen.
Investing in real estate, especially wholesaling, has become wildly popular within the last 5 years. The concept has been around longer than I've been alive, but due to the advancement in technology mixed with a little HGTV, mixed with a some 'Buy real estate with no money' seminars, everyone and their mother-in law now wants to be in real estate. I think its great that our community is becoming more educated and involved in real estate. I would even say that ownership in real estate as an investment has become a norm- a culture shift of sorts.
As with any industry that is growing, you're going to have the good guys and you're going to have the shysters. I'm writing this to define the difference between the good and bad and hopefully further push out the shysters that give wholesaling a bad name. Let's break it down into a few key characteristics that I think are important to evaluate in a wholesaler. Product, Person, Structure, Knowledge & Professionalism.
Product: There are good deals and bad deals. You can have no experience, but have good deals and be just fine. There are ways to deal with someone who has no experience if the numbers are good i.e (come to me). However, there is pretty much nothing you can do for someone who does not have good deals. When you meet a wholesaler you're interested in working with, have them send you the last few deals they did. This should be a very accurate indicator of whats to come. If they make an excuse as to why they can't send that info(happens all the time), its probably a waste of your time. Also another red flag is if they currently have no inventory at the time of your conversation. It shouldn't completely rule them out, but be cautious.
Person: The deals can be great, but if the wholesaler lacks the basic characteristics needed to ethically and competently conduct business, its probably a waste of your time. Ethics is easy- who wants a dishonest wholesaler? Dishonesty in this industry can come in many forms and situations. In any sales job, it's easy to get caught up with the idea of selling the product rather than the well-being of the person purchasing the product- especially in real estate. In wholesaling, you're typically dealing with non refundable earnest money and no option period contracts. There is plenty of room for unethical behavior within that realm. Transparency is probably the best weapon a wholesaler can utilize to combat the possibility of an investor suspecting unethical or incompetent behavior. Wholesalers MUST be transparent about their processes and contracts. Also look for verbal accuracy when talking to a wholesaler. Verbal accuracy is the idea that every statement one makes, that person is 100% sure that it is accurate and true. This goes hand in hand with transparency. If you are not being verbally accurate, you're not being transparent.
Structure: Arguably the most important and controversial aspect of wholesaling. How does the wholesaler structure their business, contracts, and closings? I don't believe there is only 1 way to do these things. I do however believe that there are standards that need to be upheld. This goes back to competence and transparency. The wholesaler should be willing and able to take you through their purchase contract and answer any questions you have. Not only should they be willing, but the wholesaler should INSIST on going over the purchase contract with you to make sure that you are fully aware of what is going on. I don't think there is any exception to this. Within the contract, all terms should be defined and disclosed. You need to know what type of closing you're doing. Is it a double close or assignment? Who pays closing costs? How much is the earnest money? Is it refundable? What happens if you terminate a contract? How long until we close? Will title be clear? What sort of deed are you receiving? All of these things need to be answered. Disclosure is key. You also need to ask about the title company. The title company plays a huge role in the structure of the deal and how smooth the deal goes. Your wholesaler should have a choice, reputable title company that they can send contracts to and close deals with. Find out who their title co is and if they don't use/have one, find out why.
Knowledge & Experience: I left this for last but it is certainly not the least important. How does an investor quantify the knowledge and experience of a wholesaler? Well first, let me just say that someone can be a good wholesaler and have little to no experience or advanced knowledge of real estate, as long as they have the 3 things above. I just think it helps to ALSO have knowledge and experience, especially when working with new investors who may need guidance. What you will run into though, is wholesalers and people in general, who lie about or fabricate their real estate experience. This is common and can sometimes be very difficult to detect, even for seasoned pro's. Of course you can do all the classic due diligence on that person- Google, Facebook, Linkedin, HCAD, County clerk. I think the most effective tool is YOU. Go and meet the wholesaler or R/E pro in person and see if they pass your smell test. Ultimately YOU are the one that needs to be comfortable because you are the one writing the check.
I hope this was insightful for anyone that made it this far in the blog post. Leave me some feedback. Let me know if I missed anything. Thank you for reading!
Houston, TX