Buying your first wholesale property, how to not get burned?

Question

I have only purchased properties via MLS in the past. I am considering buying my first wholesale investment property purchase. What kind of information about the wholesaler or property do I need to check to ensure I do not get taken advantage of? Do wholesalers have any sort of certificate/license to ensure you are buying from a trustworthy person? What questions should I ask the wholesaler about their business? I know to do my own due diligence on the property. What are the differences when buying off MLS vs wholesalers? Thank you!

Charlie MacPherson · Answer

@Jill Smith Wholesalers are almost invariably unlicensed.  That means that they're free to overstate the current property value, understate the renovation cost and overstate the ARV - all of which are very common.

Real estate licensing laws are put in place to protect the public from unscrupulous operators.  You are completely unprotected when working with unlicensed people.  Unlicensed wholesaling is illegal in almost all states (and maybe all), no matter what the latest guru seminar claims.

They will have the property under contract and will want to assign the contract to you for a fee.  You really need professional representation.  That person needs to verify that the parties are who they claim to be.  That they have the right to sell the property.  That the contract is properly written and executed and include the contingencies that you need to allow you to do due diligence. That deposits go into a real escrow account and will be returned to you if due diligence is unsatisfactory to you.

I could go on and on, but the world of wholesalers is crawling with dishonest operators who steal equity from sellers and stick it in their pocket.

My most recent interaction with a wholesaler was to slam the brakes on a deal.  This jerk had convinced a naive young couple that their house was junk (it wasn't - it needed less than $4,500 in repairs) and that his offer was the best they'd ever get.

I ran comps and showed them the true value of their home - and I sold it for $121,000 more than that lying thief of a wholesaler almost convinced them to accept.

My advice is to either retain a good attorney or connect with a strong Realtor for representation.

Of course, if wholesaling is illegal in your state, the contract between the wholesaler and the seller was formed for an illegal purpose and is actually void at it's inception. https://www.upcounsel.com/ille...  (Verify that with your attorney - I'm not one).  In that case, you should be free to go straight to the seller with your offer and cut the wholesaler out of the deal altogether.

Steve Morris · Answer

"I am considering buying my first wholesale investment property purchase."

Umm, you're the wholesaler.  Do it right and you put $0 in escrow.  Deal goes sideways, so what?  Just make sure you have grandma sign a contract at well-below market so you can cover your margin and make it attractive to someone that doesn't want to pay a lot.

The seller is the one getting screwed.