Comps Low Due to Wholesale Deals

16 Replies

Since the beginning of the year, I have purchased several properties in a neighborhood from a wholesaler, and I personally know of a second investor who has also purchased several in the same neighborhood from wholesalers (between us, we have 8 in the neighborhood of about 50 properties). When the sale gets recorded, the "sale price" is what the wholesaler and the owner agreed upon, and doesn't include the wholesaler's assignor fee (the price I actually pay). The lower "sale price" is what is being reflected on zillow/MLS sites, thus we are bringing down our own comps.

I wouldn't care, except I would like to refi and pull the cash out of them and I'm afraid the properties will not appraise high enough because our comps are artificially low.  There have been two "on market" sales that are substantially higher than our properties, so that helps, but I don't think the appraiser will use only 2 out of 10 sales in the neighborhood in the past 6 months. 

All I can think of so far is to do a rebuttal on the appraisal and submit my HUD statements, but I don't feel comfortable asking the other investor for their HUDs. Has anyone experienced this, and if so, how do you get an accurate appraisal?

Thanks! :)

Thank you for your reply @Wayne Brooks   I agree with you that I don't think it is going to be taken into consideration.  My question though is, how can I make it be considered?  I'm trying to make the argument that the assignor fee is part of MY purchase price of that property.  The entire purchase price of a property should be considered for a comp, regardless of what the wholesaler got it for.  

For example: a wholesaler gets a property for $50k and assigns it to me off market for $60k. If this property were to be listed on the MLS, it would sell for $90k. Now this happens 8 times in the past 6 months. Two additional properties in the neighborhood are listed on the MLS and sell for $90k during the same 6 months.

My comps are now 8 properties at $50k and two at $90k. The comps on the wholesale deals are listed as $50k, but that is not an accurate representation of what I purchased for, so my comps are artificially dragged down.   

I'm just trying to talk it through and see if anyone has any insight. :)

The closing is with the end buyer and not with you as the wholesaler so I am not sure why the recorded amount is your buy price. Your buy price shouldn't even be recorded as it was only put under contract at that amount, but the end contract was for another amount. Taken as a line item, the wholesale fee wouldn't be an appraisable item, but the final sales price is still the final sales price on the transaction.

When we give a late credit on a transaction, the price stays the higher amount and a credit goes on the HUD.

@Jonathan Greene Thank you.  I agree and also think it should be recorded at the final sales price.  I don't know if this is a weird Alabama rule or what, but I've used two wholesalers and two escrow offices and it's happened with both combinations.  I'm going to try reaching out to the escrow office as well as an appraiser I've used out there and see if they have any insight. I just thought maybe there was a glaring flaw in my line of thinking or an obvious strategy that the BP folks could set me straight on.

@Stacey Bochenski in the example you gave, the sales price of the property was $50K, so they are recording it correctly. The $10K is an assignment fee, like an appraisal fee or any other fee you may pay at closing. Appraisals use comparable market sales. If eight properties sold for $50K, those are valid comparable sales. It doesn't matter if they sold through the MLS or through a wholesaler. If a high number of properties are selling through wholesalers in a neighborhood, it is usually a statement on the neighborhood or the salability of the properties through other methods, like the MLS. You probably just need to wait unit your sales are a year plus old and they will stop looking at them for comparison.

To be quite honest if you paid $60K for properties that will sell for $90K, my advice is hold for a year an sell. These low cost properties have high CAPEX ratios and serve subprime tenants, which means extra management time. If you can walk away for $20K in those type of neighborhoods, that is a win.

@Joe Splitrock this isn’t the answer I wanted, but it is exactly the information I was seeking. I appreciate your time to explain it. While these are just easy example numbers, mine aren’t too far off and your advice is spot on. Thanks so much! :)

@Stacey Bochenski Due to an assignment, then the full amount DUE at closing won't be what is recorded.  Just the Purchase price since the assignment is merely a line items.  

MOST LIKELY there is work that needs to be done to a property anyway and there will be sufficient comps for the appraiser to pull from.  Since everything is being held as rentals, then other than "as-is" or deals that sold before rehab, neither of those the Appraiser should be pulling anyway without knowing the condition of those properties.

I'm used to doing a Rate and Term refi just after the paint is drying on my rehabs before I keep as rentals and generally there is never a problem due to the other amount of rehabbed comps. BUT there is also nothing wrong with merely providing the appraiser with your comps ahead of time just DON'T make them feel like they have to use them or get snippy with them if they didn't use them. HOWEVER I have found that if I was worried about that, I have oftentimes shared my findings but didn't give the ARV, I merely suggested some like condition properties and usually I have found at least one of them on their appraisal later.

If you want though, you can always discuss with the wholesaler and edit the original purchase price if it were an assignment.  Then let there be a seller credit of X amount to the wholesaler that way the purchase price shows the higher amount.  But again, if there is rehab being done, then it doesn't really mean anything anymore.  Even for Taxes, your basis will be what you purchased it for including all of your costs.

@Jesse LeBlanc Thank you!  Again, not what I was hoping for, but definitely what I needed to hear.  Most of your assumptions are correct, and I've already done one refi in another neighborhood (similar situation though) with no issues.  I anticipate these being similar, but the thought occurred to me that I may have made a problem for myself.  I'll likely hold off on initiating the refi for a 6-8 months, and let appreciation (forced and natural) take it's course.  I truly appreciate your time and insight!  :)

For a GSE appraisal today in many states lenders and appraisers are throwing out: cash sales, not arms' length sales, deals without a conventional loan, and wholesale deals as they are considered market manipulation. Arbitrating an appraisal is going to do zero good. The appraiser and the Appraisal Management Corp may charge you for each and every comp ($150 each). You cannot add a wholesale fee into an USPAP appraisal. If one or two owners control 16% of a neighborhood I assume all your sales and your second investors would be considered void. Your name or second investor name shows on transfer deeds? Even if you used different LLC names it's not difficult for appraiser to know wholesaler advertised 8 of 50 houses in a tract. The appraiser knows their paper route and they look up the addresses on the internet as to how marketed. Historic information sticks clearer than the number on Zillow. Appraisal is for the lender and investor protection and guided solely by mine government and the appraiser's own conscience. In a rapid moving market appraisers are going to fall back and be very conservative.

@Stacey Bochenski

Here in Miami a good appraiser would not take these lower sales as active comparables when doing an appraisal. Typically homes bought at significant discount are labeled as “atypical” in the county meaning they didn’t go for as much as they should for whatever reason. Primarily because they were not exposed to the market.

@Stacey Bochenski comps are different than appraisals. If it's a cash deal an appraiser isn't going to use it when he/she is appraising properties. Comps are done with properties that have sold and often one goes and looks at the tax record to see the history of the sale. I personally don't like wholesale deals because the owner has no clue of what's going on and if they sold it out right they would make more money. When the tax record is updated it is updated with what the property was bought for and if that is not happening then the title company is missing something. Every thing on the Alta/HUD-1 should be reflected in the MLS/tax record. 

The fact of the matter is that whatever a property sells for is the value, that's the definition of residential real estate comps. I understand that sometimes there is obvious equity or value add, but what someone is willing to pay is exactly what the property is worth. 

The opposite of this spectrum is all of the posts here on BP with people complaining that their market is overinflated and that people are paying "way over value" for a property. Those "overpriced" sales become comps and set the value for that market- therefore, as far as a bank is concerned (and the appraiser/bank's opinon of value is really all that matters- they make the REI world turn) that's the actual value of the property. They aren't guessing about value add, it's worth what someone is willing to pay for it.

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