4 Common Wholesaling Myths DEBUNKED

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4 Common Wholesaling Myths DEBUNKED

Stephen Chatto
Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

Real Estate Myths. I am glad my Mentor @Karl Krentzel is willing to tell me the truth so I can get deals DONE.  Her are a few myths he helped me DEBUNK

1) Myth #1 Realtors mess up deals and are a waste of time.

False - Karl has always encouraged me to work with Realtors. I am working with one now on a deal and she has been great. She found my ad on craigslist, called me up, listened to what I have to say and brought me a buyer. Now that She's involved she is keeping everything moving forward quickly and efficiently.

Extra Credit Question: Who do you think was using a higher ARV. The Buyer with the Realtor who gets to list the house after rehab or the average fix and flip investor?

2) Myth #2 - MAO = ARV *0.65 - Repairs . What a joke. I love this formula because it helps me be competitive in my market. My competition used that formula on this deal and his offer price was 50k less than mine. Plus to top it off. ARV and Repairs is completely made up. Your taking two numbers that are completely arbitrary and up to massive interpretation and then popping them in a formula to determine your offer price. COME ON. At the end of the day you need to know your market to learn where the prices should be.

3) Myth #3 - State contracts are stupid. Wow, I have learned the hard way that things run so much smother if on a state contract. As a wholesaler you are selling CONTRACT not houses. So it is fair to say that a better contract is worth more. We determined above that realtors can bring buyers. Strong buyers in fact. Do you think it is easier to sell that buyer with a Realtor a State Contract or a 2 Pager? Use a state contract and your buyer pool opens up tremendously.

4) Myth #4 - You need to know how much the repairs are, and the ARV so you can advertise your deal. What a joke. You think buyers agree with your repair cost estimates and ARV? Why waste your time. When advertising this deal I didn't include either. Here is the property. Here is What I know, Here is my Asking price. Don't think for your buyer.

I can think of multiple examples in my business when these 4 myths have been debunked. It feels good to know the truth

Hope some of you can benefit from this insight.

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Guy Gimenez
Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
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One man's myth is another man's facts. There are no absolutes in life (outside of death) or in investing..only generalities. I don't disagree with the OP on many assertions, but using one's experience to arrive at an absolute is, well, a bit of a stretch.

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  • Braden C.
    Real Estate Investor · FL · Member since 2011 · 586 posts · 360 votes
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    @Greg H. I would think the simplest way to go about it would be to have the buyer sign a no brokerage relationship disclosure. 

    For the record, I disagree with most of what the OP wrote. As someone else said, there are no absolutes in life so while his methods might have worked on his first deal, it's probably unlikely to work in the future. It would be like a wholesaler getting his first deal on a bandit sign and then calling direct mail a myth because a bandit signed worked one time. 

    The only reason I joined the conversation is because a couple people immediately started making some strong accusations at the OP with hardly any facts. Your first comment was calling the agent completely unethical for putting their needs above her client. It COULD have been unethical, but you weren't part of the deal, you don't know what was disclosed to the buyer and what wasn't. The buyer could have very well known the exact situation of the deal and been thrilled with the outcome. 

    The "jail time" comment was what got me. Come on, really? 

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  • Christopher Goldie
    Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
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    @Brandon C., the jail thing got me too. I know posing as an owner occupant during OO period can lead to some trouble, fines, maybe even jail. But HUD rarely comes off their list price much in that period, so really no deals to be had. If HUD did lockup every person that couldn't close their contract, at least I wouldn't get lonely. Hey, I might even be able to virtually wholesale HUD homes during computer time!

    1Reply
  • Jackie Lange
    Investor · Central America, Panama · Member since 2010 · 423 posts · 293 votes
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    It is almost impossible to use an agent to help you FIND wholesale deals to flip.  I've done 1000s of wholesale flips and only 2 came from real estate agent leads.  They just don't get the concept of wholesale flips.

    If the agent produced the buyer for the wholesale flip as described above, you are right, she should lose her license.  You are getting some bad advice!

    The formula for buying/selling wholesale houses has to do with private lender/hard money lender requirements. Most of them will not lend ore than 65% of the ARV minus repairs.

    Has your "coach" actually done any wholesale deals???  It does not sound like it!

    You ABSOLUTELYy need to know the estimate of what the repair costs are. If not, you can not make an intelligent offer on the property. Speaking of offers, of course, it is better not to make an offer because usually the seller would take less if you ask what they would take. You need to know the repair costs estimate and the ARV and what is the most a rehabber could borrow from a hard money lender... only with all three of these ingredients can you know what your offer needs to be so you still make a profit. Withtout all three ingredients, you will run in to the problem of offering too much for the house. Then you won't be able to wholesale it.

    You are getting some really BAD advice from this "coach!!!!!!  I hope you did not pay anything to be coached.  

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  • Christopher Goldie
    Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
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    @Jackie Lange, so what I've asked of the other "lose her license" folks is given this exact scenario, how should it have been handled? Should she just have told her client, "oh well SOL" or what? I have no problems with constructive criticism as long as it adds value. Simply saying bad advice does nothing.

    1Reply
  • Richard C.
    Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
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    Originally posted by @Christopher Goldie:

    @Brandon C., the jail thing got me too. I know posing as an owner occupant during OO period can lead to some trouble, fines, maybe even jail. But HUD rarely comes off their list price much in that period, so really no deals to be had. If HUD did lockup every person that couldn't close their contract, at least I wouldn't get lonely. Hey, I might even be able to virtually wholesale HUD homes during computer time!

     As you have now explained the transaction, I agree that there was no sham buyer and so no legal liability there.

    I do think the agent's issue is a little bit bigger than just a violation of the Realtor code of ethics, her conduct would also likely be viewed very disfavorably by her state RE commission.  Could and probably should get her a least a censure and very possibly a license suspension.

    I hope all of the disclosures are in writing. Really the easier and cleaner way to handle it would have been some additional money from the buyer to the agent at closing, which is normally OK (I don;t know how HUD feels about it.)

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  • Richard C.
    Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
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    As for the OP. this is wrong:

    You don't need to know the repairs and the ARV to advertise your deal. you need to know the repairs and the ARV in order to determine your offer price.

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  • Jackie Lange
    Investor · Central America, Panama · Member since 2010 · 423 posts · 293 votes
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    Christopher, 

    If HUD found out about this transaction you and the agent would be in big big trouble.

    RUN from your coach is this is the kind of thing he/she is teaching you to do.

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  • Jackie Lange
    Investor · Central America, Panama · Member since 2010 · 423 posts · 293 votes
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    If I remember right, several people went to jail a few years ago for doing what you just with that HUD house flip. The government sees it as defrauding them out of money that should have been theirs.

    Read yoru HUD disclosures and disclaimers that you signed at closing.

    The agent could lose her license, and at the very least be barred from every being involved in any HUD properties again.

    Never ever wholesale a property owned by the government.

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  • Christopher Goldie
    Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
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    There is no coach, nobody to run from. Still only hearing it's bad but no real advice on an alternative. Like I said, I don't believe any of the professionals I have aligned myself with would risk their license over this. The deals get closed, HUD gets there money, buyer's happy, not seeing any reason to quit. If I ever run into a similar situation, I believe I will suggest the buyer pays their agent outside of closing. I've decided to get my RE license as soon as I close this deal and another HUD one, so I'll learn first hand what's proper according to my states RE Commission. But hey I did learn some valuable tips. Thanks!

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  • Nick Stango
    Contractor · Temecula, CA · Member since 2015 · 190 posts · 36 votes
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    can a post be deleted? LOL

    0Reply
  • Raechelle Carroll
    Real Estate Investor · Alexandria, VA · Member since 2014 · 36 posts · 12 votes
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    Wow, this discussion has completely morphed from its original intent. I'm not even going to comment on all the controversy stirred up here.

    I do agree with the OP about the formula. Many investors will ask you to provide comps, pix, repair estimates, mothers's maiden name, original settlers of the town and on and on lol.

    You start feeling like you are providing a prospectus for an IPO of a fortune 500. After you provide these miscellaneous items they say "yea I'm not really investing in that area" or "that ARV is way too high." Why did you have me go through all this if you're going to have to do due diligence anyway? Seriously?

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  • Braden C.
    Real Estate Investor · FL · Member since 2011 · 586 posts · 360 votes
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    Originally posted by @Jackie Lange:

    If I remember right, several people went to jail a few years ago for doing what you just with that HUD house flip. The government sees it as defrauding them out of money that should have been theirs.

    Read yoru HUD disclosures and disclaimers that you signed at closing.

    The agent could lose her license, and at the very least be barred from every being involved in any HUD properties again.

    Never ever wholesale a property owned by the government.

    Unless something has changed with HUD disclosures and disclaimers over the past month, you're absolutely wrong. There is NOTHING that prevents you from reselling a HUD property, unless of course you bid during the OO period, but the OP made it clear he didn't. I've wholesaled dozens of HUD homes and there are numerous people on this site who exclusively wholesale HUD properties. You can't assign the property, you'll need to do a double closing, but again there is nothing illegal about that.

    Are you thinking there was a mortgage involved and they somehow committed mortgage fraud? Have you ever read the investor disclosures on a HUD property? Can you point out something that maybe I, and hundreds others, have missed?

    1Reply
  • Jeremy T.
    Investor · Pittsburgh, PA · Member since 2014 · 266 posts · 240 votes
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    oooooh boy!

    4Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
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    @Jackie Lange

    There is nothing wrong with what the OP or the agent did in the procuring of the property.  My only point was the agents relationship with her client

    You can resell a HUD home at anytime as there are no restrictions as long as you are purchasing during the investor period as the OP stated

    HUD does have a policy to which they do not want you marketing the property prior to closing on the purchase. Some of the Asset Managers enforce this more than others. Marketing was defined to me as advertising on CL and other sites, meaning publically marketing not calling on your contacts. The penalty for violating the policy would be the cancelling of the accepted bid and possibly termination of the buyer's agent NAID number. I have never seen either of these ever happen. All I have seen is scolding by phone call :)

    Nothing here is criminal and congrats to the OP for getting the deal done. I have purchased 200+ HUD homes over the years and brokered many more. Some I rehab and flip and some I just wholesale. I don't use a double close due to the fact that I am a Broker and don't want to give any appearance that the transaction is not on the up and up. A double close with the end buyers funds can be difficult to explain and execute.

    1Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
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    @Christopher Goldie

    @Braden C.

    Christopher- Like I said, I think you handled the deal fine. The agent should have structured the deal as a commission and not a JV deal to sell a property to her client. Another thought I had, maybe she did it to avoid a commission split with her Broker ? Either way what she did is not criminal, jest a violation of the Code of Ethics IMO. If she made all the disclosures, it probably doesn't even violate any rules of her states Real Estate Commission

    Braden- The agent should have structured as a commission.  Having a client and then terminating the relationship and JVing on a property that he had previously offered on just is not the right thing to do.  As Realtors, we are held to a higher standard

    Guy-  As a Broker,  what do you think about how the agent handled the transaction ?

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  • Braden C.
    Real Estate Investor · FL · Member since 2011 · 586 posts · 360 votes
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    @Greg H.

     You make excellent and valid points. Why I got involved in the discussion was because several people were assuming things without firsthand knowledge. I wouldn't want someone saying I was doing something illegal unless they were 100% certain. 

    I am also a broker, if one of my agents approached me with this same scenario I would just make sure everything was disclosed to the buyer. Because the OP would temporarily own the property, paying a commission of $5,000 on the flip wouldn't be a problem at all. If the buyer was happy, signed all disclosures, and completely understood the scenario, I would be perfectly comfortable with the transaction. I agree with Greg about calling it a JV, it should be a commission and the agent should be representing the buyers best interests.

    From the situation the OP has given, nothing done was illegal. Some people are assuming it was unethical by the Realtor but there just isn't nearly enough information here to make that claim. 

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  • Richard C.
    Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
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    Originally posted by @Braden C.:

    @Greg H.

     You make excellent and valid points. Why I got involved in the discussion was because several people were assuming things without firsthand knowledge. I wouldn't want someone saying I was doing something illegal unless they were 100% certain. 

    I am also a broker, if one of my agents approached me with this same scenario I would just make sure everything was disclosed to the buyer. Because the OP would temporarily own the property, paying a commission of $5,000 on the flip wouldn't be a problem at all. If the buyer was happy, signed all disclosures, and completely understood the scenario, I would be perfectly comfortable with the transaction. I agree with Greg about calling it a JV, it should be a commission and the agent should be representing the buyers best interests.

    From the situation the OP has given, nothing done was illegal. Some people are assuming it was unethical by the Realtor but there just isn't nearly enough information here to make that claim. 

     Remember, this is how the deal was originally described:

    Met an awesome agent just a week ago who brought her client that bid on the property that I now hold, he saves 10k on what he was willing to pay, I make 10k and she gets 5k at closing which was more than her commission would have been. Win all the way around!

    Clarifications came later. Based on the above, where does the money for that "win all the way around" come from? It has to come from somewhere. Either HUD gets less than they would have, the buyer pays more than they would have, or the broker doesn't get his split.

    Now, as further explained, I agree HUD is getting all it would have in any case, not dealing with a sham buyer. So that is transaction 1. HUD to the poster, closing happens, he owns it, all is fine.

    Transaction 2 is the poster to the end buyer.  How can it be that the buyer both got the best price he could have (not "less than he was willing to pay", the best price he could have), and the agent got $5000 more than she would have gotten in commission? Where did that $5000 come from? Because that was the agents responsibility, to get her client the best price she could.   The "extra" money for the agent either came from a price $5000 higher than the buyer could have gotten, or as Greg points out, from cutting out her brokerage.

     I hope the disclosures were in writing, explained and signed.

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  • Christopher Goldie
    Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
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    Know some good and helpful info is coming in. As some have pointed out there is one that did not win here and that is the broker. Possibly, I'm not sure if her broker was informed. I did not take that into consideration, however I don't feel it really was my place too, as much as I hate to be that way.

    Now just so its said, this deal would not have come together at all if not for her. Her client does not speak english well enough for us to communicate, nor do I believe he would have known the house he wanted was available at a better price.

    I will seek advice thenext time I encounter this situation and make sure the broker is the loop. I don't want anybody having a bad taste in their mouth regarding me.

    Thanks to everyone for their input.

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  • Tamika Moss
    Investor · District Height, MD · Member since 2014 · 7 posts · 1 vote
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    I love it, what great information. I think I am finding myth # 2 to ring very true for me. Although it is a great guideline, calculating repair cost as a wholesaler is very sticky, as you don't always know the investor's end game. I have seen several wholesale advertisements with estimated repair and ARV that were not very realistic at all. I am liking the idea of just selling the house, without pretense.

    Thank you all for your input.

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  • Christopher Goldie
    Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
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    Oh, and Stephen, sorry for hijacking your thread!

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  • Karl Krentzel
    Real Estate Broker · Tucson, AZ · Member since 2012 · 410 posts · 337 votes
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    Originally posted by @Greg H.:
    Originally posted by @Christopher Goldie:

    @Tuan Le We simply came to an agreement. I wanted $150k for the house, she told her client $155k, got him to sign a release of agent form and now she is a wholesaler JV'ing with me. So technically I am making 15k of which I pay her a JV share of 5k. Quick, simple and easy. I was willing to even split the 10k if I couldn't move quick enough.

    First off, I never said you did anything wrong or unethical. As a broker/investor, I have sold many HUD homes to previous bidders at a price lower than their bid. We used to be able to see which brokerage firm placed all the bids even those that were not accepted. I would often contact them to see if their client was still interested in the property. Great job on your part to get a deal done !

    However,  an agent who is a Realtor, agrees to abide by a certain code of conduct that you are not and that is to promote their clients needs over their own.  Here is a  part of the code of ethics we agree to abide by :

    Duties to Clients and Customers
    Article 1
    When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly. When serving a buyer, seller, landlord, tenant or other party in a non-agency capacity, REALTORS® remain obligated to treat all parties honestly. (Amended 1/01)....

      Clearly,  having a client who is interested in a particular property and going to do a joint venture(Your words) to sell it to their client is a clear violation of the code of ethics that we as Realtors must abide by

    WOW!!!! A big "Red Pill Investor Podcast Thank You!!!" To @Stephen Chatto for bringing all these POWERFUL Discussions up.  


    You are right about Article 1. @Greg H.  However, we do not know the status of the Agents as it related to the contract.  That makes this argument a bit "Non Sequitur".

    Specifically with reference to Article 4 of the NAR Code which specifically outlines how agents can work in their "own best interest" as a principal to the transaction with the WRITTEN Consent of the Customer or Client. (Which is sounds like had!)

    AWESOME Discussion about agents who wholesale!  Love it thus far! 

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  • Braden C.
    Real Estate Investor · FL · Member since 2011 · 586 posts · 360 votes
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    Ok, now that we know she cut her broker out I am perfectly fine with her being called unethical for that reason. I didn't want to assume anything until we knew for sure, but now we do. 

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  • William Johnson
    Real Estate Broker · Laval, Québec · Member since 2014 · 183 posts · 59 votes
    11y
    Originally posted by @Stephen Chatto:

    Real Estate Myths. I am glad my Mentor @Karl Krentzel is willing to tell me the truth so I can get deals DONE.  Her are a few myths he helped me DEBUNK

    1) Myth #1 Realtors mess up deals and are a waste of time.

    False - Karl has always encouraged me to work with Realtors. I am working with one now on a deal and she has been great. She found my ad on craigslist, called me up, listened to what I have to say and brought me a buyer. Now that She's involved she is keeping everything moving forward quickly and efficiently.

    Extra Credit Question: Who do you think was using a higher ARV. The Buyer with the Realtor who gets to list the house after rehab or the average fix and flip investor?

    2) Myth #2 - MAO = ARV *0.65 - Repairs . What a joke. I love this formula because it helps me be competitive in my market. My competition used that formula on this deal and his offer price was 50k less than mine. Plus to top it off. ARV and Repairs is completely made up. Your taking two numbers that are completely arbitrary and up to massive interpretation and then popping them in a formula to determine your offer price. COME ON. At the end of the day you need to know your market to learn where the prices should be.

    3) Myth #3 - State contracts are stupid. Wow, I have learned the hard way that things run so much smother if on a state contract. As a wholesaler you are selling CONTRACT not houses. So it is fair to say that a better contract is worth more. We determined above that realtors can bring buyers. Strong buyers in fact. Do you think it is easier to sell that buyer with a Realtor a State Contract or a 2 Pager? Use a state contract and your buyer pool opens up tremendously.

    4) Myth #4 - You need to know how much the repairs are, and the ARV so you can advertise your deal. What a joke. You think buyers agree with your repair cost estimates and ARV? Why waste your time. When advertising this deal I didn't include either. Here is the property. Here is What I know, Here is my Asking price. Don't think for your buyer.

    I can think of multiple examples in my business when these 4 myths have been debunked. It feels good to know the truth

    Hope some of you can benefit from this insight.

     Would you mind putting up some of your concrete examples with numbers and addresses?

    1Reply
  • Christopher Goldie
    Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
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    I don't know for sure she cut out her broker, but I'm leanind towards that. And like I said I feel that would ultimately be on her. Now I'll pose this question @Braden C., and others assuming the broker was cut out is there any recourse aganist me or would she take the full burden?

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  • Richard C.
    Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    If you didn't know and coordinate it, you are probably fine.  There is a tort of "Interference with Advantageous Business Relationships" but it requires intent.  And is a pretty long shot regardless.  So I expect you are fine legally.  Whether brokers will be happy to see you walk in the door is of course another question.

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