What are the risks?

Question

So I've been doing some reading here on BiggerPockets and I just wanna say I'm really impressed with how helpful everyone is.

My questions are:

What are the risks of wholesaling?

What could go wrong?

What is considered failure?

Tyrus Shivers · Answer

All agents are not angels, just like not all wholesalers are unethical. One thing that irritates the most is a person who has a license and knows little more than nothing and then does not follow any of the ethics that they are supposed too. This goes for agents, lawyers, doctors, etc.

I found that honesty goes a long way and wholesalers need to be honest in their business. Until laws change to where you cannot assign a contract, then its totally legal. So the ethics comes down to the person and not the legality.

I would recommend wholesalers get their license. However if they choose not to and follow the law, so be it.

Agents need to do their job and stop hiding behind I have a license and wholesalers are taking my business. If their business is low, market more. I bet more people trust an agent more than someone just walking off the street. So they have the upper hand anyway.

Dev Horn · Answer

OMG - Phoenix!  You are in the belly of the beast, my friend! (not only the most competitive, but home to more REI gurus than any city could possibly deserve).  LOL =)

Buddy LaRue · Answer

David, wholesaling is a legitimate business, with a lot of swindlers in it.   If you do it right, and build a good reputation among the buy/hold and flip investors you'll do fine.  If you try to fudge your numbers, over estimating the after repair value and underestimating repairs, you'll build a bad reputation and won't last in the business.

Jon Holdman · Answer

I think the hardest aspect of real estate is estimating value.  You really have to understand an area in depth to be able to put a value number on a property.  That means looking at a lot of properties and following a market for some time.  Many years ago we were looking at houses in Sugarland, TX.   As we were driving around the agent would say "that's a nice house, but has deferred maintenance" and similar comments.  She had clearly been in every house in that area and knew them and that area intimately.  You need to reach something like that level of familiarity.

Second is estimating rehab budgets.  I'm truly awful at this.  Its difficult because the same job can get dramatically different bids from different contractors.  But as a wholesaler you have to have some number to decide if you have a deal.

Actually finding deals is also very difficult.  You will need to invest time, effort, and no small amount of money in marketing to find deals.  Gurus make this sound like you create a web site, stick up a few bandit signs or make offers on listed properties and you'll easily find deals.  I don't think so.

Once you have a property under contract, you have the risk of not finding a buyer and then losing your earnest money.

Licensed agents and real estate boards view wholesaling as "unlicensed brokering".  I think they're actually correct in that view.  The structures wholesaler use of getting houses under contract or writing options and selling those try to avoid the legalities of needing a license.  But there's always a chance you get hassled or worse by a state board.

Jon Holdman · Answer

I think the biggest risk is you put in a lot of time and money and never manage to do a deal.  See The Truth About Wholesaling.

Jon Holdman · Answer

@Scott Hearne wholesalers find buyers, find sellers, put them together and collect some money.  That's brokering.  All the structures of contract assignments, double closings, selling LLCs, options, etc. are put in place to avoid the legal requirement to have a license to get a fee for connecting buyers and sellers.  But the wholesaler has no intention of every owning the property when the deal is all said and done.

Andrew Syrios · Answer

Jon Holdman is definitely right, I've seen a lot of new wholesalers waste a lot of time and not really get anywhere.

Tyrus Shivers · Answer

My plan definitely is to be licensed. Yes, it is the real estate commission that has blurred the yes/no answer. Call several times and different people give different answers. There is a thread online with others discussing the same thing.  I will be licensed in all aspects I participate in. Already on the ball with licensing in other states.

I was just asking because when I told some PMs in Maryland I was seeking a broker's license to do PM, a few scoffed at the idea. Then as I researched I found that the law is unclear and those who are supposed to be able to answer are unclear as well.

The law is crystal clear in Alabama. Must be a broker.

Bill Gulley · Answer

We are getting off topic, but, 1. I'm not familiar with Maryland, 2. Can't imagine the real estate commission not knowing that one.

Pretty standard, a license is not required if you manage your own properties or you are an employee managing a property owned by your employer, this aspect is also often a site manager living in a complex managed.

A broker's license is required when you manage properties for others and offer managerial services to the public. You might be considered an employee with one principal owner managing any number of properties, you won't be seen as an employee serving two or more masters, if you manage two homes each owned by different owners, you'll be providing management services.

Not even a contest between a licensed broker soliciting management and an unlicensed person. If you're planning on operating in other states I suggest you get the license and one in each state, states have participating agreements you may not need to be tested in other states. :)

BTW, that loophole thinking, I can manage a property for you with a power of attorney, that will get past the license requirement for one party being served, it won't fly if I'm conducting business as a property manager. Much the same issue. :)

What are the risks?

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