High Risks with Wholesalers: What am I missing?

[Rick Albert]

Hello!

I'm analyzing properties and wholesalers are bringing me deals. The challenge I have is it appears to be so much risk tied to it, especially for an out of state investor. Here are some concerns I have:

1. There isn't a "due diligence phase." I can't lock up the property and go through the loan process, inspections, etc. Basically I lock it up and have to buy it.

2. How do I verify this is a legit transaction? These are people with no license, etc. with no fiduciary responsibility to anyone, so how would I know this is actually a legit transaction? Can I choose the closing company that I trust?

3. How do disclosures work? The Sellers typically have to disclose any material facts about the property, but you are flying blind is my understanding?

Obviously I have some bias being a Realtor in my market, but if I'm spending my cash I want to know it is somewhat protected.

Any assistance would be appreciated.

Thank you!

[Eric N.]

Quote from @Nadeem Alamgir:

Quote from @Henry Lazerow:

The idea is you get a crazy good deal so these risks are worth it. Reality is most wholesale deals are awful, fake rehab/ARV numbers hidden big ticket repairs and not even far enough below prices you can negotiate off MLS. Just work with a realtor who invests themselves and can find you a good deal.

Agreed, it's a volume game, and yes, some of these guys are scammy, but if you can filter them out, you'll find deals you won't see on the market. Even with their assignment fees added on, the value add deals make a lot more sense than most MLS deals.

Most of posters on this thread are real estate agents. They resent wholesalers because they believe wholesalers are stealing their bread and butter. Some brokers and RE agents just hate wholesalers, and this will never change.

Here is the truth: 

1. Real estate agent has a conflict of interest when representing investors. Agent is always interested in inflating the worth and price of property, because agent earns commission based on the sold price of the property. I have seen a lot of investors in deep dirt , because they paid retail price on as is property that is not worth half of what it costs to buy and fully rehab it.

2. Wholesalers are humans, like politicians, cops, attorneys, brokers, agents, doctors, astronauts and etc. Some are scumbags, others are not. Some are competent, others are clueless. Some are deliberately deceitful, others are transparent. 

3. Investor is not a mentally challenged , elderly or minor consumer, in need of a nanny or third party guardian/protector. Investor is an entrepreneur and as any businessman must accept the risks and responsibilities that come with running a business. Lazy and stupid investors will always fail, but smart ones will study their market, understand that they are responsible for their own actions and will only buy properties that make sense investing in.

4. As a flipper I am currently looking to buy a property in $1.1M - $1.3M ARV neighborhood. I have a partner who is GC. I have a team of three realtors in the area where I am looking to buy a house for rehab. I know how much it will cost to rehab the house, based on whatever variables and finishes I select. I know DOM for those houses listed in 1.1.M-1.3M range. I will only buy it if I can get it for ARV minus Cost of Rehab minus 10% resale cost minus my closing costs, minus my Hard Money Cost (interest/origination fees) minus holding cost and minus $250,000 I want to make in 6 to 9 months period if I buy that property. Whatever that number IS (after all deductions) is MAO I will pay for the property. If I don't get it for that number I will NOT buy it. I would rather NOT flip than loose money or work and sweat while everyone else makes money. I am the only person responsible for doing my due diligence.

5. As a wholesaler, I do my best to get the property for less than 70% of ARV minus rehab costs and my assignment fee. I know what underwriters and hard money lenders look for when they approve hard money and DSCR loans. But when I have property under contract I don't expect contract buyer to rely on my numbers or analysis. I usually say: here is the house and this is my asking price. At most I will disclose ARV, based on comps in the area. Rehab costs are for me personally to figure , so I can properly negotiate the selling price with the seller. But I don't think it's a good idea to share it with buyer. I may share it if I know they have plenty of experience, to show that I have a clue what their cost of rehab will be. But generally wholesalers should avoid posting rehab costs for a deal. I don't know who they will use for construction and where they will get their materials. Some investors run their own crews and have GC license. They have storages and use stored materials from previous projects and buy dirt cheap materials and appliances from auctions. Others hire general contractors who charge premium for running the project, they pay full price for materials. As you can imagine, cost of rehab can vary drastically from one to another investor. So, I will never be able to tell buyer what exactly it will cost them to fix the property. They are the ones who must figure it out. I will run mid point numbers just to figure what the property is worth as an investment opportunity before I put it under contract.

P.S. I liked your response that's why I replied to your post. You are honest. If I ever decided to work with a realtor I would pick someone like you.