Too Many REO wholesalers?

Question

After flipping houses for over 25 years I'm looking for a new way to make money in real estate. Unfortunitely the "renovating and flipping" business model has broken down. 3-4 years ago everyone started flipping then came the TV shows and then RE bubble burst!

Recently made several offers on potential rental properties - only to be beaten by 6 to 10 other offers.

If so many investors start wholesaling REO's (herd mentality) will they bid up REO prices too high -  are there enough cash buyers for all these new wholesalers?  What happens when the number of REOs start declining in the next 12-18 months?

Would be interested in vetern wholesaler opinions!

Ryan Webber · Answer

Why do you assume that it is wholesalers bidding on the properties against you?  Are you sure they weren't rehabbers or other landlords like yourself?

I think some of your reasoning might be flawed in reference to wholesalers.  Wholesalers can't really affect the supply and demand balance.  If they bid up a property higher than the "investor" market value then they will end up stuck with it or backing out on it.  They can only do that a couple times at the most before they are either out of business or need to find another profession because they aren't selling any deals.

Normally a wholesaler will only get an REO if they were the only one bidding on it or if their offer had more value to it than any other (i.e. it was the ONLY one with no contingencies).  Think about it, a wholesaler has to buy the house cheaper than most other investors would buy it for or they can't mark it up and sell it to those same investors.  My experience is that 99% of the time if I'm bidding against another investor, my offer is probably lower and I'm probably not getting the deal.

The key is being consistent and persistent with making offers.  Most investors are not consistent and persistent.  There might be 10 offers on that REO today but only 5 offers on the one that comes out next Friday and then only 2 offers on the one that came out the following Monday, and then what do you know, the next day on Tuesday another came out and not a single soul put in an offer except me.  Being consistent and persistent will bring you success.

I also think you might be jumping to conclusions about "all these new wholesalers".  Wholesaling isn't new, and wholesaling REO's is far from common.  If the flipping model is dead in your market, then a large number of wholesalers could not sustain themselves unless your market has a tremendous amount of investors looking for rental property right now.  This is possible, but extremely unlikely since money has tightened up at all levels and for all investors.  I just don't see a market having that large of a base of rental investors right now.

What I think is more likely is that if your market is getting 6-10 offers on an REO then I would say there is a good chance that the flipping houses model is NOT broken in your market.  I would spend some more time analyzing your market's indiosyncrasies.  I don't know what exactly brought you to the conclusion that your market is dead for flips, but you might want to look at it again.

Now of course, your market might be dead for flips and not have a large rental investor's pool but still have a fluke influx of wholesalers.  It would be a temporary imbalance of supply and demand and if that's the case I would guess in a month or two your competition on REO's would dramatically decrease.

Stephani Davis · Answer

Hi Tim,

There is a ton of competition where I'm at, too, but there is still plenty to go around, especially if you are consistently making offers.

I go after the properties that have been sitting awhile with no price reductions, and have been getting some really good deals this way.  Meanwhile,  everyone else fights over the new listings that come out at great prices (these usually get 10-15 offers within a few hours).

I do a lot of marketing for buyers, and I am finding new cash buyers all the time.

I say take advantage of the low hanging fruit while it's here!

Steph