Turning Wholesalers into the Good Guys
Rental Property Investor · Newport News, VA · Member since 2018 · 11 posts · 14 votes
I am in the process of looking for potential/motivated sellers in order to do some wholesale deals (enough to get me the money to do my own rehab/flip). As I've been researching, I see a lot that Wholesalers turn out to be the "bad guys." Unfortunately, I am an accountant/auditor, so I am automatically looked as a bad guy with my clients (lol) and do not what to be known as the bag guy in my real estate world. So I am starting this discussion for investors to vent or simply let me know the things that wholesalers do that annoys them. I know the main two things are estimating rehab costs and ARV (I am currently reading and doing a lot of research into this to accurately calculate these values, and my accounting skills help a little). My intent is to get all the bad things wholesalers do to ensure that I make it my mission to be the complete opposite and start an honest business with high integrity. Vent away!
@Latia Rowland @Mike Cumbie is totally ignoring the fact that there are several categories of sellers who can't or won't sell through a realtor. He's living in a fantasy if he thinks every seller can list every house in every possible scenario and come out better than selling direct. I know this because I exclusively buy direct from sellers who fall into the following categories:
1. Sellers who have been burned by agents before.
2. Sellers who have no equity with which to pay a commission.
3. Sellers who don't have the time, money, or desire to get their property "listing ready".
4. Sellers who don't want the fact that they need to sell to be "shouted from the mountain tops". They want a private and discreet transaction.
5. Sellers who don't want a parade of tire-kickers marching through their house.
6. Sellers who tried listing and their agent failed to produce an offer.
You can do real estate however you want. But being a realtor is totally different than being an investor. You work with a different group of sellers with different needs. "Wholesaling" is not about scamming sellers into taking less than they can get listing with a realtor. True wholesaling is an entirely separate market from the retail MLS.
Caleb - thank you for your insight! I will add these two items to my “not to do list” and lying to the seller is something I definitely don’t want to get myself into especially as a newbie.
Hi @Latia Rowland,
Welcome to the site!
Wholesalers in general are fine. However consider 2 scenarios.
1) You market and find a distressed owner. You convince the owner to sell at a low price where someone can make a profit. You get them to sign and you very quietly market to a small group of people as not to get regulators up in arms. Being careful not to market the property but just your paper that says you can buy it. You make a few bucks on the deal and go to the next one. If it doesn't sell, they thought they had a contract to sell, sorry!
2) You market and find a distressed owner. You convince the owner to sell at a low price where someone can make a profit. You get them to sign (a listing agreement) and you explode in marketing letting everyone in the world know this property is for sale, You take out newspaper ads, TV commercials, put it on the internet and shout it from the highest mountain. You get every possible person with some money to make an offer and the owner gets highest and best value. You make a few bucks on the deal and go to the next one. If it doesn't sell you never offered to buy it in the first place, just to help them sell.
If it does not sell in scenario 2, there is no way it is selling in scenario 1. The difference, one is licensed for a couple hundred bucks and the other is not.
Also consider scenario 3) Same as above, but the seller does not want to list, but wants to sell. Go find a buyer and represent them, you will know enough of them by then. Nobody else knows, you have a buyer and a seller that doesn't want the world to know...... Kind of makes for a lack of competition for your buyer.
Good Luck!
In every other industry a wholesaler buys something in high volumes and sells it retail in smaller volumes. It is typically a cash intensive, low margin business. In the RE world the equivalent would be if you went to banks and auctions and bought a lot of foreclosed properties and then resold them quickly at small profits. That would be wholesaling. It is also value added. What passes for "wholesaling" here on BP is mostly finding desperate sellers, getting them to give up a lot of their equity and passing them on to an investor with cash to close. Its basically dirty and unethical because you represent yourself as a buyer even if you have no cash to buy. And you have to find someone desperate or uneducated enough to not know they can do better by simply listing their property with a licensed agent.
If you want to run an ethical business, this is not the business for you.
Thank you! I am extremely excited about joining pockets. I have been listening to the podcasts, reading the blogs, attending the webinars, and of course reading so many books.
Based on what you're saying in scenario 1 and what @Account Closed is saying, it seems that wholesalers mislead sellers, at least that's what I got from it. I guess for an ease of mind and integrity, it is best to get licensed and do it as a broker or real estate egent. I mean I know it is a way to do it right, but it seems easier to go about it the "legal" way. It seems like a thin line between ethical and unethical.
I think both of you made very great points and I appreciate it. Reputation is everything to me and I will never want to make money off of someone's lack of knowledge or desperateness. So I will reconsider! I will network, look for a mentor, and then hopefully partner with someone to get started or use a FHA since I will be a first time home buyer.
@Account Closed what’s the difference between you talking the seller into a lower price versus the wholesaler talking the seller into a lower price?
If the wholesaler is actually knowledgeable about rehabbing and is honest. I’m assuming this is true although it’s often not. There are some wholesalers who could flip if they wanted to but choose not to.
P.S. I’m not a wholesaler. I’m a knowledgeable bird dog. I source the leads and sell them but leave the method of nurturing and closing the deal to whoever wants it.
@Latia Rowland @Mike Cumbie is totally ignoring the fact that there are several categories of sellers who can't or won't sell through a realtor. He's living in a fantasy if he thinks every seller can list every house in every possible scenario and come out better than selling direct. I know this because I exclusively buy direct from sellers who fall into the following categories:
1. Sellers who have been burned by agents before.
2. Sellers who have no equity with which to pay a commission.
3. Sellers who don't have the time, money, or desire to get their property "listing ready".
4. Sellers who don't want the fact that they need to sell to be "shouted from the mountain tops". They want a private and discreet transaction.
5. Sellers who don't want a parade of tire-kickers marching through their house.
6. Sellers who tried listing and their agent failed to produce an offer.
You can do real estate however you want. But being a realtor is totally different than being an investor. You work with a different group of sellers with different needs. "Wholesaling" is not about scamming sellers into taking less than they can get listing with a realtor. True wholesaling is an entirely separate market from the retail MLS.
@Alexis S. that’s what I wanted it to be. All the blogs I read were bashing them as well. So I was interested in what is it that they do so newbies can avoid it.
@Kelly Conley you also make a good point. I never had intentions of telling the seller I am the end buyer I was planning on letting them know what I was doing. To me, the benefit of using a wholesaler was to avoid all the fees from an agent or broker, especially if it’s someone who truly wants to get rid of their home.
@Doug P. - both you and @Mike Cumbie made valid points. I guess it’s how the wholesaler as an individual do the business.
If there are wholesalers out there pretending to be cash buyers or taking advantage of motivated sellers then I can see how it becomes unethical.
But you made valid points as I just mentioned above. I thought the benefit of a wholesaler was for those sellers who didn’t have the money to pay all the fees for the agents or brokers. And like you said who wanted it to be a discreet transaction, etc.
I think if I get into wholesaling I will be up front and let the seller know what I do but how it benefits them over a broker or real estate agent. Let it be the seller’s option to use me or an agent/broker.
REALTOR and Licensed agent are two different things. I am not even going to get into the Ethics of a REALTOR vs a licensed agent.
The main piece of the licensing law is not to deceive the seller. To disclose on first substantive contact "Who you represent".
Either
1) "I represent you the seller above all else"
2) "I represent a buyer who wants to purchase your house for their benefit above all else"
3) "I represent myself where I am working to get a profit for myself above all else"
If anyone is prepared to do the above then I see zero reason not to spend the couple hundred bucks to be licensed. It has nothing to do with how pretty a house is, how much work it needs, who you are going to market it to (with the exception of the agent you can actually market the house).
Everything else is just excuses why you aren't going to say the above when you are working with someone. You can sell every situation you described as a licensed agent legally above board and on the books (MLS or not MLS it does not matter, Signs or no signs, it does not matter, flyers and emails or not). As long as you disclose who you work for period. You can believe that somehow you shouldn't have to tell anyone who you are really working for, and that ends up being between you and the regulators.
Doug Pretorius if they have little to no equity it’s not gonna work to wholesale their property either.
There are plenty of ways to be an ethical wholesaler. Here’s what I would say you need to do to be a completely ethical wholesaler and actually provide value to sellers and end buyers.
1. Tell them you’re going to find an end buyer. Don’t sugar coat it or use vague terms. Be honest.
2. Have cash to close in case you don’t have an end buyer. Saying you’ll buy a property and then don’t is not a good thing to do time and time again.
3. Become really good at rehab numbers and don’t cut corners on this to make it work. When a wholesaler comes to me and says a full rehab to get the place in retail quality is 8k I already know it’s not a good deal.
4. Don't pad the ARV. If you've got two comps of 120k and 135k, your ARV should be around 125-127ishk. Don't come to me and say the arv is 140k, when it clearly isn't. If you can't find comps then it's also likely going to be hard to sell for the flipper.
I have seen some good wholesale deals, did the right person in my area. They typically looked something like this: wholesaler asking price of 20-30k, House needs 40k rehab and ARV is 100k ish. Note the giant discount between the arv and the asking price.
If the arv is 130k and you’re asking 99k, idk how that’s going to work.
This is awesome. As a wholesaler starting out, my main focus is ARV & Repair/Remodel estimates. I've even been accused of overestimating repairs, in a wholesaler facebook group, which I disagreed with for that particular deal.
I find running comps for ARV to be the easier part of the 2 subjects. I have a method for estimating repairs, but from what I read it really just comes with experience. I plan to have an inspection done by a licensed inspector, on any house I put under contract. But what should I do about really pin pointing the updates? Is paying a General Contractor to look at the property to give me a precise estimate an option? All I know of is having contractors give bids, which could turn out to be different. Also, would update/remodel bids be something I could include in my wholesaler packet, or are those sort of too unofficial?
Apologies for putting all of this after a quote. Lol
Mike, I think the whole concept of wholesaling and/or investing is based on the attractiveness of the opportunity. Buyers out there still want move-in ready. Inspection periods, appraisals, contingencies with conventional buyers can all be hang ups and frustrating things for a seller. We pick up properties all the time that were living on a prayer for a conventional offer but their house wasn't up to the standard of what was available in the neighborhood. So, coming in with a legitimate cash offer from us, removing contingencies 2 days later, closing in 7 days, is good news for the seller!
Latia, focus on finding buyers just as much as the properties. When wholesaling to investors, they are not like conventional buyers. You can develop relationships and trust with them and do business together multiple times over. A problem that wholesalers can run into is that they get something under contract and then come to find out they didn't buy that good of a deal and might feel the pressure to lie and bloat the values and undershoot the rehab and then they scramble to find a buyer to pass it off to.
Find your "why" and let your integrity and skills flow through that. My why is I want to help people build wealth to be able to make a change and impact in their life, family, and community. So my mission is tainted if I willfully skew the numbers. In the end, your buyer's circle might only be 10-30 people. But they all should value what you can offer them.
@Doug P. in your example of low equity are trying to say that a wholesaler takes a smaller cut than a 6% commission of a realtor? The numbers I am seeing wholesalers share range from 5% to over 100% in some examples I have seen on BP. I am talking markup to the buyer with NO value add to the property in the middle.
Can we all agree that a seller will never make more money from a wholesaler than on the MLS market? I will concede wholesalers deliver a fast, as-is sale, but the trade off is getting paid less money.
My experience with wholesalers is many of them lack knowledge, money, and ethics to conduct business properly.
To me, an ethical wholesaler must have:
1) Intimate pricing knowledge of the market he/she works in. Probably no fewer than 50 real estate deals within the past 2 years in a given price-point and location already transacted would be a good STARTING point. I will interview his past Buyers and find out how accurate the ARV numbers were.
2) Sufficient cash to close all purchase agreements made, so as to keep their word to their seller if they can't flip it to a buyer. I will interview his past Sellers to find out if he did everything he promised or left them high and dry.
3) Excellent knowledge of the construction trade, cost estimating ability, local code and zoning laws, and project time schedules to bring a rehab in on budget and on time and in conformance with the law. Otherwise his ARV numbers are garbage SWAGs pulled off Zillow.
Those characteristics do not describe the typical wholesaler fresh out of a guru seminar/webinar. The best wholesalers I've met are semi-retired real estate agents who act as transactional brokers. They have market knowledge and know that ethical dealing and adding significant value to the transaction is the only way to have a long-term, successful business.
@Caleb Heimsoth @Joe Splitrock If there's no equity you wholesale terms instead of cash.
@Mike Cumbie Here in Ontario being a REALTOR(R) is a bit more invovled. Initial licensing costs $6,000 and takes 4 years of schooling. Then the ongoing licensing, REALTOR(R) association and MLS fees run $3-4k a year last I checked. Required continuing education is another $2-$3k every 2 years. Then desk fees are $1,500-$2,000 per month. And finally, whatever split you negotiate with your broker.
Why would any investor take on those costs and the grief your broker would give you for investing instead of closing 'normal' sales for him/her when it's totally unnecessary?
And, I'm sorry, but you're simply misinformed. REALTOR(R)'s cannot sell every house in every situation. I've seen REALTOR(R)'s force sellers into foreclosure because they promised a sale at a price they knew they could not produce when they knew full well that the seller had no equity and could not come out of pocket to pay their commission.
I'm sorry. I've been in this business for nearly 20 years and I have seen REALTOR(R)'s do so many vile things it really gets me worked up. I honestly believe 90%+ of REALTOR(R)'s should be in prison for fraud and collusion.
@Joe Splitrock When someone sells to me they pay no fees or commissions and no closing costs or concessions. So obviously 0% is less than 6%.
In my opinion. Good wholesaler should have some (the more the better) deals under their belt. Without having done any buying/selling/renting/rehabs, their estimates and ARVs are just random guessing (unless of course they pay a contractor for real numbers). In my area closing costs when buying can be $10k or more (due to taxes, title and attorney fees, etc). Wholesaler never include these costs in their calculations.
I have no idea how it works in Canada and I will not pretend to understand legal licensing across the border. The OP is in the U.S so any licensing requirements in Canada are going to be different.
That being said, you can call me misinformed, but I am a REALTOR and I am quite familiar with the ethics and requirements.
1) Licensed Real Estate Salesperson...... Is different from
2) REALTOR
You can continue to call them the same thing, but they are different. All Mustangs are Fords but not all Fords are Mustangs. All REALTORS are Licensed agents, but all licensed agents are not REALTORS.
My recommendation to the OP was to become a licensed agent. In most states about $300 - 700. Which allows a person to broker deals between buyer and seller legally, under a broker...... On the other hand, becoming a REALTOR, is joining a trade organization. I personally believe in it, but I never suggested she gets into paying the dues and all of that.
I was simply suggesting she spend a few hours online and pay for the licensing so she can legally make buyers and sellers connected. Of course if she migrates to Canada all of my suggestions may be invalid.
As far as not being able to sell anything you listed, you are mistaken, I could sell real property under any of those circumstances, at least here in NY where I am licensed...... and also chose to join the local/state and National REALTOR association, which I was not suggesting to the OP.
@Mike Cumbie And all REALTOR(R)'s are Pintos.
@Account Closed what’s the difference between you talking the seller into a lower price versus the wholesaler talking the seller into a lower price?
1. I am the actual buyer and I have the funds to close the transaction. I also have every intention of closing a transaction.
2. I am not actively searching for desperate sellers and sitting across the table from Grandma trying to swindle her out of her equity. I buy from educated sellers (rehabbers or other investors or those represented by an agent) so nobody is getting taken advantage of.
@Account Closed You're basically saying if someone buys a deal under market value, they are taking advantage of the seller. You don't realize how skewed that way of thinking is.
I purchase all of my deals off-market and under market value. All of my sellers know they could get a much higher price for their property if they listed it and waited (in fact, I tell them so). You know why they still take my "low" offer? Because they place value in things other than simply the price.
For example, a seller was about to lose her house in an auction and get nothing. Me buying it from her gave her a nice check and saved her credit. Yep I was buying it far below market value but she already knew that.
A house I saw today....the owner had used it as a marijuana grow house and now wants to sell it quietly without blasting it on the MLS.
"I am not actively searching for desperate sellers"...You mean marketing???
@Pratik P. But you just don't understand. If only they had listed with a REALTOR they could have waited 90+ days, had their dirty laundry aired publicly, and then lost everything in the foreclosure. BUT they would have at least felt secure in the knowledge that they had their best interests represented by a licensed professional, as their life went down in flames.