The Truth about Wholesaling!

The Truth about Wholesaling!

Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

There are so many people and companies out there who claim to be wholesalers and many more newbies who claim to want to start out in wholesaling as a means to get started in the biz.

Let me tell you about a recent experience with a so-called wholesale deal: You be the judge too!
A property was offered to me as a wholesale purchase.
It was offered at $270k with only $10k in rehab (so claimed the wholesaler) and the exit value they provided was $350k. With these numbers, the deal is at 80% of value which is pretty much the most I could pay. I explained that the exit price appeared to be on the high side (just from my expert knowledge of the area) and that $10k in rehab is pretty rare. I was then told that they may be willing to sell to me at $260k (so obviously they had at least $20k in mark-up at their OG price, which by the way is fine if the deal had a good spread, this one was bare)
With that reduction in mind, I went to the property.
It was very close to the freeway and the freeway noise could be heard quite loudly from the yard and slightly from the inside with all doors closed. This decreases values some what. Next, I found that the condition of the property was no where close to $10k in minor rehab. The kitchen had no place for a refrigerator with the current layout and it was poorly designed. The cabinets appeared to be newer, but done cheap and laid out poorly. The countertops needed replacement to granite, and new kitchen appliances. All flooring needed to be replaced, there was some foundation issues from the earthquake of 94' (Northridge quake), the bathroom was in need of a full gut and rehab new, all bedrooms needed new light fixtures, closet doors, and some electrical upgrades, plus the driveway needed to be re-surfaced and the chain-link fence removed and replaced with a more appropriate wood fencing for curb appeal. Both interior and exterior needed paint, and all windows should be replaced new (requiring some minor stucco repairs as well.)
After my evaluation, it was determined that the exit value was $300k ($319k as the max high list point) and the rehab was $30k and could be $35k.
At a $260k purchase and $30k rehab with $310k exit, this deal is at 93.5% As such, it is an oxymoron to use the word deal to describe this investment. I only pray that some sucker does not get screwed on this property.

The moral of the story: To be a true wholesaler, you must give out true and accurate figures, otherwise you make a bad name for yourself.

To be a true wholesaler you need these 3 main ingredients:
1. The ability to contract RE at great discounts.
2. The ability to build a real buyer's list (real cash buyers with a real proof of funds)
3. Ability to evaluate your market and ability to peg rehab numbers. Both of these require a vast knowledge of the local market conditions and the know-how to quote repair items.
Without ALL 3 of these items, you CAN NOT be a successful wholesaler.
To add a 4th item, you should be honest, provide accurate numbers, and provide as much due diligence to your potential buyers as possible. This will allow you to keep your buyers coming back for more deals.

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Member since 2010 · 16 posts · 124 votes
15y

Maybe they are a new company that have ambition but lack some experience in evaluation. I hope you left the same results you described in your post on their website or emailed them what you found. Maybe it will give them some insight as to what to do/not to do before putting another property like this on the market. All of us begin making dumb mistakes and misjudgements, it's only bad when we ignore feedback from those who can offer wisdom.

See this reply in the discussion

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  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Great post @Darrell Shepherd you basically summarized my entire point in one post, nicely done.

    I particularly like this one as it happens constantly:

    "It also cracks me up when I see the same house from 3-4 different "wholesalers" all with different numbers. I get them when they are actively listed, too. Cracks me up, especially when their price is over the listing...not really sure if they think nobody's gonna notice or what."

  • WA · Member since 2013 · 13 posts · 7 votes
    12y

    Thanks Will,

    Great advice! I just got started networking and have a few people on my buyers list! My current goal is to start out wholesaling to get some immediate cash so I can rehab- which is what I really want to do!

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Erica Miller:
    Thanks Will,

    Great advice! I just got started networking and have a few people on my buyers list! My current goal is to start out wholesaling to get some immediate cash so I can rehab- which is what I really want to do!

    Good for you, hopefully this thread will help you get down the right path.

  • Financial Advisor · Raleigh, NC · Member since 2013 · 71 posts · 11 votes
    12y
    Originally posted by @Erica Miller:
    Thanks Will,

    Great advice! I just got started networking and have a few people on my buyers list! My current goal is to start out wholesaling to get some immediate cash so I can rehab- which is what I really want to do!

    Good luck Erica...Hope you do well!

  • John HornerPro Member
    Flipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
    12y

    Crazy long thread, but great content!

  • Greenville, SC · Member since 2008 · 8 posts · 7 votes
    12y

    Will,

    What you described in going to the property and doing your due dilligence is what every buyer has to do before they move on the deal.

    In this case the numbers don't work and you would tell the wholesaler you are going to pass. It won't take long for everyone to see that this is not a deal.

    It is not the responsibility of the wholesaler to give accurate repair estimates, although he or she should be well within the ballpark.

    It is the responsibility of the buyer to run their numbers and see if it is a deal.

    I have my core buyers group of about 6 people that I always give my deals to first.

    The way I would present the deal is to say something like-

    Here is the house at 123 Main Street.

    I think the ARV is $300K.

    The repairs are around $35K

    I will assign the contract to you for $180K.

    Get back to me in 24 hours.

    (I will have the property under contract for $175K max, probably much lower).

    Again, the due diligence you described is what my buyer would do to see if it is a deal or not. It is not the wholesalers gig to give spot on repair numbers. That is the responsibility of the buyer.

    Your buyers will know that you usually have good deals and even if the numbers don't match, they are close enough for everyone to make money.

    At first glance, wholesaling looks to be the easiest way to get into RE investing. It is not. But, wholesaling is the only kind RE investing I will do. It is almost anti-climactic when I get the seller to sign a contract and a buyer to take the deal. I am already thinking about the next deal I am working on.

    I make my money when I get the contract. I collect my money when the house closes.

    Oh, I am always at the closing even though I have assigned to contract. The sellers are still selling their house to me in their eyes and it is only right that I be there at the closing. Plus I like walking out with that big check.

    DD

  • Investor · Upland, CA · Member since 2012 · 45 posts · 5 votes
    12y
    Great post Will Barnard darwin
  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @David Darling:

    It is not the responsibility of the wholesaler to give accurate repair estimates, although he or she should be well within the ballpark.

    This statement is entirely contradictory. It states the wholesaler has no responsibility to provide accurate numbers then goes onto state that the wholesaler needs to provide numbers that are close to accurate. I have never stated anywhere that any wholesaler must provide spot on, exact numbers. Even a contractor may not be able to do that. What I have stated is that if you want to be a good wholesaler and successful at it, learn how to properly estimate repairs and ARVs so that you can provide the buyer numbers that are "in the ballpark". Besides, if you can't identify the ARV and the rehab, how can you possibly calculate what your offer should be!

  • Barstow, CA · Member since 2013 · 51 posts · 7 votes
    12y

    @Will Barnard and anyone else.

    Will what is the allure to wholesaling, I'm seeing quite a bit of folks heading into that area?

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Ron Kelley:
    @Will Barnard and anyone else.

    Will what is the allure to wholesaling, I'm seeing quite a bit of folks heading into that area?

    People *think* wholesaling:

    - Is easy

    - Can generate a lot of money quickly

    - Doesn't require much experience

    - Doesn't require any cash

    - Can be done part-time from behind a computer

    - Doesn't require an education

    None of these things are true, which is why 99% of people (my rough estimate) who decide to try wholesaling never complete a single deal.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Ron Kelley:
    @Will Barnard and anyone else.

    Will what is the allure to wholesaling, I'm seeing quite a bit of folks heading into that area?

    The allure is the low risk, low amount of capital needed, and apparent ease of entry, however, as seen by this thread, it is not all that easy.

  • Specialist · Houston, TX · Member since 2012 · 579 posts · 301 votes
    12y

    @Will Barnard

    It seems too that the margins in wholesale deals has gotten much thinner. Maybe it's b/c the really good/big rehabbers have built their marketing machines to go direct to sellers and not through wholesalers any more?

    I've seen some larger wholesalers where getting $1k on wholesale fees and that makes it pretty thin for others. They take the $1k but are doing volume so instead of a $10k fee on 1 property, they just do 10 houses a month or more.

    I'm now doing a few commercial deals which have some great returns but they take much longer on average. Anyone else trying to wholesale commercial?

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    12y

    Will and J Scott have taken the words out my mouth or off my finger tips the last few response posts.

    Keep in mind, buyers do not necessarily have to be investors aka rehabbers. You may also attract buyers who want to buy and live on property.

    An example: I have a buyer right this second who is seeking a home for his family. He wants a good deal and doesn't mind sweat equity. His credit score is 750 and he's willing to place 30%-50% down in order to acquire a loan. In other words, he can qualify very easily. Even with the new changes coming in 2014 which will affect 48% of buyers who could qualify today (2013) but not qualify in 2014.

    Just keep your mind open to who your buyers are or could be.

    If you have a solid secured deal and the numbers are on point, you will sell quickly.

    As for the numbers, an ARV is backed by data in that area. It's the science of the numbers. In the end, a sale of a home is usually tied to the emotional component from the buyer or buyer's wife. But whenever you gather all your CMA data, you should have the low, average, high and median price per square footage. This should include sold, pending, expired, cancelled and active. Not to mention the Listing vs. Sold percentage ratio and days on market (DOM). This is your cushion and should give you a confident accurate assessment of the ARV you are wholesaling.

    Remember compare Apples to Apples (pool for pool, update for update, etc).

    I could write a book on this alone but this is just a nutshell version.

    I hope this helps.

    Just my two pesos.

    Big Henry

  • Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y

    @Darrell Shepherd

    "BTW, Any buyer using numbers given to them by someone that makes a profit when you buy whether you make money or not should have their head examined. I use other people's numbers to weed out the ones that are obviously off my numbers, but after its got my interest I completely ignore what they gave me, and usually make fun of them if they are off by a large margin so they learn something. Gently to some, pretty rudely to ones I think know better. "

    ----

    Love that statement. I am the same way. I want to get an ARV and a repair estimate because if the wholesalers optimistic numbers can't even pass a 70% type test then it isn't even worth trying to figure out how off the numbers might be. I also let them know what I think of the ARV (since if that is off I don't bother looking at the place to figure out how bad the repair estimate is) and why it is high and give them some of the comps that I found that say it is possibly going to be less than they have.

    Sometimes they might have good comps but only take the good ones and I explain that you have to look at the worst case. Other times you get total garbage from them that are like 14 month old places that are 5 miles away when you have 3 almost identical houses within 0.25 miles that sold in the last 30 days, for 20% less than their ARV, they aren't given as gentle treatment.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Shaun Reilly:

    Sometimes they might have good comps but only take the good ones and I explain that you have to look at the worst case.

    While I agree totally with this, I do want to point out that every market is different and for every market, those market conditions can result in the ability to use the best comps. For example, here in So Cal, properties in the $300k-$500k range are flying off the shelves (those that are in perfect condition) and as such, one can easily use the top two sold comps in the area to peg a realistic ARV in a sellers market. But typically, using the best case scenario comps is a recipe for disaster as Shaun pointed out, just not always.

  • Honolulu, HI · Member since 2013 · 43 posts · 0 votes
    12y
    Very informative post.
  • Barstow, CA · Member since 2013 · 51 posts · 7 votes
    12y

    @J Scott @Will Barnard

    Thanks for painting the picture, and with words like " easy, can generate a lot of money quickly, low risk, low amount of capital needed" flowing through would be wholesalers minds I can definitely see the draw.

    @Henry M.

    Great example, thanks for sharing!

  • Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y
    Originally posted by @Will Barnard:
    Originally posted by @Shaun Reilly:
    Sometimes they might have good comps but only take the good ones and I explain that you have to look at the worst case.

    While I agree totally with this, I do want to point out that every market is different and for every market, those market conditions can result in the ability to use the best comps. For example, here in So Cal, properties in the $300k-$500k range are flying off the shelves (those that are in perfect condition) and as such, one can easily use the top two sold comps in the area to peg a realistic ARV in a sellers market. But typically, using the best case scenario comps is a recipe for disaster as Shaun pointed out, just not always.

    I think we are more or less on the same page.

    By way of illustration lets say a house that a wholesaler gives me has comps (for sake of simplicity all have same bed/bath mix and within ~5% of sqft and lot size and any other amenities and level of condition) of:

    #1 Sold 3 weeks ago, is 0.2 miles away sold for $348K

    #2 Sold 4 weeks ago, is 0.25 miles away sold for $329K

    #3 Sold 6 weeks ago, is 0.25 miles away sold for $352K

    #4 Sold 4 weeks ago, is 0.3 miles away sold for $349.5K

    The wholesaler give me 1, 3, and 4 and says there is an ARV of $349K.

    Not unreasonable* at all but I look them up and see those same ones but also #2. There is no obvious reason why that one went a bit less. Even if I think it has an ARV of $349K and would list it for that, assuming no major change in the market form purchase to resale, that $329K concerns me.

    If at $349K it is right at my minimum profit target I would hesitate since knocking $20K of that makes the deal very thin. I don't need to make a killing if I have to sell it around $330K but I want to make sure it is still worth the effort.

    ----

    * Note I almost never get anything from a wholesaler that justifiable. Usually have much weaker comps used to justify the inflated ARV and more than one that shows a lower value. But even in the scenario above I'd have some ARV concerns.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Yes, we are on the same page and thanks for the illustration. In a strong sellers market, I would have little to none concerns with comp 2. First, there are 3 others that evidence higher value, second, the market is likely appreciating in a strong sellers market, and third, my end product is top notch and superior to any of the comps (most likely) which would allow me to obtain the $349k and likely $355k or higher, but with those comps, I would peg ARV at $350k.

    Now, in a buyers market, I would Only use the $329k comp and ignore the others, so the idea is that the market determines how one should evaluate and adjust the comps.

  • Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y
    Originally posted by @Will Barnard:
    Yes, we are on the same page and thanks for the illustration. In a strong sellers market, I would have little to none concerns with comp 2. First, there are 3 others that evidence higher value, second, the market is likely appreciating in a strong sellers market, and third, my end product is top notch and superior to any of the comps (most likely) which would allow me to obtain the $349k and likely $355k or higher, but with those comps, I would peg ARV at $350k.

    Now, in a buyers market, I would Only use the $329k comp and ignore the others, so the idea is that the market determines how one should evaluate and adjust the comps.

    I tend to be on the conservative side and remember enough stories of people that bought right 6-9 years ago (depending when their particular areas bubble burst) getting killed when the market shifted abruptly.

    I won't say it is the right way to do it but I look pretty hard at some of those bad cases to make sure I'm going to come out okay if things do go bad. Also it does depend on the spread too. If in my example I would be looking at $60K profit at $350K ARV then I wouldn't care about the $329K comp since making $40K is still well within my target range. Now if I'm looking at like $25K then selling it $20K under ARV is a really big deal and the wholesaler will get their ear talked off about that low comp. :)

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    That's true Shaun, the market makes all the difference so when you have a large spread, you can go with the higher of the comps, if your spread is thin, I too would be very cautious of the lower comp.

  • Real Estate Broker · Orange, CT · Member since 2013 · 951 posts · 218 votes
    12y

    The original thread sums up about 95% of the wholesaler 'deals' I see. In my opinion a good deal only needs 1 phone call, not a mass email blast.

  • Mansfield, TX · Member since 2013 · 207 posts · 26 votes
    12y
    Originally posted by @Phil Z.:
    The original thread sums up about 95% of the wholesaler 'deals' I see. In my opinion a good deal only needs 1 phone call, not a mass email blast.

    Disagree. I made 40k profit after all expenses wholesaling part time this year and 2014 is looking to be very busy already. There is value in BOTH have a large list and a close group of pocket investors.

    Even for properties that I make a call to sell I still send out the email blast while im waiting to get paper work. It builds my brand here in the DFW area and everytime I send out a deal I typically get new buyers that had a friend or colleague forward me one of their deals. In additoin, it helps build credibility with your list, it shows that you are putting actual deals out there and can close on them.

    The larger the list, the more confident you can be you can take down a house. It will help you find buyers for odd ball deals too (ie. 2/1/0 or 3/1/0s or owner finance type houses in areas with weaker comps). Your list will grow as a result of being large and referrals, and many opportunities and deals will begin to find you (joint ventures, private money etc.)

    Their is a big family owned wholesaling business here in DFW who primarily just joint ventures with other wholesalers in the area and gets a fee for finding a buyer, and they are making a killing.

    For people who actually want to build a wholesaling BUSINESS I recommend incorporating both.

  • Saint Paul, MN · Member since 2012 · 17 posts · 0 votes
    12y

    so as an investor or wholesaler, how would you sum up this thread? I mean, on one end,I hear wholesaling is dead. the other is $40k party time. What's the real truth about wholesaling?

  • Developer · Hollywood, CA · Member since 2011 · 81 posts · 29 votes
    12y
    The man who thinks he can and the man who thinks he can't are both right. Which one are you?”

    How's that for a summary! Wholesaling is DEAD! HA!!!!!!!!!!!! LOL Yeah right!

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