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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  • Mansfield, TX · Member since 2013 · 207 posts · 26 votes
    12y
    Originally posted by @Henry M.:
    Originally posted by @Bill Mitchell:
    @Henry M. I wholesaled part time in addition to my 9 to 5. 2013 was my first year, and I assigned 10 contracts that all closed.

    Congratulations Bill.

    I hope you are even more successful in 2014.

    How is your approach in estimating your wholesale deals?

    What do you believe makes you successful in assigning contracts to cash buyers?

    Big Henry

    Henry, its simple in my opinion, deliver to the market what the market wants. When you understand your local market and sub niches its not that hard to do. For instance there are many areas where landlords will pay 80% less repairs and that is considered a great deal in this tight market. Makes sense we only have a 3 to 4 MoS inventory in Dallas-Fort Worth right now.

    Anyways, from there its about getting the house under contract for the right price. Here is where your money is made. Then you simply mark up the contract to the price the market is willing to pay and dont be too greedy and you shouldnt have any problems.

    I use large inflated general numbers for estimating my rehabs, and I am very conservative with both my ARV and rehab estimates.

    A basic rehab should be at least $10 psf; however it goes a little deeper than that.

    A property built after 1975 might be about $10 psf for a basic rehab, on a 1955-1975 house I would start around at least $13 psf

    From there I would mark it up depending on the nature of the repairs. Here is where you might want to get a contractor if your not great at estimating repairs yet. For instance if a house needs foundation on slab its probably going to be at least $4 psf. If its really bad, depending on the amount of int ext piers it might be as high as $7 psf, you will get a feel for this as you do more houses. If it needed furnace + condensor +$5,000 at least.

    So if a hosue was built in 1978 and needed some foundation work I would do $10 psf + $4 psf foundation +$1 psf contingency and then I would round that final number up to be conservative.

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

    Thanks Bill.

    Input like this helps all who read this thread. Even as a veteran, we always learn new ways to skin a cat.

    Big Henry

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

    Wow, this is going down the road of how to estimate repair costs. I don't want I get too far off topic in this thread as how to estimate repair costs is specifically discussed in several other threads. I will say that I am not a fan or believer in repairs estimated by cost per sq. ft. simply because it is not close to accurate and not just due to quality of rehab. One house may need an entire new kitchen and all the other stuff while the exact same house down the street may just need all the other stuff so the cost per sq. ft would be dramatically different in these two scenarios.

    Enough on that, the important message in all of this (thank you all for contributing to this, I agree that estimated repairs is one of the essential factors in being a successful wholesaler or rehabber) is to properly estimate repair costs and deliver that number along with a correct ARV to the potential wholesale buyer.

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

    Will,

    I agree with you to some extent. However, keep in mind you opened up this thread in 2010 highlighting your displeasure in assessment value of a property repair value. In both price and repairs from let's say an incompetent wholesaler.

    I believe we're still on track with the integrity of this thread. Wholesalers truly need to learn these components. Otherwise, why name it the truth about wholesaling?

    Outside of searching and locating a property or creating a legitimate buyer's list, what else are we to discuss? Of course, price and repair estimates.

    I like where this is going and it looks like this thread can produce great insight for years to come.

    Not busting chops.

    Big Henry

  • Mansfield, TX · Member since 2013 · 207 posts · 26 votes
    12y
    Originally posted by @Will Barnard:
    Wow, this is going down the road of how to estimate repair costs. I don't want I get too far off topic in this thread as how to estimate repair costs is specifically discussed in several other threads. I will say that I am not a fan or believer in repairs estimated by cost per sq. ft. simply because it is not close to accurate and not just due to quality of rehab. One house may need an entire new kitchen and all the other stuff while the exact same house down the street may just need all the other stuff so the cost per sq. ft would be dramatically different in these two scenarios.
    Enough on that, the important message in all of this (thank you all for contributing to this, I agree that estimated repairs is one of the essential factors in being a successful wholesaler or rehabber) is to properly estimate repair costs and deliver that number along with a correct ARV to the potential wholesale buyer.

    Will that is fair, these are generalizations using $psf. It really depends on the level of finish out of comparables and the exit strategy for the house. I regularly have my clients tell me they paid well UNDER what my estimated rehab costs are, that is why I say to be conservative. And in your example if house A needs an entire new kitchen, and house B already has a great kitchen, then guess what if you are conservative and use big #'s for the rehab estimate it wont really make that big of a difference.

    Because if you say House B needs 40k in rehab, but its kitchen has already been redone, and the actual rehab is more along the lines of 32k you were overly conservative with your rehab that is a good thing.

    That is why i like $ psf if you are very conservative with it, it leaves a lot of wiggle room for you or your end buyer because you are over estimating repairs and rounding up the final estimate.

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

    No worries Henry, I agree. I was just saying that rather than be repetitive here, other threads already have this debate so one should reference them, that's all. I do agree that estimating repairs and how One does it properly is exactly on track with this thread.

    @Bill Mitchell I too agree with you that IF you take some conservative numbers for your average price per sq., you should be fine. One problem I see with that is that, in competitive markets such as mine, going too conservative rather than nailing down a very close cost budget could price you out of the chance of getting it, therefore, I do recommend to any wholesaler or rehabber to really learn how to get more detailed and more precise means to calculate a rehab so that you not only provide accurate info,but you avoid the unnecessary chance of pricing yourself out of the deal.

  • Mansfield, TX · Member since 2013 · 207 posts · 26 votes
    12y

    @Will Barnard I definitely agree with what your saying. If you can specifically long hand out the repairs, you will likely be able to offer more to the seller and have a higher chance of getting the offer accepted. When you use conservative $ psf it definitely will lower your offer that you can give to the seller.

    I haven't rehabbed enough of my houses on my own where I would personally feel comfortable long handing everything. But in the future its something I would definitly consider, would be another factor to help you win in tough competition.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Bill Mitchell:
    @Will Barnard I definitely agree with what your saying. If you can specifically long hand out the repairs, you will likely be able to offer more to the seller and have a higher chance of getting the offer accepted. When you use conservative $ psf it definitely will lower your offer that you can give to the seller.
    I haven't rehabbed enough of my houses on my own where I would personally feel comfortable long handing everything. But in the future its something I would definitly consider, would be another factor to help you win in tough competition.

    I have done my fair share of rehabs and have also walked through and analyzed hundreds more I didn't buy. That is where I got a lot of practice and fine tuned by skill, I would recommend everybody wanting to learn how to do this, to go walk tons of properties and practice.

    I can walk through a standard 1500 or 2000 sq. ft home and come out 10 minutes later with a rehab number in my head that will be damn close to the actual cost. This was only accomplished by practicing.

  • Real Estate Investor · Lubbock, TX · Member since 2012 · 80 posts · 17 votes
    12y

    I guess I should of mentioned that this sq ft prices are working locally here in West Texas.

    I do understand different parts of the country are totally different.

    We have properties retail for $150,000 that are 3000 sq ft if that gives you a idea.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Jeff Smith:
    I guess I should of mentioned that this sq ft prices are working locally here in West Texas.

    Can you give us an idea of what you're able to do for $5/sf or $10/sf?

    Are these insured contractors? Are you doing work yourself?

  • Hammond, LA · Member since 2011 · 57 posts · 2 votes
    12y

    Great post!!!!

  • Residential Real Estate Agent · Minneapolis, MN · Member since 2014 · 61 posts · 15 votes
    12y

    Man, this is good stuff! I have to say, my desire to enter the RE investing world with integrity and in a way that adds value has been encouraged much. Thank you!

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Dylan Swanson:
    Man, this is good stuff! I have to say, my desire to enter the RE investing world with integrity and in a way that adds value has been encouraged much. Thank you!

    It is certainly refreshing to hear that. I have had to reiterate numerous times in this thread that it is NOT a bash on the strategy or the individual, rather, a "how not to" and thus a "how to" be a good wholesaler. Thanks for your feedback and I am happy it was helpful to you.

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Rehabbing costs, just caught the last few posts, taking the scenic route on the topic, LOL.

    Another thread being applicable to the topic here.

    http://www.biggerpockets.com/forums/93/topics/118261

    :)

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

    Some of the best wholesalers I know (I don't know many and can count them on one hand) do direct marketing to motivated and or absentee homeowners, they negotiate a good deal and have an assignment clause in the contract.

    If you intend to wholesale, I highly recommend taking this approach.

  • Renter · Trenton, TX · Member since 2014 · 3 posts · 0 votes
    12y
    Great info! Thanks!
  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    12y

    Here's the truth of the matter in one word:
    .............

    Diversity

    Okay, let me expand;)

    To only wholesale would be a mistake that most would call "having all your eggs in only one basket".

    If a repeat of the recent 2008 to 2009's collapse of the market with its bubble burst will leave you high and dry, it will do so without the mercy if in fact you do not diversify your tactics & strategies in real estate.

    Wholesaling should truly be a way to either fill in the gap or to try and gain capital for ongoing real estate endeavors (of course assuming you are a serious investor, part or full time).

    Just a food for thought and my two pesos.

    Big Henry

  • Investor · Thousand Oaks, CA · Member since 2012 · 176 posts · 47 votes
    12y

    I stopped looking at deals from most "wholesalers". I see about 3 to 5 A DAY and I have yet to see one that is an actual deal!

    Never have I actually seen a real deal from a wholesaler. :/

    I wish there was a good one in my market!

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    12y
    Originally posted by @Josh Justiniano:
    I stopped looking at deals from most "wholesalers". I see about 3 to 5 A DAY and I have yet to see one that is an actual deal!

    Never have I actually seen a real deal from a wholesaler. :/

    I wish there was a good one in my market!

    Hence the reason why Wil started this marathon of a thread.

    This thread is to slowly and painfully educate the new or inexperienced investor/wholesaler in the process of a good wholesale deal.

    I believe that if someone can read this thread in it's entirety they will pick up a few key pieces to help iron out the rough edges. Not to mention, be a little cuckoo for attempting... Lol.

    And let me state this to most of you experienced investors who feel there are truly poor wholesalers out there in your areas. Educate and teach these new or inexperienced investor/wholesalers so they understand your criteria and expectation of a good deal.

    I have about a dozen investor/wholesalers I mentor (@ no charge) paying it forward in learning the craft of real estate investing. This way I slowly help change the mentality of the approach to our respective areas. In my case, two opposite areas, San Antonio (Bexar County) & Austin (Travis County). This way, when these guys learn (most from here - BP), they understand the dynamics of a good deal. A good deal meaning being conservative not greedy and a deal even they would/may be willing to close themselves if the opportunity presented itself.

    There's my state of the union speech on wholesaling or real estate investing in a nutshell.

    Again as always, just my two pesos.

    Big Henry

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

    Nice post Henry, thanks for the great comments.

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    12y
    Originally posted by @Will Barnard:
    Nice post Henry, thanks for the great comments.

    Will,

    Buddy as always a pleasure.

    When are you going to unfold your arms?

    Haha.

    Honestly, initially I thought this thread's life was a fluke but truly feel as time passed on we owe it to the community to be real and genuine when it comes to sharing the knowledge of real estate.

    I was a newbie once and I put my heart and soul into creating a passion and determination that would not be denied. I was hungry for my first deal that I was foolish enough to go to each door (which btw, I had a stranger take me to each address), knock on, and believe I could sell the idea that I could save someone from their distress.

    Keep in mind, I had no job, no credit, no money, and am as ugly as a toad (no offense to the little froggys of the world).

    All this was after befriending a couple of brokers from the area who were big shots in the business. Ones who advertised on half a dozen pages in the newspaper. Which was big back then as there was little headway of a thing called the internet. One Broker had his biography and the amount of deals they closed in dollars and signs plastered all over one of those pages.

    I told them I wanted to buy properties with no money down - ca$h back @ closing... And these guys laughed at me as if they heard the funniest most absurd joke in the world. They truly had tears in their eyes.

    Instead of me choking them and as the ghetto would say, catch a case. I used it as fuel to catapult me into the highest level of competitiveness I had ever experienced. I refused to lose.

    Months later (as in my profile) I closed my first deal with an owner from one of them unanswered door knocks after meeting him (seller) at a Denny's @ 6AM in the morning.

    No money down and received $6,500 cash back at closing. Not to mentioned a negotiated $10K 2nd lien on the property down to $1K. And twice refinanced pulling out $15K each time with finally using Section 8/Housing as my tenants for over 12 years.

    I know, I know... What does this have to do with wholesaling?

    This...

    It's about paying it forward and helping those inexperienced while treating them with respect, fanning those sparks of desires into flames, and eventually into blazes.

    Thanks Will for the acknowledgement. It is welcomed with much respect coming from a seasoned peer as you. It only motivates me to continue sharing the education with an internal mission I could never erase.

    Just my two pesos.

    Learn your craft.

    Sincerely,

    Big Henry

  • Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    12y

    Working with a good wholesaler is like working with a good listing agent. Do the listing agents you know just hand the sweet deals to strangers on a list via email? They sure don't

    They've built a relationship with trusted buyers and that is who gets the call, same deal with a solid wholesale.

    Anyone browsing eblasted wholesales is getting sloppy seconds, or thirds or fourths. But why should you get first crack at a sweet deal? What have you done to establish a relationship with that solid wholesaler? Gotten on a list? Have you ever called them? You get out of things what you put into them. Folks just expecting a slam dunk deal to just end up in your inbox for no effort have a very unrealistic expectation of how wholesaling works.

  • San Antonio, TX · Member since 2014 · 4 posts · 1 vote
    12y
    Omg this is dirty... And dealing with an ethic challenged company like that's must have been painful :(
  • vancouver, British Columbia · Member since 2014 · 5 posts · 1 vote
    12y

    @Will Barnard and @Henry M.

    What a great thread and great people!

    If I could ask for just a little guidance I have two questions.

    As someone looking to one day run a full service real estate business how should I begin? Is wholesaling the best place to start building capital and “learning the ropes”?

    My interpretation of how I read everyone starting out is where I see myself right now. Its hard, there are a mountain of obstacles in front me and I love it! I welcome the challenge and cant wait to see what type of person I become at the end of this road.

    Thanks in advance!

    Sincerely,

    Tyler Jaeger

  • Investor · Fort Wayne, IN · Member since 2014 · 1k+ posts · 515 votes
    12y

    Thanks for the post. Having been a large wholesaler earlier in my career,(sold about 50 deals in 6 months) I don't see how a wholesaler can get a good enough deal to leave spread in this market. Also all the GURU"S found the wholesaling makes money (selling there SECERT Course) and getting 10's of thousand for a few clicks of the mouse. I was a wholesaler and I still stay away from them today. If I have a deal it never makes it past 2 phone calls more a less an email not in our current market.

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