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.

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  • Real Estate Investor · Rogers, MN · Member since 2014 · 2 posts · 2 votes
    11y

    As a newbie myself how would you suggest about getting a good buyer's list.....(besides going to a local REI Meeting). I am in the Minneapolis area and I am jumping in with both feet. Also anything else you could add would be welcome. Thanks and btw awesome article.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    11y

    @Rick Miller - I suggest you start off by reading the sticky topics found at the top of the BP Wholesaling forum. 

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y

    @Rick Miller there are several threads on how to build a buyers list. Do a BP search for "how to build a buyers list". That said, you don't need a large buyers list, all you need is one or three serious all cash buyers to be successful. Knowing what they want and where will better enable you to search for those specifics.

    Go to your county recorders office or a title company and have them pull all cash transactions in your area. When the all cash transaction has some investment company name to it, it is most likely an investor. You now know by what they purchased what they look for. Go find another for them (after making contact with them).

  • Renter · Auburn/kent, WA · Member since 2014 · 20 posts · 2 votes
    11y

    I'm also green as well and I have learned more from this site then I have from buying so called guides or programs.  I will start with the pinned posts thanks for the suggestions. 

  • Real Estate Broker · Orlando, FL · Member since 2014 · 153 posts · 73 votes
    11y

    Great post @Will Barnard I find that the hardest problem people have with wholesaling is doing a rehab estimate. Specially if they have not flipped a house or are new. I won't even look at a property if it isn't at least 70% below ARV here in Orlando and that is including my wholesale fee which is normally between $4-$8k. Anything higher will not satisfy a good risk vs reward.

  • Los Angeles, CA · Member since 2014 · 3 posts · 0 votes
    11y

    Hi everybody, please give me your opinion on this wholesaling deal. I'm working with a wholesaler that wants $10,000 assignment fee cashier's check sent directly to him inorder to assign me a deal. I insisted that it goes to the escrow company and he said it doesn't work that way. Has anyone dealt with wholesalers like that or should I walk away. My concern is what if the deal falls thru and doesn't close escrow and I would have to sue to get my money back. It is a good deal and I do want it. How can I go around it? Any advice would help!

  • Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    @Jenny Chung 

    I would run away from anyone who isn't willing to be paid from escrow.

  • Flipper/Rehabber · Atlantic County, NJ · Member since 2012 · 514 posts · 209 votes
    11y

    I personally would contact the title company or attorney doing the closing and ask them how it can be done. 

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y

    Jenny,

    I answered your question in response to your PM to me, but for the benefit of all, DO NOT ever send money directly to a wholesaler before the transaction is closed. If this wholesaler won't or can't (which should not be so) go through escrow on the fee, ask him to have you close the transaction and when it is recorded with the county recorders office, he can pick up the check from you. If he has a problem with that and claims trust or what if you don't pay him, say, now you know how I feel!

    This could very well be a scam or an inexperienced wholesaler. Either way, find out, get somebody experienced like myself on a three way call with you and the wholesaler, we can either prove the red flag or find a resolution that is safe for both sides.

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    11y

    Jenny Chung,

    To add to Will Barnard's post, if there is a trust issue from the wholesaler to you, then just have the escrow party (i.e. title company, attorney, etc.) disburse a check to the wholesaler directly, this way your hands are clean and he doesn't feel the same apprehensions you have.

    All you would have to do is create a simple disbursement or allocation of funds letter and this will give the escrow company the written authority to disburse a check direct to any party you desire.

    If the wholesaler is adamant about receiving funds up upfront, then it is a scam. Anyone who tells you otherwise, is either a scam artist themselves, in on it or ignorant when it comes to wholesale or assignment fees.


    Just my two pesos.

    Big Henry

  • Real Estate Investor · Ridgway, CO · Member since 2014 · 76 posts · 10 votes
    11y

    I am a wholesaler and here is what I have done to get  handle on my local market.  For the last three months I have been building my buyers list from postings in craigslist.  Lots of phone time and lots of conversations with sellers, landlords, contractors and RE agents.  I learned right off that I would have to offer my buyers a good deal and learned that no one is successfully filling that nitch in Western Colorado.

    I have one of the best RE agents in the area. She was voted the best by her peers for the last two years running.  She is super investor friendly a true superstar!  She has worked very closely with me and allowed me to comp more than 40 properties last month.  More market research.

    Then of  course it comes to making the sale to the end buyer.  This is the ultimate in market research because it comes down to finding out exactly what my buyers can pay for a specific property.  I then get back in there and negotiate under the inspection clause of the contract for terms that the cash buyer can swing.

    Certainly not a simple or quick process.  It takes passion, persistence, honesty, and time.  Every step makes the next one easier and Ridgway Holdings is now the go to wholesaler in Western Colorado and becoming more so all the time.

  • Real Estate Investor · Madison Heights, MI · Member since 2014 · 693 posts · 216 votes
    11y

    HAHAHAHAHA what a thread.  Most wholesalers suck.  Most wholesalers are jokes that never make a deal.

    Wholesalers are not investors.  Most wholesalers are broke [edited] people that saw a late night TV 30 minute commercial and don't know anything about anything.

    Most wholesalers are people that think everyone else is stupid

  • Investor · Fort Wayne, IN · Member since 2014 · 1k+ posts · 515 votes
    11y

    But wholesaling makes so much money for the GURU that is. They found how to wholesale that is their overpriced course instead of properties. Wholesaling is real and works but it involves work and the good wholesalers arent the newbies.

  • Investor · Phoenix, AZ · Member since 2014 · 24 posts · 4 votes
    11y

    The problem is most of the people that are saying they are wholesalers are not really wholesalers. They are what we call Co-Wholesalers ( Piggy Back Wholesalers ) and the problem begins with a few Guru's out there that are teaching these people who to do this with out leaving there house. They are giving wholesalers a bad name. I run into this on a daily basis. I have a wholesaler who sends me deals then there short after I get flooded with these Co-Wholesalers sending the same property with mark ups from 2k to 10k and they never leave there parents basement!      

  • Little Elm, TX · Member since 2014 · 356 posts · 47 votes
    11y

    As a newbie trying to enter the wholesale market and establish a good reputation this thread brings up a question for me: the repair prices. When I watch flip shows on tv the flipper(s) go through the home and decide "I want to open this wall up, I want to gut this bathroom but only replace the floor in that one; I will need to install wrought iron on here and we should put carpet only upstairs", etc,  etc.  My question is how in the world would a wholesaler know what all the rehabber would do in the house, in order to provide good estimates of repair costs? 

    And if somehow the wholesaler is able to take the rehabber inside the home to get that buyer's repair costs, what would stop that rehabber from taking the property right from under the wholesaler? Im assuming if the wholesaler can show it, its most likely under contract, so does the wholesaler just make sure there is a kick-out clause so no one else can come in and undersale?

    Answers will be greatly appreciated, 

    Erin

  • Little Elm, TX · Member since 2014 · 356 posts · 47 votes
    11y

    *I meant: does the wholesaler make sure there is not a kick-out clause?*

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Erin Elam:

    *I meant: does the wholesaler make sure there is not a kick-out clause?*

     First, I don't think most serious wholesalers would accept a deal with a kick-out clause.  If they did, they'd probably be careful enough to only work with buyers who wouldn't go around them.

    As for the rehab estimates, the wholesaler can't know what a rehabber would likely do to a property, but a wholesaler can say, "If the rehabber does X, the ARV will be Y." Then the wholesaler can put numbers on X and Y and see if there is profit potential. If so, the deal is a good one.

    Now, it's possible that a rehabber will come in with a different X and Y, but as long as there is one reasonable X and Y that works, the wholesaler should be good to go.

    Does that make sense?

  • Little Elm, TX · Member since 2014 · 356 posts · 47 votes
    11y

    @J Scott yes that does thank you! So now my question is what types of things should I look at as a wholesaler to try and provide reasonable numbers? Just enough to make the home livable? What would you want a wholesaler to include in repairs - only things that need fixing? And on that note if I brought a GC in and said hey give me a number on 'repair costs' would they most likely provide a number closer to what a rehabber would want to see?

    @Sammy Gallegos and @Will Barnard i would like your input on this as well please.

    Thanks!

    Erin

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Erin Elam:

    @J Scott yes that does thank you! So now my question is what types of things should I look at as a wholesaler to try and provide reasonable numbers? Just enough to make the home livable? What would you want a wholesaler to include in repairs - only things that need fixing? And on that note if I brought a GC in and said hey give me a number on 'repair costs' would they most likely provide a number closer to what a rehabber would want to see?

     I've said it before and I'll say it again -- wholesaling is not a basic strategy.  To be a good wholesaler, you need to understand real estate transactions, rehabbing, landlording, financing, etc.  The best wholesalers started in other types of investing and grew into wholesaling.

    If you want to learn the stuff above, learn about rehabbing/flipping.  Then use those skills to help with your wholesaling...

  • Investor · Phoenix, AZ · Member since 2014 · 24 posts · 4 votes
    11y

    Hello Erin, Everyone has their own opinion on what a wholesaler is. As a wholesaler myself, I have my way of doing business and this is my opinion. The first thing a wholesaler must do is find buyers! Then he or she must find out what kind of buyer they are such as are they a Fix & Flip buyer or a Rental Buyer or a Speculative buyer. Each one of these buyers will pay different, Your Fix & Flip will pay the least because he has to buy it low so that he can rehab it and then list it and still make a profit. A rental buyer  will pay a little more for properties because he is looking at long term positive cash flow! A speculative buyer will pay the most for the simple reason is this type of buyer is looking at buying the property and selling it when the market is right and that is when they will make their money. Most new wholesalers are what we call Co-Wholesalers other wise known as "Piggy Back Wholesalers" These are the ones that have bought into some Guru that teaches them to sell other wholesalers properties. These type of people do not have a clue on how to run comps or how to estimate repairs. They just know how to copy and paste! Most of them just sit behind a computer and look at what someone else is selling or what someone is sending to them. Then they mark it up anywhere from 5 hundred to 5 thousand dollars and mark it to their buyers list. So what I would recommend is find yourself a good Mentor that will teach you how to find buyers how to locate distressed sellers and how to calculate repairs. Hope this helps you. [solicitation and email removed]

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y

    @Erin Elam Speaking for selling wholesale deals to a rehab flipper, you need to estimate all the items needed to bring the property to the ARV that most closely matches the comps. In other words, if the subject property has a very poor floor plan or layout that could be fixed with some wall removals and wall additions, then you need to figure that. Clearly new paint, flooring, bathrooms, kitchen, and landscaping will be typical. If the subject property already has an upgraded kitchen, then naturally that section is not included.

    You really need to know your market and what the competition has in their homes, then duplicate or make slightly better to get your ARV.

    Can one rehabber have better vision or do things differently or better to achieve a higher ARV? Yes, while others can do a poor job and not get close to the ARV, your job as the wholesaler is to provide the info necessary for the buyer yo make an informed decision based on true facts and figures.

  • Real Estate Investor · Mesa, AZ · Member since 2014 · 73 posts · 24 votes
    11y

    I'm not a wholesaler and I didn't sleep in a Holiday Inn last night but I am struggling with the premise of this post. 

    Perhaps I don't understand the definition of a wholesaler. Why do many feel that it's the responsibility of the wholesaler to estimate the rehab cost and the ARV? Is that how this works? Really? Sounds like a pretty high standard.

    If I'm buying something from you, I will check it out myself and take responsibility for determining whether a deal is a deal or not. I may appreciate your opinion or valuation and I may not. I'm the only one who can determine if the numbers work. If I miss, it's on me, not some wholesaler.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y
  • Real Estate Investor · Mesa, AZ · Member since 2014 · 73 posts · 24 votes
    11y

    OK, I can see where if a wholesaler missed the ARV and rehab estimate, he might contract the property at too high of a cost for some flippers to make their desired profit.

    I guess that I'm equating it to a Realtor that takes an overpriced property just for the listing. Are they dishonest or immoral? I sincerely doubt that. Maybe they just mis-calculated or their idea of re-habbed or move-in ready is different than mine.

    I'm betting that they can't do that too many times before they go out of business unless they have a strong buyers list that is able to make something out of those deals.

    Wholesaling is an Interesting aspect of REI.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y
    Originally posted by @Kelley B.:

    OK, I can see where if a wholesaler missed the ARV and rehab estimate, he might contract the property at too high of a cost for some flippers to make their desired profit.

    I guess that I'm equating it to a Realtor that takes an overpriced property just for the listing. Are they dishonest or immoral? I sincerely doubt that. Maybe they just mis-calculated or their idea of re-habbed or move-in ready is different than mine.

     Not quite an equal comparison, but using that, realtors take overpriced listings to get the listing, they over promise and under deliver, but they know when they get no activity, they can go back to the client and tell them the market has spoken and we need to lower the price to get It sold. In the wholesaler situation, they don't have that luxury and simply lose the deal. They typically go I to it paying too much due to lack of knowledge and experience or they fudge the numbers and hope one of their less savvy or desperate for any deal buyers will bite the hook.

    Thank you for your contributions to this thread, you have generated a great side discussion on this topic Kelley.

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