The Truth about Wholesaling!

The Truth about Wholesaling!

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

    Good info Will. Like I said, I'm not familiar with wholesaling real estate and stumbled onto this thread in my research (Bigger Pockets has more rabbit holes!). I learned a lot from reading this thread.

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

    Thanks @Will Barnard that is the type of explanation I was looking for. I understand what others are saying about there being different markets and competition but I wanted a better GP idea and you gave it to me.  Thanks again. 

    Erin

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

    Good points @Sammy Gallegos I appreciate those tips and the breakdown of the 3 buyers I will be dealing with - great info to keep in mind as I come across properties. 

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

    @Kelley B. Hello Kelley and Erin, Maybe this will help you a little. This formula is for an Assignment of Contract. Every state is different so make sure you can do an assignment of

     THE OFFER FORMULA (to do an Assignment)

    When you are ready to try an assignment, you can use the offer formula that is nothing more than adding or subtracting four numbers. How much work is it to get these four numbers, you might ask? Well, three of the four numbers you can plug in! That's right! You will only need to calculate one of these numbers.

    ARV - Your Realtor will provide comps to give you the ARV, After Repaired Value

    The Percentage at which your Buyer wants the Property - Your buyer will tell you what type of deal they want and how much of a discount they want off of the ARV (or how much of the ARV they will pay).

    Less Estimated Rehab Repairs - This is the only number you will break a little sweat to calculate. Remember you can have a home improvement store such as Home Depot or Lowe's assist you with estimates. In most areas, Lowe's provides free estimates for exterior work such as roof, siding, windows, doors, fencing, decking, etc.

    Look at trying to calculate repairs in a home like eating an elephant: just take it one bite at a time. Let's take a look at some of the things we are looking at:

    Exterior - Bigger Ticket Items

    • Roof - look at chimney as well
    • Siding
    • Exterior Doors and Windows
    • Condition of the Fencing, Decking and Landscaping
    • Garage - Roof Siding and Doors, is there electric in the garage?

    Interior - Bigger Ticket Items

    • HVAC - Heating, Venting and Air conditioning
    • Electrical
    • Plumbing
    • Kitchen
    • Baths
    • Major Drywall work

    Other Interior Items

    • Paint
    • Flooring
    • Fixtures
    • Interior Doors

    Other Considerations

    Does the property have services provided by the local town or city? Sewage and water are two city services we take for granted. Some homes will have a well for water and a septic tank for sewage. Know what each property has and determine if any additional due diligence is necessary. 

     Tip:

    Remember your repair amount needs to be in the ballpark. 

    Your Profit - How much profit do you desire to make? This is where you enter the dollar amount you are trying to make on the deal. Remember the better the deal, the more profit you can probably make.

    So let's take a look at an example of this:

    We have found a home that is the type of house our cash buyers want and is in the neighborhood they want. We just have to determine if we can get this house under contract at a price that will appeal to our cash buyers.

    Example Calculation for an Assignment Deal:

    We have a buyer who wants a 20% discount; in other words, they are willing to pay 80% of ARV.

    ARV = $100,000

    Buyer will pay total all-in price = $80,000

    Repairs = $15,000

    We want to make an Assignment Fee = $5,000

    Now let's add this up:

    Buyer's All-in price is = $80,000

    • Repairs = $15,000
    • Your Profit = $5,000

    The max offer that may work for this deal is $60,000

    If you get this deal under contract for $60,000, the buyer does the $15,000 in repairs, and the buyer pays you $5,000 for an assignment fee, then the total all-in price the buyer will pay is $80,000 ($60,000 + $15,000 + $5,000)contract in your state.

  • Milwaukee, WI · Member since 2015 · 1 post · 0 votes
    11y
    Originally posted by @Will Barnard:

    James, thanks for your response, I could not agree more and that is one of many reasons why I created this thread. Not only to teach people who to wholesale right and spread the trusth about the fact that it is not as simple as the gurus would make you believe, but to also help preach that doing it right on both a legal AND an ethical manner will help preserve our business.

    These crooked so-called wholesalers who lock deals with little spread and lie about exit values and rehab costs in hopes to sucker a newbie buyer into buying their deal will likely cause that new buyer to lose their shirt and most likely never re-enter the market. Such occurances can be negative ligfe changing events for an investor and if we can help prevent just one occurance such as that, I feel I have done my part.

     Good Afternoon Will.

    Let me start by saying excellent thread my man! I am a local cellular phone store owner in the Milwaukee, WI area. I have dreamed about entering into RE every since Monopoly was introduced to me as a child. I have read virtually everything imaginable on this subject, as well as completed many of the guru's seminars such as... Than Merrill's Fortune Builders, Robert Kiyosaki's Rich Dad... and many more.

    I have read many comments on this thread about these "crooked so-called wholesalers." I must say that it has been very informative. I pride myself on doing great business that is not motivated by getting over on customers for higher profits. The nature of the business that I am currently in details me inquiring exactly what the customer wants. It's more profitable for me to have a returning customer than to sell them more than what is needed, one time only. So, I totally get it.

    Now for the juicy stuff! Will, can the stigma be reversed? As a seasoned buyer, I understand how you can relate to other buyers. I totally get you being sympathetic to buyers who may get sucker by a crooked wholesalers. However, are there cases of the opposite? Are there scenarios of seasoned buyers who take advantage of "Newbie" wholesalers? Are the doors purposely slammed, with an exaggerated stigma, on new wholesalers with the intent to officially lower what profits  that can be made by wholesalers? Can it be the case of "The Rich Gets Richer?" 

    Its common sense, in my opinion, that a buyer should have a larger profit spread. However, the stigma place on new wholesalers can be discouraging! There may have been deals where the numbers where totally great for a buyer and he still used "the numbers aren't good" strategy in efforts to lower the price. The wholesaler could have possibly worked his tail off for this great deal just to be subsequently, shut down by a greedy, more experienced buyer. This also can be life changing and cause a newbie to lose his shirt as well. Since there is not an official boycott on wholesalers, it can possibly make a new wholesaler think the stigma has more of an interior motive, instead of it being a way to improve wholesalers tactics.

    Sorry for the book,

    Albert Thornton
    Leaders Of The Free World LLC.

  • Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    11y

    @Albert Thornton let me share with you the perspective from the other side of the fence: the investor buyer who is looking for a deal. I have money sitting on the sideline right now and that does not feel good: I need to find a deal. It sounds weird, but investors will tell you that having money sitting arround and not finding a workable deal can make you pretty anxious. I am driving arround and looking at properties almost on a daily basis. I am making offers where I can (I don't do shotgun lowball, the asking price has to be within reach) and I am really, really, really looking to get something under contract!

    If a wholesaler would present a deal to me that is workable, do you think I would tell him that the numbers don't make sense just to see if he would be willing to give up his profit so I can fatten up the deal on my side? No way would I risk loosing that deal to someone else!

    If I can live with the numbers I really don't care that how much he is making: I will be happy to sign on the dotted line. I know how hard it is to find a deal that's good enough for an investor - a wholesaler has to do that and then beat that by at least another 5k. That is very hard to do and I respect the guys that have mastered this art!

    Like @J Scott said earlier wholesaleing is absolutley not an easy startegy and it requires a lot of hard work and a lot of different skills that most newbies just don't have.

    I contact every wholesaler that I come across. I call the number on the bandit signs, I sign up on their web page, I answer all their questions so I can can get on their "buyers list". I even tell then to contact me with every deal they have, even if they think it's a bad one. You may have guessed it, I have not gotten a single lead from a wholesaler. 

    And it makes sense. Most of the guys are completley new to the business and are fresh from a seminar. They have been told it's easy, but it's just the oposite. After half a year they disapear again. I know there are some successful wholesalers out there, but I have not met one yet. If someone asks me my advise to get started it would be - safe some money and buy a house, fix it up and rent it out. That's probably easier and wil teach you what you need to know to become a succesful and respected wholesaler - eventually. 

  • Real Estate Investor · Raleigh, NC · Member since 2011 · 142 posts · 39 votes
    11y

    @Will Barnard this is so true. I always say most wholesalers are like that buy here pay here used car lot on the bad side of town shady business. I only know one guy who makes money wholesaling. They assume you will do no DD on deal...... Mind blowing

  • Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
    11y

    Pretty interesting thread.  One thing that hasn't been made clear (forgive me if it has and I missed it) is that wholesaling can be attractive to those with a lower risk tolerance who don't want to take on the risks of rehabbing, spec building, etc.  Sure, one can make more rehabbing a home, but for that extra profit you are also taking on more risk.  What if the home doesn't sell?

    Some wholesalers I know make very good money.  One of them is a close friend and he wholesales for the following reasons:

    1. he has been in real estate for over 10 years and knows the basics very well

    2. he is relatively risk averse and doesn't want to take on the risks of rehabbing, despite the potentially higher payday if successful.  he'd prefer to make his $10k and pass on the risk to the rehabber.

    3. he has a great "people" personality and he's the kind of guy that you trust after knowing him for about 30 seconds.  he used to be great with the ladies in high school and college, now he's great in someone's living room.  he has an uncanny ability to "read a room" and always seem to know the right thing to say to put someone at ease.

    4. he is not interesting in "graduating" up to another type of investing; (he invests for passive income with local commercial real estate companies)

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

    @Account Closed I am not sure if your point has been discussed in this thread previously, however, I would agree with you. There is much less risk in wholesaling and along with that, less profit, comparably speaking. Nothing wrong with that at all, simply wholesale more quantity , deliver higher quality deals, and make more.

  • Real Estate Investor · Navarre, FL · Member since 2013 · 38 posts · 32 votes
    11y

    This is a good post, As a very well known wholesaler in my market, I try my best to fully evaluate all prices and make sure that there is a significant profit for my end buyer. This is also why my partner @JPaul Mills and I have a very good reputation. If you do not know how much rehab costs are, get a contractor to come out and look at the property with you. You may have to pay the guy for his time but, after a few times of him walking through a property with you, you can start doing your own estimates because then you know. Also, when determining an ARV, work with a real estate agent to pull a CMA and that will tell you more than anything else.

  • Wholesaler · Navarre, FL · Member since 2014 · 252 posts · 86 votes
    11y

    I just laugh at all those guys and gals n here who bash wholesalers. Yes there are the bad wines who give us good ones a bad name  I pat myself on the back for all the marketing I do. That's what gets the leads coming in because everyone and their brother is all over the foreclosures and the auctions but to get your hands on an OFF MARKET property to flip. Sounds like a good deal to me. Wouldn't you say so @Mike Flowers ?

  • Valdosta, GA · Member since 2014 · 11 posts · 2 votes
    11y

    Thanks for the buyers mindset, It's good to know how and what a buyers expects from a Quality wholesaler. Certainly this information will be useful in my pursuit of finding and  locating deals for perspective buyers. And there is nothing remotely simple or easy about Wholesaling, It's probably one of the most difficult things to acquire  or do competently .

  • Renter · Hiram, GA · Member since 2015 · 23 posts · 5 votes
    11y

    I am a true newbie and have to admit that I bought into the hype of wholesaling. I can't express how grateful I am to all the experience and in site that I have gotten from previous post. I now know that I must be diligent in my research and building my knowledge to become a respected investor in this business and that hard work is what it takes not a get rich quick scheme.   Thank you

  • Renter · Dallas, TX · Member since 2015 · 5 posts · 1 vote
    11y

    This has been extremely helpful!  I am entering real estate and would keep to whole sale. However, I know that is is important to make sure that I can deliver what the investor truly wants.

  • New York City, NY · Member since 2014 · 15 posts · 7 votes
    11y

    Thank you for posting your experience with a so called wholesaler. I plan on starting my real estate career with wholesaling, but I'm the type of person that likes to know the ins and outs of something before I do it. This definitely taught me something that is very important, to evaluate property as if I'm buying it myself and to learn how to properly come up with a rehab price that will be accurate and realistic. 

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

    Ok BP I have another question :). So let's say I have a GC to give me accurate rehab numbers.  How am I supposed to know the layouts/features of the comps if I don't have access to mls?

    Any and all input is appreciated,

    Erin

  • Little Elm, TX · Member since 2014 · 356 posts · 47 votes
    11y
    Originally posted by @Erin Elam:

    Ok BP I have another question :). So let's say I have a GC to give me accurate rehab numbers.  How am I supposed to know the layouts/features of the comps if I don't have access to mls?

    Any and all input is appreciated,

    Erin

     *Bumping

  • Bulawayo, Zimbabwe · Member since 2015 · 1k+ posts · 253 votes
    11y

    Wow..23 pages.Thanx for the contributions.Surely money can be made consistently with wholesaling.However i picked up that it can be like a job(no passive income), nevertheless the skills you pick up(finding deals,negotiating) are also great for the buy and hold investor

  • Investor · Houston, TX · Member since 2008 · 167 posts · 44 votes
    11y

    This is a great thread.  Wholesalers and/or wholesaling is tough.  The bottom line is we all want deals.  The problem Is what makes a good deal and how you evaluate said deal.  The word wholesaler can be gut wrenching  but if you know what you're doing and who who're dealing with it can be great.  

    Do your due diligence and educate yourself on the market and you can be successful.  The simple fact of finding a deal is hard enough.  So, it's double edged.....hate wholesalers or love them or do it yourself, it's not easy.  We are all learning.  Educate those that are new, those that are learning, and those that do business.  We all want to be in the same place....just doing deals.

  • Will BarnardPro Member
    Moderator
    OP
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y
    Originally posted by @Erin Elam:

    Ok BP I have another question :). So let's say I have a GC to give me accurate rehab numbers.  How am I supposed to know the layouts/features of the comps if I don't have access to mls?

    Any and all input is appreciated,

    Erin

    You need to get access or rely on someone (perhaps a RE agent) to get you the info you seek (which is necessary to evaluate ARV and what the so,d comps had in them). Using public sites with free access is better than nothing, but it is not live, it us not as accurate, and it often is missing vital info and data. Get access to properly accomplish your mission.

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

    @Will Barnard thank you for your answer. Exactly what I needed to know. 

    Regards, 

    Erin

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

    Possible Rehab (Fix & Flip) or Wholesale Deal:

    So I had a veteran Realtor speak to me about a pocket listing… He tells me the property is worth about $450K and the investor who purchased it is in over his head and out of money. The investor is into the property about $260K and is in need of selling the property @ $300K… Of course, assuming the cushion is to cover closing costs and Realtor commissions (once listed). He said, it was “As-Is/Where-Is”, and that there was plenty of meat on the bone for someone to come in with a crew and finish it out. There were cabinets and granite counters at property among other materials, but not installed.

    I asked the veteran Realtor to send me the CMA and Data on the subject property and I would do my own due diligence and compare to his info.

    I also requested a third party (another Realtor – a friend) to cross reference my numbers.

    Let's take a close look at the (subject) property:
    SUBJECT PROPERTY:

    • Type: Single Family Detached
    • Exterior: Brick, Siding
    • # of Stories: 1
    • Year Built: 1950
    • Recent Rehab: Semi
    • Bedrooms: 3
    • Full Baths: 2
    • # Parking Spaces: 2
    • Square Feet: 2,263
    • List Price: 300,000


    Now let's dive into the numbers:

    I believe the comps from my third party are very close in range with square footage and very similar to the subject property. Not to mention, very similar to my numbers and own research.


    SEE TABLE “A”

    I personally would use the Average SOLD price, which places this property at $123.94 per square foot. By multiplying this with subject property's square footage by 2,263, our total equates to $280,476 (ARV – AVG SOLD). Even if we take the high SOLD price per sq. ft. and multiply to subject's sq. ft., we total @ $361,492 (ARV - HIGH).

    Now let’s look and compare the veteran Realtor’s numbers:

    SEE TABLE “B”

    This veteran Realtor's numbers and comps are unfortunately horrendous... A true disservice to his client and anyone new interested in investing. His comps consist of comparing a vegetable to a fruit. He truly cherry-picked higher priced and size comps, which were much further in distance... Not to mention, using the wrong average; Avg. Total Price vs. Avg. Price per Sq. Ft. on similar properties to the subject property.

    He uses a two story with outstanding features @ $188.52/sq. ft. (SOLD @ $545K) to equate an ARV/List Price of $426,633 (affecting avg price on comps)... As for his second comp, it too is another discrepancy in contrast to subject property @ $145.37/sq. ft. (SOLD @ $438K)... Even if we used this comp, which is not a good comp, against the subject property, we would have an ARV of $328,972... Keep in mind, he is trying to list the house @ $300K in "As-Is/Where-Is" condition and is claiming there is "meat on the bone".

    Finally, his third comp is about 90% closer to subject property @ $134.95/sq ft (SOLD @ $296,900) and realistically, that is where I see the true numbers, which is between $280K - $297K... Again, he is trying to list the house @ $300K in "AS-IS" condition... With a CMA (which he actually created for the seller seven months ago) resulting at a suggested list price of $426,633 (ARV).

    This is what riles up investors. Now if he brings me other properties, do you think I will trust his product and method? He not only gave me a CMA he prepared for his client seven (7) months ago, which has errors in itself, but he did not take the time to retrieve the last three (3) to (6) months of appropriate and similar comps for the subject property he was trying to sell me.

    Irregardless, I do my own due diligence with all properties that come across my desk that I am interested in, as should you. In this case, my first impression on this Realtor, is a bad one.

    I thought I would provide just some limited insight (without pictures and other info to truly compare the CMA's to each other) to help those who are new to the business and understand why it is so important to understand the numbers and process.

    In my opinion, if a wholesaler or Realtor for that matter, does not know the ARV, Renovation or Rehab Costs, and the Sales Price… I won't even entertain any property they bring to me.

    Bottom line, please take heed of this lesson, learn your field and I hope this helps as this is just my two pesos.

    PS: Practice, Practice, Practice

    Big Henry

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

    Thanks for the example Henry, this illustrates how important it is to understand how to comp a property as a RE investor (and all you wholesalers). Adjusting comps to properly compare to the subject property is not just math, but an art form and it takes practice as well as more practice. A good place to get some fine line details into this is to take an appraisal class or learn from an appraiser. I have found that many agents don't even know how to adjust comps and running a CMA is not enough. Garbage in = Garbage out every time.

  • Real Estate Investor · Woodstock, MD · Member since 2015 · 28 posts · 7 votes
    11y
    Originally posted by @Mike G.:

    My investing strategy is currently in rehabbing/flipping. I have noticed that some wholesalers underestimate the repair costs (sometimes significantly) and overestimate the ARV. Maybe the deal is better for someone looking to buy and hold, but the wholesaler should specify that.

     And a wholesaler should know what their buyer is looking for buy and flip or hold two totally different jobs, otherwise the repair estimates will always be all wrong.

  • Real Estate Investor · Woodstock, MD · Member since 2015 · 28 posts · 7 votes
    11y
    Originally posted by @Morris Lucas:

    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.

    I really appreciate this discussion as buyer beware but also because value is afforded by you to wholesalers who do their due diligence. 

    As someone new, i am generally thinking from a position of the good, the bad, and the ugly for starters, 10K 20K 30K to judge whether a property worth pursuing. Then actually running the numbers for all the work i see as needed based on area material and labor costs. And finally, for a house put under contract paying a contractor do an actual estimate for either flip or hold for my buyers who have given me their criteria. 

    My goal is to provide value to the market, giving inaccurate rehab estimates isnt going to serve my buyers or me if i want to continue to do business (or sleep at night).

    So far comps, even from realtors are iffy, in part because of the wild fluxuations and uncertainty in the market. I think providing the actual comps being used and any discussion about the values in the area to my buyers so they can judge for themselves what the ARV is would be the best approach.

    Does my strategy have merit from a buyers perspective?

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