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 · Woodstock, MD · Member since 2015 · 28 posts · 7 votes
    11y

    of course i would provide the ARV i believe to be correct and that i used for my calculations.

  • Real Estate Investor · Woodstock, MD · Member since 2015 · 28 posts · 7 votes
    11y

    The example Henry gave is great, and unfortunately im already seeing similar examples. As a wholesaler i need to really review and when appropriate supplement the comps with additional information i have found. Thank for laying it out there.

  • Real Estate Investor · San Antonio, TX · Member since 2014 · 785 posts · 190 votes
    11y

    to be a good wholesaler - 

    1. The ability to contract RE at great discounts.
    2. The ability to build a real buyer's list (larger, the better)
    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.

    Very true! that's why any new investor should team up with an expert mentor in their area. You'll never be able to do those three things on your own IMHO. There are free mentors all over the place, no matter what people say. [Removed Solicitation]

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

    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?

    Yes, very much so. Providing the evidence in how you determined your ARV is a great way to add value. Showing evidence on how you came to yr rehab estimate is also another great value add like providing a line item of each repair or at least a list of repairs included in your total rehab budget used.

  • Real Estate Investor · Woodstock, MD · Member since 2015 · 28 posts · 7 votes
    11y
    Originally posted by @Will Barnard:
    Originally posted by @Kathleen Miles:
    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.

    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?

    Yes, very much so. Providing the evidence in how you determined your ARV is a great way to add value. Showing evidence on how you came to yr rehab estimate is also another great value add like providing a line item of each repair or at least a list of repairs included in your total rehab budget used.

     Thanks for the input and feedback Will. I really appreciate it.

  • New to Real Estate · Ogden · Member since 2014 · 107 posts · 19 votes
    11y

    Newbie Wholesaler..."to be"

    First of all, this is why I have yet to wholesale a property. I believe in educating myself as much as possible before I even attempt to approach a seller and offer to a REIA or rehabber . I have passed up a few possible great deals b/c I want to not only feel like I know what I'm doing. I want to start off on the right foot. I also want to calculate comps comfortably. I'm seeing that the numbers are where it becomes the trickiest. Marketing, approaching sellers and finding deals are all the most simple parts to learn. Calculating cost, A.R.V. and coming up with a number where everyone wins is definitely not as simple as the 7% formula. I am so excited to start, but not until I can represent myself as professional and accurate as possible. I think that may be pretty soon though!

    ~Prosperous Investing~

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    11y
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  • Realtor · Orange County, CA · Member since 2015 · 74 posts · 13 votes
    11y

    Thanks for your post Will!

    I will definitely keep those 3 things in mind as I try to build a great name for myself!

  • Newark, OH · Member since 2015 · 17 posts · 0 votes
    11y

    @Will Barnard

     Thanks for the advice! I am an aspiring wholesaler myself and right now am trying to learn the business. Are there ways that I can learn the value of my local market before I start wholsesaling, as well as be able to accurately give estimates for rehab costs before I start wholesaling? I want to make sure I know my stuff before I start doing it so I don't get myself or someone else in a bad deal.

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    11y
    Originally posted by @Matthew Carr:

    @Will Barnard

     Are there ways that I can learn the value of my local market before I start wholsesaling, as well as be able to accurately give estimates for rehab costs before I start wholesaling?

    Matthew, 

    You may want to read this thread as I have answered these questions in detail. 

    Big Henry 

  • Newark, OH · Member since 2015 · 17 posts · 0 votes
    11y

    Ok thanks! @Henry M.

  • Real Estate Agent · Kissimmee, FL · Member since 2014 · 32 posts · 21 votes
    11y

    As someone who's just getting into the Wholesaling business, let me weigh in by saying thank you for all your comments - they are invaluable. It seems to me the lessons to be taken away from this topic are twofold: First (and most importantly), operate with honesty and integrity. Second, it's important to know your craft. Obviously, the latter is much easier said than done, and there are levels of expertise (as in all crafts), but like any job, you can't be the CEO without first learning how to operate the copy machine. As far as operating with honesty and integrity are concerned; that just seems to be a no-brainer to me. I hold no misconceptions about how hard this is - yes, I'm sure there will be many "no's" from potential cash buyers, but it also seems to me that if you do your homework; if you present deals in a way that creates a "win-win" situation for all; and if you are honest in your dealings, success will come. As we used to say in the Navy, "the cream always rises to the top." Frankly, nothing scares me more than a hit to my personal reputation. Money comes and money goes, but I will always carry the same name. Thanks again for all your comments. They are most appreciated!

  • Real Estate Investor · Cedar Park, TX · Member since 2014 · 28 posts · 8 votes
    11y
    Originally posted by @Kelley B.:

    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.

     It's not the responsibility of the wholesaler to determine actual costs, but it is their responsibility to have good "ball park estimates." I'll always use my own calculations, but the numbers provided by the wholesaler should be close to reality, not a baiting tactic. If a wholesaler is unable to provide reliable information to buyers, they won't be wholesaling long. It's also about honesty, courtesy and being a professional. I wouldn't want to waste an investors time with bad information or inflated numbers, that doesn't help anyone or my reputation! My 2 cents.

  • Investor · MD · Member since 2015 · 208 posts · 32 votes
    11y

    @Will Barnard 

    Wow! Thank YOU! I was told the opposite of what you're 24 pages discuss. I learned a lot of the do's & don'ts and I'm not even interested in wholesaling. I'm a former property manager of several apt. buildings in NYC. Anyway, I want to rent out my current starter home & rehab a house while living in it. I had to rebuild this current home due to a fire, so I have a little recent rehab experience. I was told that I should wholesale some deals before I get into rehab so I could learn the ropes of a good deal. But according to you pros, that's backwards. I should be rehabbing, which is what I want to do anyway. What's your opinion?

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    11y
    Originally posted by @Natasha M.:

    @Will Barnard 

     What's your opinion?

    Natasha,

    Keep an open mind and allow the deal to come to you. If the deal warrants more profit in rehabbing than wholesaling, then do so... If you find a property where you can acquire and hold, then do so... Remain open and allow the deals to flow vs. you setting your mind to just one aspect of real estate.

    Just my two pesos.

    Big Henry

  • Investor · MD · Member since 2015 · 208 posts · 32 votes
    11y

    @Henry M.

     sounds like great advice. I'll do that, thanks!

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

    Great question Natasha, there is no right or wrong answer however, it is my considered opinion that the best wholesalers are the best marketers (for deals) or they are experienced rehabbers. That said, if you have a rehab project and the profits are worth the time and effort more so than a wholesale fee, then do the rehab. Perhaps you can take on an experienced project manger or a consultant who can help save you from costly mistakes.

  • Nutley, NJ · Member since 2014 · 11 posts · 3 votes
    11y

    Great post @Will Barnard.  Thank you for providing your thoughts on wholesaling.  Being a newbie, I admittedly was initially led to believe that wholesaling was the best way to get started.  However, as I've done my research and heard from pro investors in the forum, it seems clear that I will have to develop my knowledge extensively to be a good wholesaler.  I am aware that marketing techniques such as direct mailing to unlisted properties is a big key to finding great deals.  However, what would you say is the best way for new investors such as myself to learn how to properly assess rehab costs?  Is this a matter of having a contractor with you during your initial inspections until learning how to properly spot necessary rehab items and their costs, or is there a more efficient way of doing so?  

  • Bellingham, WA · Member since 2015 · 2 posts · 0 votes
    11y

    I think people that are starting in the business think that the easiest way to go is thru wholesaling, but they do not take into consideration that to be a good wholesaler you have to have knowledge, be very good with estimating repairs, be a great negotiator, etc. Wholesaling is not easy!  Thank you for sharing your experience.

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

    Great post @Will Barnard.  Thank you for providing your thoughts on wholesaling.  Being a newbie, I admittedly was initially led to believe that wholesaling was the best way to get started.  However, as I've done my research and heard from pro investors in the forum, it seems clear that I will have to develop my knowledge extensively to be a good wholesaler.  I am aware that marketing techniques such as direct mailing to unlisted properties is a big key to finding great deals.  However, what would you say is the best way for new investors such as myself to learn how to properly assess rehab costs?  Is this a matter of having a contractor with you during your initial inspections until learning how to properly spot necessary rehab items and their costs, or is there a more efficient way of doing so?  

     There are a ton of threads on how to estimate rehab costs, I have provided info in many of them. Here is a thread where I gave a somewhat detailed answer, check it out: http://www.biggerpockets.com/forums/67/topics/7318...

  • Real Estate Investor · St. Louis, MO · Member since 2015 · 12 posts · 5 votes
    11y
    Originally posted by @Henrietta M.:

    Newbie Wholesaler..."to be"

    First of all, this is why I have yet to wholesale a property. I believe in educating myself as much as possible before I even attempt to approach a seller and offer to a REIA or rehabber . I have passed up a few possible great deals b/c I want to not only feel like I know what I'm doing. I want to start off on the right foot. I also want to calculate comps comfortably. I'm seeing that the numbers are where it becomes the trickiest. Marketing, approaching sellers and finding deals are all the most simple parts to learn. Calculating cost, A.R.V. and coming up with a number where everyone wins is definitely not as simple as the 7% formula. I am so excited to start, but not until I can represent myself as professional and accurate as possible. I think that may be pretty soon though!

    ~Prosperous Investing~

    I agree with EVERYTHING you wrote. My reputation is important to me and I do not want to destroy it before I really begin. I'm researching, studying and taking as much time as needed to learn my craft before I offer my services.

  • Wholesaler · Jonesboro, AR · Member since 2014 · 36 posts · 10 votes
    11y
    @Nemi W.

    It certainly is good to receive constructive feedback towards making adjustments to how one evaluates a property. I'm almost ready to put my big toe into the wholesaling pool and I don't mind saying that I'm a bit nervous considering the amount of negative comments I have read regarding Wholesaler's that are doing a poor job. 

    I have spent a considerable amount of time reading the blogs, forums, and listening to podcasts on BP as well as reading books on the subject on R.E. towards gaining  substantive insight into becoming a professional in the area of wholesaling properties. 

    I sincerely hope that my mistakes will not be judged by the fact that I'm a wholesaler as opposed to someone new to the business and attempting to learn from their mistakes.  

  • Real Estate Investor · Wyandotte, MI · Member since 2014 · 66 posts · 41 votes
    11y

    @Will Barnard Great post!  I agree.  I just posted something about a very similar thought.

    The things you list that are required to become a great wholesaler are the same things needed to actually invest.  I think a consistent, good wholesaler, who doesn't quickly move on to actual investing is kinda like a unicorn...

  • wholesale/assign/whatever · Levittown, NY · Member since 2015 · 33 posts · 14 votes
    11y

    I am a wholesaler and I make sure my numbers on 100% on for my cash buyer and gving wiggle room so that most likely, they will make more. 

    I think people run the numbers and their offer price looks so low compared to the asking price of the property. So, they start to play around with the numbers because they want the deal to go through without thinking about the consequences at closing. 

    1. foreclosed property asking $460,000

    2. Finding comps that are 100% accurate - run by your realtor. Accurate comps would be homes that sold in that area within 5 blocks, within the last 3 months and have the same amount of beds and baths. The sq of the $460,000 is 4139. So, the houses that you would use for comps must be 20% higher or lower than 4139. I am using 3 houses that sold in the area that meet all the qualifications above, add them, and divide by 3. You get your median price. You take the sq footage of each property (using 3 properties) add them and then divide that number by 3. Take the median price of the 3 properties and divide the number of the median price of the sq footage. This will give you the amount per sq foot. You take the sq footage of the foreclosed house..in this case it's 4139 and multiply that by the price you got, in this case it's 205. You take the sq footage 4139 and multiply it by 205 and you get your ARV. Take the ARV x 70% (.7). You take that number and subtract the amount for the rehab ( you get the rehab number from a contractor ( I never ever guess this number. I want it exact,) then you subtract the amount of money that your cash buyer needs to make. I live in NY and I would never use a cash buyer that tells me he needs to make 45 grand on the property. I move on to the investor that that has the same philosophy that I do.... "Greed does not rest until it is satisfied and Greed is never satisfied". I'm not, never have been and never will be a greedy person. Me (the wholesaler's fee) and subtract that. Then you take that number and subtract around 10 grand for "wiggle" room. The number you have at the end of this is your offer price. A wholesaler cannot simply start fooling around with the number to get a deal done that is going to piss everyone off. It's not about getting the deal done, it's about getting it done right and everyone walking away from the table Happy Campers!! 🏦

  • Investor · Orlando, FL · Member since 2013 · 99 posts · 69 votes
    11y

    @Will Barnard 

    Integrity is definitely a missing ingredient among "wholesalers" here in the Orlando area as well. This might have been mentioned earlier, but when thinking of the word "wholesale" we should be thinking of making money in terms of volume of transactions, not just looking to knock it out of the park on one individual deal at the expense of the buyer. Much like wholesalers in other sectors tend to make money on bulk purchases or on a high volume of transactions over time, the same should be considered for real estate. In an ideal situation everyone would love to make $10 to $20k for every wholesale deal, but if the value isn't there for the end buyer there is no need to inflate numbers.

    At the firm I work with in Orlando, we have been able to maintain an A rating with the Better Business Bureau while doing 1,000+ transactions, and a good portion of the deals have been wholesale deals. While no system is perfect, we've been able to separate ourselves from competitors by putting sold comps, rent comps complete with maps and sold dates in our marketing flyers for our properties. Folks can get a good feel for the integrity of our deals by having all the information at a glance, vs pie in the sky values arm twisting and high pressure sales tactics. The common trend with other wholesalers is to just put a "Zestimate" or a random list of addresses that have "sold nearby", without any sold dates, map to verify the comps are in the neighborhood or are similar to the subject property. We trade doing 1 or 2 deals a month with huge profit margins for doing 20 to 30 monthly and leaving a enough money on the table for investors, while not compromising our integrity.

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