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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  • Amelia, OH · Member since 2017 · 2 posts · 2 votes
    9y

    the question is, how does a new wholesaler learn these tips quick so as not to look like a buffoon?

  • Flipper/Rehabber · Indianapolis, IN · Member since 2015 · 204 posts · 89 votes
    9y

    Thanks for the post @Will Barnard, I learned something from that.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y
    Originally posted by @Gregg Walker:

    the question is, how does a new wholesaler learn these tips quick so as not to look like a buffoon?

     By being a member of BP Nation, asking the question, and getting all the great answers all in one location.

    Of course "quick" should not be your sole focus. It takes time to build a business and grow it, it does not happen over night.

  • Chino, CA · Member since 2016 · 9 posts · 1 vote
    9y

    Great information in this thread about wholesaling. There are indeed many wholesalers out there who are marking up deals to a point where they are no longer attractive and do not make sense. For any wholesalers who are looking to JV deals make sure the numbers make sense and deals are truly profitable by factoring in the following (accurate ARV - desired investor profit - rehab costs - holding costs - closing costs - wholesaler fee). If the deal does make sense ensure that the property is the under contract as it is illegal to market a property otherwise (I have seen instances where the property was not under contract but the wholesaler was marketing the property). Stay persistent, consistent, and steady and conduct yourself with the utmost honesty/integrity and you will see results.

  • Edgewood, MD · Member since 2014 · 283 posts · 59 votes
    9y
    Originally posted by @Sajan Bhakta:

    Great information in this thread about wholesaling. There are indeed many wholesalers out there who are marking up deals to a point where they are no longer attractive and do not make sense. For any wholesalers who are looking to JV deals make sure the numbers make sense and deals are truly profitable by factoring in the following (accurate ARV - desired investor profit - rehab costs - holding costs - closing costs - wholesaler fee).  If the deal does make sense ensure that the property is the under contract as it is illegal to market a property otherwise (I have seen instances where the property was not under contract but the wholesaler was marketing the property).  Stay persistent, consistent, and steady and conduct yourself with the utmost honesty/integrity and you will see results.  

     How would I find out what the holding and closing costs are?

  • Edgewood, MD · Member since 2014 · 283 posts · 59 votes
    9y
    Originally posted by @Gary Harris:

    Hi Chad,

    Expenses

    1.) Closing to buy 4% of ARV

    2.) Closing to sell     3%

    3.)  Holding               10%

    4.) Marketing             3%

    5.) My Profit              15%

    TOTAL                      35%

    100% - 35% = 65% What's left over to buy house and repair house

    $250,000 ARV x 65% = $162,500 - $15,000 (Repairs) = $147,500 MAX OFFER

     Thanks for the post. I was wondering how to factor in closing and holding costs.

  • Wholesaler · Avondale, AZ · Member since 2017 · 21 posts · 1 vote
    9y
    Thank you for your insight Will. I'm relatively new at wholesaling in the Arizona market. Anything that helps me be a better wholesaler for my buyers is good learning material. Sorry about your unfortunate experience. There are many in the wholesaling industry that are only in it for the quick profit and dont care about the people around them. If your ever interested in buying in the Arizona area, lets connect.
  • Business Owner · Madison, WI · Member since 2017 · 79 posts · 59 votes
    9y

    The only thing is that I wish I had built up the capital from wholesaling before Facebook went public, If i had invested at the time I would have made 4x my money....I think about this every night. 

  • Boston, MA · Member since 2017 · 11 posts · 6 votes
    9y

    thank you

    I want to help the company I work for by adding to the acquisitions teams efforts 

  • New to Real Estate · Wilmington, MA · Member since 2017 · 16 posts · 12 votes
    9y

    This was a great read, I know its old but great.

    I've done a few wholesale deals myself and it took many misses to get hits.  I only knew a little about the trades skills but had general ideas on costs at least what I could see.    I used my rough math and what the owner was looking for to determine if I would move onto the next step.  If the owner wanted 300k and my math said i would need 50k in rehab and the comps were 400k it wasnt a hit for me cause my GC would surely add some more Ks to that.  I added a big cushion also.

    I brought in a GC and paid him a little something to get me better idea on costs.  It wasnt down to the $ but close enough within reason the investors i flipped to were happy.  I did need to drop my assignment fee once or twice but it was more important to me to also build a relationship with the investors and also this GC.

    the bad part the GC was great but had issues with drugs and alcohol so working on another one.

  • Real Estate Developer, Investor, and Broker · Raleigh, NC · Member since 2017 · 99 posts · 82 votes
    9y
    Originally posted by @Gregg Walker:

    the question is, how does a new wholesaler learn these tips quick so as not to look like a buffoon?

    That's the million dollar question.

    Study, research, network. This forum and your local REIA are probably the best places to accomplish most to all of this. At least up front (and on-going as well).

    As a rehabber and broker with a couple decades under my belt, I'd also add that it's going to be almost impossible not to make some mistakes along the way. Especially in the beginning. The important thing here is that when you DO make a mistake - try not to get too discouraged or let it become an excuse to quit or be apathetic - LEARN FROM IT

    Don't be like way too many people and just keep making the same mistakes over and over. Also, big tip here .. LISTEN to the feedback the experienced rehabbers on your buyers list are giving you. Even if it's negative or 'feels' not-constructive when you first hear it. Don't be so proud that you miss what they're really saying. Even if it stings a little, they're likely giving you the key info you need to make the necessary tweaks you'll need to make to your business model successful.

    (hint: you might have to actively ask them for feedback .. more than once .. most of the time that a wholesaler sends me an unrealistic prospect, I don't have the time to write them a response detailing all of the reasons the deal they just sent me isn't really a deal .. not to mention, most people don't like having their ideas, thoughts, preconceptions, business models etc. challenged. most are offended by this. so unless they come right out and ask me why I'm not making offers or responding to their prospects or a particular deal, I don't usually say anything)

  • Seminole, FL · Member since 2017 · 86 posts · 39 votes
    9y

     That was one of the best posts I read. I've tried to teach my kids the exact same philosophy: when someone says it can't be done (or even worse, you aren't good/smart/strong/quick enough to do that), to either let it roll off like water on a duck's back, or use that as fuel for your fire! Will be reading a lot more of your poses @Henry M.

  • Seminole, FL · Member since 2017 · 86 posts · 39 votes
    9y
    Originally posted by @John Woodman:

    ...

    I brought in a GC and paid him a little something to get me better idea on costs.  It wasnt down to the $ but close enough within reason the investors i flipped to were happy.  I did need to drop my assignment fee once or twice but it was more important to me to also build a relationship with the investors and also this GC.

    When you say you brought in a GC, was that actually on wholesale deals? If I am going to evaluate a wholesale deal, I would like to have a GC to review my estimations, but then I'm not planning on actually doing repairs, just getting info to show it is a deal (or bail if it's not) for some buyer. I guess my main question is how does a GC look at being used as a "second set of eyes"?

    And thanks so much for this thread @Will Barnard! I think I will spend a month combing over it!

  • New to Real Estate · Wilmington, MA · Member since 2017 · 16 posts · 12 votes
    9y

    On 2 of them yes.  My first attempt I failed badly.  I did not know enough about how much things cost and my estimate was way under.  So when I brought the offer to my buyer he needed approx $30k more to make it happen.

    I would say if you had a good eye and knowledge on what things cost for rehab you may not need one.  I paid one $250 and he was happy to spend an hour with me in the home and another hour writing up the rough draft on the est which I brought my buyers and they liked it.  Of course I did try to also try to have the buyer use the GC on the project but they went with their own.

    So as a wholesaler you wont do your own repairs but if your #s are off you wont get to reassign the contract and you may lose the buyers down the road as could be know "as the guy that cant come up with realistic rehab #s"

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y

    I just noticed that this thread, quite possibly the most popular longest running thread on the site, just got its 200th vote for the original post. That too could be a record for BP and I am so happy to see that so many people have taken all this info in and hopefully become better and wiser investors.

    Lately, you may have noticed a lot of comments regarding the legality of wholesaling throughout BP Nation. One of the reasons for that is due to the fact that many states are "cracking down" on unlicensed dealing for real estate. That does not make wholesaling illegal, but it does take away some of the ways people have been wholesaling. The act of assigning contracts is perfectly legal but there are ways to do it that would violate other laws and regulations so one must be careful on how exactly they structure, market, and transact a wholesale deal. If you lock a contract, bring your funds or that of borrowed funds, close, then resell the very next day, perfectly legal everywhere. If you lock a contract with an assignment clause, have no intent of closing if you don't find a buyer, public market the property, etc, you likely will have done one or multiple items that could get you in trouble.

  • Real Estate Professional · Mesquite, TX · Member since 2017 · 28 posts · 5 votes
    9y

    Absolutely. I am new in the industry here, I have actually worked for investors... but I think what you mentioned is where most people go wrong, jumping in thinking they do not need to have any knowledge of Real estate... I am spending my "starting stages" researching all that I can.. All about estimating repair cost, property values, location etc.. I dont think going to zillow and using their zestimate and using some equation are accurate enough.. to much risk there. 

    I am going to wholesale as a way to get into RE of course, with the hopes to flip one day.. I think there is money to be made here on every level, seller, wholesaler, and flipper, IF DONE RIGHT, Honestly, and accurately. 

  • Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    9y

    Northridge quake property-I walk away from it immediately. 

    There is no certification about wholesaler and qualification.  I am extremely weary those who claim they do.  At a local investor club several realtors got up stating they have wholesale or tape in Silicon Valley have many pocket listings. As you know homes have double to tripled in value from the 2012 trough. It is close to impossible people are underwater here. There are one or two reo homes coming up every 6 months.  I checked out these flamboyant realtors by looking at their biz cards they just got their licenses, almost all never had a transaction. 

    You need to have proven tract record that you have been doing it for awhile check out their credit, references.   

  • Phoenix, AZ · Member since 2014 · 5 posts · 3 votes
    9y

    Collarbleu-phx-wholesale

    I am hearing a lot of wholesaler horror stories lately. It seems integrity is in short supply. Wholesaling is more a service within an industry.  That is how I am building my wholesaling business, a service. The more stories I read, the closer I get to defining five star service. 

  • Specialist · San Francisco, CA · Member since 2017 · 9 posts · 1 vote
    9y
    Originally posted by @Howard Grant:

    Collarbleu-phx-wholesale

    I am hearing a lot of wholesaler horror stories lately. It seems integrity is in short supply. Wholesaling is more a service within an industry.  That is how I am building my wholesaling business, a service. The more stories I read, the closer I get to defining five star service. 

    Well said. My sentiments exactly. The more "fly-by nighters" there are, the better it will be to recognize the efficient well oiled machines. Anyone can correct my lingo if they'd like, but it seems to me a true and correct wholesaler is becoming a "niche" in itself. There's a market for the detail oriented ones to reappear. 

    Great post. 

  • Lakeland, FL · Member since 2017 · 9 posts · 1 vote
    9y

    Would you say in you honest opinion.  would you recommend rehabbing over wholesaling or would it be a lot easier to just do judgement liens and property tax as a new investor just to get some capital??? 

  • Chesapeake, VA · Member since 2013 · 4 posts · 1 vote
    9y
    Wow is all I can say. I've been reading the "no and low money down" book and considering trying the wholesale approach and this is definitely an eye opener. Thanks for the insight!
  • Norcross, GA · Member since 2017 · 6 posts · 1 vote
    9y

    Great post Will,

    From your post: "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"

    I think the reason a lot of people look at wholesaling as an entry point can be because of its low barrier of entry and the lack of commitment to taking ownership of property just putting it under contract. A good wholesaler has to be well educated on the Acquisition, Rehab, and Sell process. So this way when they present a deal to an investor they are confident that it is a strong deal.

  • Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes
    9y

    Just realized this post is over 6 years old.  The same principles hold true even today!

  • Philadelphia, PA · Member since 2017 · 26 posts · 11 votes
    9y

    What is considered a reasonable mark up for wholesalers? I've seen some as low as $5K and as high as $20K.  What determines the size of the mark up?

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y
    Originally posted by @Erica M Chambers:

    What is considered a reasonable mark up for wholesalers? I've seen some as low as $5K and as high as $20K.  What determines the size of the mark up?

    A very good question and the answer is, it depends. It depends on the current market conditions, the individual property, the amount of rehab needed to get to the ARV, the abilities of the wholesaler, and the wholesalers buyers list and buyer criteria.

    Typically I always followed a rule that the wholesale fee should be somewhere in the 10% range of the gross spread. So for example, if the purchase was $200k and the rehab $50k with an exit of $350k, then the "gross spread" is $100k and a $10k wholesale fee would be fair for both sides.

    I have seen $50k and even $100k wholesale fees so it all depends on the deal too. 

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