The Truth about Wholesaling!

893 Replies

Originally posted by @Francisco Corral :
@Will Barnard As a new wholesaler I don't want to fall under this umbrella. Would you suggest I find buyers and contact RE meeting their specific criteria or what first step would you recommend?

 Knowing your buyer’s criteria is an important step in the right direction for sure. I certainly would not skip that step as so many do. Knowing your market and your numbers are also key elements to your potential success.

Thank you! Thank you! Thank you! I am a potential wholesaler looking to get into real estate. Post like these tells me exactly what not to do. When I finally dig in and start doing deals, I hope to keep a good reputation. Thank you for your candidness.

There was a comment above stating this thread was really beating up wholesalers. It is not the first time it was mentioned in this thread either. As I have stated repeatedly, nothing can be further from the truth. This thread is to tell the truth about the strategy and what not to do, what to learn, what teams to get, and how to run this business in a professional manner. If you take that as a beat up of wholesalers, then you need to re-evaluate your inaccurate take on this thread.

@Will Barnard . So True. While Wholesaling can be the fastest way to earn an income in REI, there are Wholesalers who give it a bad name. In the last few days I was back-and-forth on a deal, where we even increased our offer to get the property. When it was revealed to us the Wholesaler was asking for a $32k AF on a $212k pp, I was disgusted. 15% AF Fee? That's crazy.

Originally posted by @Nina Grayson :

@Will Barnard. So True. While Wholesaling can be the fastest way to earn an income in REI, there are Wholesalers who give it a bad name. In the last few days I was back-and-forth on a deal, where we even increased our offer to get the property. When it was revealed to us the Wholesaler was asking for a $32k AF on a $212k pp, I was disgusted. 15% AF Fee? That's crazy.

 I agree that such a high fee for an assignment is crazy, however, I do also agree that capitalism (without getting political here) is a good thing and business owners are welcome (and should) get what the market will bear, but your example appears to be well above what is reasonable.

That said, I see it happening day in, day out and is part of the reason/problem as to why sellers are asking for so much these days as wholesalers and even rookie rehabbers are offering too much for deals creating an artificial spike in certain markets like LA.

I have always said and believe that around 10% of the gross spread in a deal is a fair ask price for wholesalers. So if you have a $212 purchase with a $40k rehab and an exit value of $325,000, then the gross spread is $73k and as such, a fee of $7k-$10k would be fair in a case like that. I am seeing offerings on a daily basis where my expected profit would be $125k (after purchase of $750k and construction/rehab of $350k) and the wholesaler would have it locked up for $700k expecting $50k profit for flipping a contract whereas the real risk and effort is on my end and my profit is just over double that?! I just say no thanks and move on.

Originally posted by @Will Barnard :
Originally posted by @Nina Grayson:

@Will Barnard.  I am seeing offerings on a daily basis where my expected profit would be $125k (after purchase of $750k and construction/rehab of $350k) and the wholesaler would have it locked up for $700k expecting $50k profit for flipping a contract whereas the real risk and effort is on my end and my profit is just over double that?! I just say no thanks and move on.

 Exactamundo!  We offered $7350 AF, which was more than 10%.  We walked away.  

@Will Barnard Amen to this Will, I am newer to real estate investment and too have been offered “deals” that aren’t in fact deals. Beware of these and urge every newer investor to get a good real estate angent under your team and do your own due diligence on these deals to not get screwed.
Originally posted by @Will Barnard :
Originally posted by @Nina Grayson:

@Will Barnard. So True. While Wholesaling can be the fastest way to earn an income in REI, there are Wholesalers who give it a bad name. In the last few days I was back-and-forth on a deal, where we even increased our offer to get the property. When it was revealed to us the Wholesaler was asking for a $32k AF on a $212k pp, I was disgusted. 15% AF Fee? That's crazy.

 I agree that such a high fee for an assignment is crazy, however, I do also agree that capitalism (without getting political here) is a good thing and business owners are welcome (and should) get what the market will bear, but your example appears to be well above what is reasonable.

That said, I see it happening day in, day out and is part of the reason/problem as to why sellers are asking for so much these days as wholesalers and even rookie rehabbers are offering too much for deals creating an artificial spike in certain markets like LA.

I have always said and believe that around 10% of the gross spread in a deal is a fair ask price for wholesalers. So if you have a $212 purchase with a $40k rehab and an exit value of $325,000, then the gross spread is $73k and as such, a fee of $7k-$10k would be fair in a case like that. I am seeing offerings on a daily basis where my expected profit would be $125k (after purchase of $750k and construction/rehab of $350k) and the wholesaler would have it locked up for $700k expecting $50k profit for flipping a contract whereas the real risk and effort is on my end and my profit is just over double that?! I just say no thanks and move on.

# me to I understand wholesalers have to spend money for deals.. but they take no risk after that.. its just not a risk reward proposition I care to be a party to.. ergo even though I get hounded to be put on cash buyers list I simply wont do it.. I get all the deals I need from my agents.. and auction companies and other sources..   not to mention the legions of beginners that are total time wasters.. I understand we all have to start somewhere.. so I leave that business to those who cant source deals or have great contacts within the real estate agent community.. and those contacts are earned you just don't show up one day and go to the top of the list.  

Everybody has an opinion on this Jay and to each his own but on occasion, I find a select few who understand the business, have built value add systems and bro g value to the table by sourcing deal flow. These select few parties I deal with, the rest are time wasters, especially in this competitive market we find ourselves in.

Originally posted by @Will Barnard :

Everybody has an opinion on this Jay and to each his own but on occasion, I find a select few who understand the business, have built value add systems and bro g value to the table by sourcing deal flow. These select few parties I deal with, the rest are time wasters, especially in this competitive market we find ourselves in.

I have found a few of those you describe and I make them equity partners..  so they dont have to go shopping for that elusive cash buyer..

I have to disagree with you guys. Why does it matter so much what the other guy is making? If the deal works for you, then buy it! 

I wholesale deals where I make more money than the flipper and they are 100% okay with it. If someone works their butt off and spends a lot of marketing dollars to get a deal, they should sell it for the highest price the market will bear. 

Originally posted by @Pratik P. :

I have to disagree with you guys. Why does it matter so much what the other guy is making? If the deal works for you, then buy it! 

I wholesale deals where I make more money than the flipper and they are 100% okay with it. If someone works their butt off and spends a lot of marketing dollars to get a deal, they should sell it for the highest price the market will bear. 

 I am all for capitalism as well, however, I have to draw the line when a wholesaler makes $65K on a wholesale fee for a $600k sold price when I make $100k if Im lucky after 10 months or hard work and risk. Marketing dollars or not, they just didn't bring that much value to make such a high fee. I was not happy with it, but took it to do the tight deal and take on higher risk than I am normally comfortable with. The real problem is all the rookies and those that bank on the market continuing to climb to make their spread, making it almost impossible for us full timers to make decent spreads on deals for our time and risk. The good news is these people will be gone when the market shifts and in I will pop to take down their foreclosed properties again and start the cycle all over again.

@Will Barnard I definitely understand the many risks as a flipper. I've done flips before and frankly I do my best not to do full rehabs these days. Wholesaling/wholetailing are my go-to strategies. At the end of the day, it's completely up to the buyer if they want to pass on it due to the wholesaler's profit..but I just don't see why they would pass up a deal if they think it's a good one.... What if your wholesaler had bought the property and was re-selling it a week later, would your view change then? Just curious. 

I'm definitely eager for the market to continue its descent as well :]

Originally posted by @Pratik P. :

@Will Barnard I definitely understand the many risks as a flipper. I've done flips before and frankly I do my best not to do full rehabs these days. Wholesaling/wholetailing are my go-to strategies. At the end of the day, it's completely up to the buyer if they want to pass on it due to the wholesaler's profit..but I just don't see why they would pass up a deal if they think it's a good one.... What if your wholesaler had bought the property and was re-selling it a week later, would your view change then? Just curious. 

I'm definitely eager for the market to continue its descent as well :]

 It is clear you are coming from the side of the fence as the wholesaler and defending the position. Fair enough and I will go out on a limb here and guess you avoid doing full rehabs as you are aware of the higher risks and efforts involved. Who doesn't want the easy money! My point was and remains that wholesalers going for some of these "excessive profits" (in my book they are) makes my market even more competitive than it has to be and in most cases, I and others are NOT willing to take them down not because they are making so much but because the deal is no longer a deal at that price. So many others "settle" and take the deal in hopes for higher sales prices in time, they are literally gambling on continued appreciation to take the deal down. Most will lose that bet moving forward from this point. 

Originally posted by @Will Barnard :
Originally posted by @Pratik P.:

@Will Barnard I definitely understand the many risks as a flipper. I've done flips before and frankly I do my best not to do full rehabs these days. Wholesaling/wholetailing are my go-to strategies. At the end of the day, it's completely up to the buyer if they want to pass on it due to the wholesaler's profit..but I just don't see why they would pass up a deal if they think it's a good one.... What if your wholesaler had bought the property and was re-selling it a week later, would your view change then? Just curious. 

I'm definitely eager for the market to continue its descent as well :]

 It is clear you are coming from the side of the fence as the wholesaler and defending the position. Fair enough and I will go out on a limb here and guess you avoid doing full rehabs as you are aware of the higher risks and efforts involved. Who doesn't want the easy money! My point was and remains that wholesalers going for some of these "excessive profits" (in my book they are) makes my market even more competitive than it has to be and in most cases, I and others are NOT willing to take them down not because they are making so much but because the deal is no longer a deal at that price. So many others "settle" and take the deal in hopes for higher sales prices in time, they are literally gambling on continued appreciation to take the deal down. Most will lose that bet moving forward from this point. 

 I agree, some investors are buying deals that are far from being deals. I always ask for a reasonable price but it usually gets bid up. A lot of them were saved by the market here but thats coming to a stop. I've had investors respond to my marketing recently and tell me they're trying to get out of a flip which they paid too much for. 

I don't want to rehab right now because I noticed flips were taking my focus away from marketing/wholesaling and also the market over here in Sac is a bit funky. And on top of that, we're headed into winter. 

:) 

I am not a wholesaler, but have bought some houses from a few.

I think the "excessive profits" that @Will Barnard described is largely because there are people so hungry for a deal that they drive up the costs of the wholesale price.  Also, there is definitely a component of greed with some of the wholesalers.

Now, I have paid an AF at a much higher percentage than was proposed to @Nina Grayson and I didn't mind paying it because there was enough meat on the bone for a good profit. There are maybe 2 or 3 guys that can get properties under contract at obscene prices in my market, therefore giving them these abnormally high AFs.  It is a tough pill to swallow that they get so much.  However, for the rest of the wholesalers, they can't secure houses for these prices, so yes, if they were to ask for the same amount, it would not fly. Well, maybe.  People get crazy in the bidding process, not realizing that the meat on the bone was consumed by that wholesaler.

I do understand that wholesalers have large marketing costs.  I have learned that one of them in my market spends about 10k a month on marketing and staff for his wholesaling business.  One in another market told me marketing costs alone were 15k monthly.   However, as Will said, the flipper will be taking a great risk, so we have to be careful what we pay for a wholesale deal.

In the last year, compression of margins is occurring in my market because prices of retail houses are falling and prices of wholesale houses have not.  We must be cautious if this continues. A lot of flippers will be getting burned because they paid to much for the houses.

@David S. I definitely wish more investors understood the work and risk wholesalers take with their marketing. I've had months where I was negative revenue and it makes me nervous as hell when the phone doesn't ring enough after a 5k marketing campaign. 

Just 2 months ago, I had to track down a seller, visit him twice in jail, bought the property from him with a clouded title and then spent another month clearing title. I sold it to an investor for a very large profit, but of course the buyer would only see the HUD and go "he's making how much?!?!?!" Rehabbing it would have been very straightforward and easy for me. It was a full gut. Just had to clean it out, gut it and start over. But for the reasons stated above, I wanted to be done with it and move to the next deal.

I appreciate this thread for what it is -- constructive criticism. However, I must admit that as a new wholesaler, it's sobering to learn I'm venturing into such murky waters between investors and wholesalers. Unfortunately, bad apples can and do spoil it for the bunch. All the same, trust is earned. I'm confident that adhering to honest business practices will always speak for itself in the end. Good post.

Originally posted by @Cheryl W. :

I appreciate this thread for what it is -- constructive criticism. However, I must admit that as a new wholesaler, it's sobering to learn I'm venturing into such murky waters between investors and wholesalers. Unfortunately, bad apples can and do spoil it for the bunch. All the same, trust is earned. I'm confident that adhering to honest business practices will always speak for itself in the end. Good post.

 It is not just the wholesaler-investor issue but also the wholesaler-seller issue. So many lock up deals with no intent to close if they don't find a buyer, they use any number of contingencies to back out of the contract and leave the seller hanging. This happens more often than not and is part of the reason why certain ways of wholesaling is illegal in many states.

Be that as it may, the important factor to remember is that honesty, disclosure, and operating within the legal limits of the law are of vital importance. Do that and enjoy a legal and successful business model.

Originally posted by @Will Barnard :
Originally posted by @Cheryl W.:

I appreciate this thread for what it is -- constructive criticism. However, I must admit that as a new wholesaler, it's sobering to learn I'm venturing into such murky waters between investors and wholesalers. Unfortunately, bad apples can and do spoil it for the bunch. All the same, trust is earned. I'm confident that adhering to honest business practices will always speak for itself in the end. Good post.

 It is not just the wholesaler-investor issue but also the wholesaler-seller issue. So many lock up deals with no intent to close if they don't find a buyer, they use any number of contingencies to back out of the contract and leave the seller hanging. This happens more often than not and is part of the reason why certain ways of wholesaling is illegal in many states.

Be that as it may, the important factor to remember is that honesty, disclosure, and operating within the legal limits of the law are of vital importance. Do that and enjoy a legal and successful business model.

ya that's my main rub.. I cant tell you how many houses that we bought at court house steps that a wholesaler had tied up and could not close.. leaving the folks to lose it.. and Frankly mortgage lenders as well. telling them no problem you can refi..  too bad this model just mirrors real estate brokerage.. makes for a lot of confusion in the civilian ranks  

In my opinion, there are far too many people in the business these days that are very short sighted. They are so focused on making as much money as they possibly can TODAY, and not thinking about how they can create a long term mutually beneficial relationship. This goes for wholesalers, flippers and realtors. Maybe it is the world of instant gratification that we now live in, or maybe it is just plain old greed, but either way it is NOT the correct way to run a business. No business will last for years and years to come without building some solid long term mutually beneficial relationships.

It seems to me, that somewhere along the way wholesaling as it was originally intended got all twisted. It used to work in such a way that a wholesaler had a private list of investor buyers that they sent their deals out to. They took the time to get to know these people, learn their business model, build a relationship with them and then go out there and find them great deals that fit their model. Once they got a property under contract they then called up their #1 buyer that they had a great working relationship with and asked them if they were interested in the deal. If they were interested, they assigned the contract to them and both were happy. It was truly a win-win type deal. If that buyer wasn't interested they went to their #2 buyer and so on down the line. They did not mass market their deals (which is typically being done in an illegal manner these days).

In today's world most wholesalers run things as if they are running an auction. They get a property under contract and then blast it out to the world though every medium possible, looking to make the maximum profit per deal. They don't build relationships with their investors and therefore create animosity and tension in the REI world. They add no value to the investor by being an auction house for deals. They shouldn't even be called wholesalers anymore... they are auctioneers. 

As a flipper, I don't want to have to fight over every deal that comes my way from a wholesaler. If that is how you do business then I don't even care to look at your deals. I'd rather find my own that I don't have to fight over with a dozen other flippers that are part of this pseudo auction nonsense. 

If you are running your wholesale business like an auction every time you get a deal under contract you bring no value to the end buyer investors. You're just another stressor in their world...

Braden I feel your pain but unfortunately I don't believe the majority of people and businesses operate from a long term vision now or in the past.  If they did the success rate of new businesses would be higher.

The barrier to entry to get into a real estate license and ESPECIALLY wholesaling which does not require a license is LOW.  Full disclosure our house buying company wholesales hundreds of properties a year but i advocate that if you are to wholesale properties that they should be required to be licensed just to bring some regulatory oversight and make it just a smidge harder for people to get started.

Our wholesaling company is working really hard to grow large and train our client buyers and sellers to expect more from their wholesaler then "buyer beware" and a bunch of weasel clauses for sellers they are getting now.

For instance:

Every seller knows we are wholesaling  and is given the option to list the house with us at a higher price

We guarantee our ARV and rent comps to our buyers

We own a construction company as well so we KNOW our rehab numbers and adjust quickly as prices adjust

We still take $3-$5k non refundable (unless we cant get clear title) from buyers and i know thats a source of contention for BP but as a business operator those deposits protect our sellers and ensure that whoever puts the money down is ready to close then.  There are too many fake buyers in market to not a non refundable option fee to ensure the buyer is ready to go.

I know there are good arguments against the deposits, but so long as you are dealing with reputable companies the deposits are a non issue.  But reputable being the key work....which goes back to my licensure argument for wholesalers.