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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  • Wholesaler · Rocky Mount, NC · Member since 2018 · 30 posts · 6 votes
    5y

    Truly awesome observations of regarding noobs getting out there and just kinda of cowboying their way through the process. I have been a beginning investor myself for two plus years. Starting out I was reminded to be diligent in pursuit of true numbers in my deals. Also, I was admonished to be honest with sellers, buyers, GC's, subs and the like. I have only done a single deal which I'm still waiting for my wholesale fee on a JV deal (it has been months as of this writing). Still, I remain steadfast in my principled and systematic way of being and investor. I chose this journey, it has not been as fulfilling as I'd hoped but 2021 is still my year. Thanks for the insights. They mirror what I've been learning not to do as well as what I should do.

  • New to Real Estate · San Diego, CA · Member since 2019 · 48 posts · 23 votes
    5y

    Great post @Will Barnard!

  • Brooklyn, NY · Member since 2018 · 45 posts · 18 votes
    5y

    I've been studying REI to death and at some point I'll have to pull the trigger and go from studying to taking action. I'm a bit shy and don't have tons of connections. I thought to myself, "I'll find a wholesaler." Thank goodness for this post - it's 10 years old and still getting traction! I'll have to find another way.

  • Investor · NJ · Member since 2021 · 121 posts · 33 votes
    5y

    @Will Barnard

    I like your advice, I’m planning to start in Wholesaling. How do i get the Rehab costs? Do i take contractor with me while touring?

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y
    Originally posted by @Mallikarjun Reddy Pateel:

    @Will Barnard

    I like your advice, I’m planning to start in Wholesaling. How do i get the Rehab costs? Do i take contractor with me while touring?

    Imagine your a contractor. Would you be willing to come out to a property I may or may not buy and in which you likely will not get any work from it and spend your time providing a bid? It takes time and practice but you really need to know how to estimate rehab costs on your own and I have written in many threads in full details of how to accomplish this task.

  • Wholesaler · Chicago, IL · Member since 2018 · 84 posts · 83 votes
    5y

    @Will Barnard Good post. It sounds like they have issues with accurate underwriting, rehab costs, and comps. Ouuuf. Not great for a wholesale company.

    With that said, as an investor, I never look at rehab numbers or ARV from a wholesaler. We always run our own rehab budgets and ARV comps.

    When you receive a deal from a wholesaler, my recommendation is to first pull as-is, cash sales, within a year and quarter-mile to determine if their price is in line with recent sales to investors. If it is, I'd then pull ARV comps and visit the property to determine my own rehab budget. If you consistently see deals from the same wholesaler priced well above as-is cash sales in the area, I'd request to be removed from their list.

    As a wholesale company, my team and I don't provide rehab costs. We only work with investors that can analyze the rehab numbers themselves. Some of our investors do rental grade rehabs, and others do top-notch rehabs. Everyone's cost of labor differs as well. We'd be doing a disservice if we provided rehab numbers. We provide ARV comps within a year, quarter-mile, within 10 years above and below the build date, property type, etc. Sometimes we have to expand those parameters when there are no recent sales, but we show that to our investors.

    Our focus is on finding great deals that we offer below or in line with other as-is cash sales in the area. For us to make any money, we have to get it under contract below that price.

  • Member since 2021 · 9 posts · 2 votes
    5y

    @Will Barnard i think all business should be conducted with integrity. I’m new the wholesaling real estate and have not closed my first deal. I am a Data and Analytics Specialist so I let the numbers talk for me. I think this is why I am so nervous about actually making an offer because I don’t want to seem like I’m trying to be greedy or getting over on something. I want my deals to be fair. For example, if the profit for the cash buyer after rehab is 25K I would prefer my assignment fee to be around 5k or 4K..... do y’all think that is a good mindset to have?

  • Member since 2021 · 3 posts · 3 votes
    5y

    I'm a new wholesaler myself, and it makes me very sad that there are people out there doing that. I make it my upmost priority to to always uphold my morals and values in every facet of my life, especially my business. Just know that not every wholesaler is like that, and there are people that would never put a price tag on their ethics and values just like myself. I wish you the best of luck on your real estate journey, and I appreciate you sharing your story. I believe there's a piece of the pie for everyone. There's no need to conduct business in that manner. Best wishes to you my friend. I hope you continue to be successful and thrive.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y
    Originally posted by @Mike Kehoe:

    @Will Barnard Good post. It sounds like they have issues with accurate underwriting, rehab costs, and comps. Ouuuf. Not great for a wholesale company.

    With that said, as an investor, I never look at rehab numbers or ARV from a wholesaler. We always run our own rehab budgets and ARV comps.

    When you receive a deal from a wholesaler, my recommendation is to first pull as-is, cash sales, within a year and quarter-mile to determine if their price is in line with recent sales to investors. If it is, I'd then pull ARV comps and visit the property to determine my own rehab budget. If you consistently see deals from the same wholesaler priced well above as-is cash sales in the area, I'd request to be removed from their list.

    As a wholesale company, my team and I don't provide rehab costs. We only work with investors that can analyze the rehab numbers themselves. Some of our investors do rental grade rehabs, and others do top-notch rehabs. Everyone's cost of labor differs as well. We'd be doing a disservice if we provided rehab numbers. We provide ARV comps within a year, quarter-mile, within 10 years above and below the build date, property type, etc. Sometimes we have to expand those parameters when there are no recent sales, but we show that to our investors.

    Our focus is on finding great deals that we offer below or in line with other as-is cash sales in the area. For us to make any money, we have to get it under contract below that price.

     I have heard this same (or very similar) explanation several times in the past. I question it as it seems impossible to conduct business this way. First off, if you as the wholesaler do not know what the rehab numbers should be, how can you possibly make a confident offer to a seller? As a flipper, you need to know 3 main things before making an offer. 1. The exit value 2. The rehab numbers 3. The local market conditions. Without knowing those 3 things, you are adding risk that could otherwise be mitigated. If you know the exit value number and the ask price from seller is X, without knowing how much you need to put into the deal to get it to that exit number, you can't make the offer confidently. I realize some investors will have lower or higher materials and labor costs depending on their skill level, buying power, experience, network of contractors and sub contractors, etc. but you certainly need to have a decent handle on an estimated rehab budget and at bare minimum, a scope of work identified for others to price in their own rehab numbers.

    Where I have been frustrated time and again in dealing with wholesalers is their standard boiler plate numbers. So many times I would see wholesalers list just about every one of their deals with the same exact rehab budget. Obviously it was just a plugged number and does more of a disservice than it does help anyone.

  • New to Real Estate · Fort Washington, MD · Member since 2020 · 46 posts · 10 votes
    5y

    Wow, what a horror story!!! I'm learning how to be a wholesaler and I want to have all those qualities so I can help buyers get good deals and have zero hassle.

  • Flipper/Rehabber · Elmhurst, IL · Member since 2020 · 11 posts · 2 votes
    5y

    @Will Barnard I am a handyman, former Marine, going to school for construction management and can talk to anyone. I feel like I have so many assets that would make me a good wholesaler, but I just get the impression that it's attracts some sleazy folks.

    Any recommendations on where I should direct my focus?

  • Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
    5y

    Tell me something..  If a seller found out on public record that his property sold for $500,000 more then what their offer was don't you think they will cause havoc especially if brokers are involved?

  • Rental Property Investor · Los Angeles · Member since 2021 · 125 posts · 64 votes
    5y

    very good information. I'm glad that you were able to dodge a bullet here. I am copying the "To be a true wholesaler you need these 3 main ingredients:" part and putting it in my notes! Thanks.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y
    Originally posted by @Patrick Shaw:

    @Will Barnard I am a handyman, former Marine, going to school for construction management and can talk to anyone. I feel like I have so many assets that would make me a good wholesaler, but I just get the impression that it's attracts some sleazy folks.

    Any recommendations on where I should direct my focus?

    That is tough to say, but no matter which investment or business strategy you intend to go with, focusing on education for that focus should be your #1 priority. Wholesaling is a business, it is not investing. If you want that to be your focus, learn your market, the numbers, and the legalities of performing your transaction (both morally and legally). Buying and holding RE should be just about everyone's goal as flipping or wholesaling income stops once you stop and holding is one of the greatest hedges against inflation, especially when responsible leverage is applied.

  • Flipper/Rehabber · Phoenix Arizona · Member since 2020 · 1k+ posts · 686 votes
    5y

    It ( wholesaling ) will be gone within 3 years.

    It is practicing ( Real Estate ) without a license. 

    No meat on any bones in Phoenix. ( no deal worth looking at)

    If it goes to the list, then it is not a good deal.  They always have 2-5 buyers that get the best deals!  Always!

    They would sell their Mother for a buck!!!

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y
    Originally posted by @David Avery:

    It ( wholesaling ) will be gone within 3 years.

    It is practicing ( Real Estate ) without a license. 

    No meat on any bones in Phoenix. ( no deal worth looking at)

    If it goes to the list, then it is not a good deal.  They always have 2-5 buyers that get the best deals!  Always!

    They would sell their Mother for a buck!!!

     Questions: What source are you referencing that shows wholesaling will be gone in 3 years? I find that not possible.

    Wholesaling is practicing RE without a license - In many cases, yes, not in all cases. There are ways to wholesale RE legally and without a license and there are many more ways to do it illegally. Just like driving a car, it is not illegal to drive but you can perform it illegally.

    No meat on any bones - That is a broad and bold statement, while I agree with you that the market conditions in AZ are fully on the side of sellers not buyers (this is the case in most areas across the country and even more prevalent here in So Cal), this is not to say that there is no such thing as a deal, you just have to get creative and go after more quantity to land that one deal.

    Your list statement - absolutely true! Your Mother statement - I see many where this is true. I just had a wholesaler send out a deal where it was a 2 week escrow all cash with an $80k mark up on a home under $1M. That is over an 8% fee! Now the fee is down to $30k and still not a deal at that price. Too greedy!

  • Hilo, HI · Member since 2021 · 2 posts · 3 votes
    5y

    Aloha, This forum is amazing and very informative. 

    I am "Semi-Retired" and very interested in wholesaling. I fully realize that I will not "Get Rich Quick" my needs are few. I just want to do some work and get a reasonable return. I've got a pretty good handle on 70% minus repair costs. I need to work on the rest. 

    Mahalo nui loa, 

    Tom

  • Investor · Foothill Ranch, CA · Member since 2021 · 35 posts · 25 votes
    5y

    This thread was posted over 10 years ago and it still rings true! The few wholesalers I've received deals from were not deals at all once I was able to complete my due diligence. Newbie investors should educate themselves on wholesaling so they know what makes a great wholesale deal, learn to run comps, and how to calculate rehab costs. Trust but verify when dealing with a wholesaler or company. Newbie wholesalers should learn what makes a great wholesale deal as well and stop taking advantage of sellers and newbie investors with crap deals. So much time is wasted when wholesalers become greedy!

  • Member since 2021 · 6 posts · 5 votes
    5y

    Thank you for explaining what makes a great wholesaler i will stick to your pointers on making sure my numbers are accurate or very close to accurate.  Thank you.

  • Member since 2021 · 2 posts · 0 votes
    5y

    @Will Barnard you’re absolutely right!

  • Wholesaler · Griffin, GA · Member since 2021 · 9 posts · 4 votes
    5y

    That person did not take their time, they want to make a deal

  • Member since 2019 · 10 posts · 4 votes
    5y

    Yikes. As someone looking to get into wholesaling, one of the first problems I'm seeing with many are a lack of integrity. It's a great lesson to learn from the start; I need to develop my knowledge and skills, but if I want to be taken seriously I also need to be honest and straightforward. Thanks, Will!

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y

    Under these incredibly competitive market conditions, it can very well be easier to actually do your own flip as opposed to wholesaling. If the wholesale deal is a flip, then you must find a deal with enough meat on the bone for the flipper AND you. If you flip it yourself, less of a spread needed (from a general numbers perspective). That said, you need to also build a team of agents, construction crews, material suppliers, lenders, (a designer perhaps), escrow, title, etc. 

    So many people are told that wholesaling is easy and no money or credit required. Simply not the truth and in these times, perhaps even more difficult. 

  • Member since 2019 · 10 posts · 4 votes
    5y

    Oh, wow. Thankfully, I didn't expect wholesaling to be easy, but I had no idea that doing my own flip might even be easier! I originally wanted to wholesale first to build up cash reserves then get into flipping since, like you said, I would need to build a team (and the idea is intimidating, of course). With this new perspective in mind, I'll look more into keeping any deals I find. Thanks again, Will!

  • Member since 2021 · 4 posts · 0 votes
    5y

    Check out Max Maxwell video on wholesaling, he gives a good breakdown

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