The Truth about Wholesaling!

843 Replies

Originally posted by Isaiah Gaines:
First and foremost that you for creating this sticky as it is very helpful and informative.

As a newbie at real estate wholesaling here in New York City most investors dont want to do deals with someone that is not experienced and will not offer any pointers. I have found most of my local investors by responding to ads on craigslist and asking questions on preferences that they have.

I have not done my first deal as of yet as for two main reasons:

1.I was always hung up on the contractual part of the wholesaling process and consulted with my lawyer. I was informed that even though I am attempting to assign my contract to another buyer IF I cannot find a buyer for any reason I/my LLC can be sued for "Specific Performance". To those that are experienced wholesalers what are your remedies to avoid this situation? (I thought of clauses in the contract that would state myself/seller can cancel the contract at any time/any reason via written notice. Would that work? What if they are adamant on drawing up a contract? An addendum is only valid if both parties agree and sign it or else the origional contract stands )

2. The comps. I attempted to get comps from zillow and remax for properties in my local area but the numbers didnt add up. I have seen most investors wont go higher than 70% ARV or they will consider it a bad deal however some are flexible. Are there more accurate ways to perform a comp on a particular property.

Also any nice words of advise would be appreaciated as well.

First of all, I'm not an attorney so don't listen to me (disclaimer.)

1. The seller can't sue you for specific performance if you have the right clauses in your contract (contract contingent on buyer securing funds from 3rd party buyer, contract contingent on partners approval, contract contingent on passing inspection, etc.) These will protect you and allow you to back out of the contract if you really need to. That being said, don't ever sign a contract unless you know you can find a buyer for it. Backing out of contracts regularly is just bad business and will give you a bad rep.

2. Work with a realtor that will pull comps for you. In exchange, you can refer to him/her all your unused leads that you get. They should be able to pull good comps and give you an accurate ARV of the subject property.

Hope this helps!

To add to that, learn your market so that you can analyze comps and come up with your own ARV's. In addition, learn how to estimate rehab costs. Those two numbers are essential to come up with max offer amounts.

Originally posted by Will Barnard:
To add to that, learn your market so that you can analyze comps and come up with your own ARV's. In addition, learn how to estimate rehab costs. Those two numbers are essential to come up with max offer amounts.

Correct me if I'm wrong, but can't you get free estimates from places like Home Depot or other contractors? If not for free, then I'm willing to pay someone for their gas, since it's only an estimate and shouldnt take up too much time.

Originally posted by Isaiah Gaines:
...

1.I was always hung up on the contractual part of the wholesaling process and consulted with my lawyer. I was informed that even though I am attempting to assign my contract to another buyer IF I cannot find a buyer for any reason I/my LLC can be sued for "Specific Performance". To those that are experienced wholesalers what are your remedies to avoid this situation? ...

There is a concept called "liquidated damages" that a GOOD attorney should be familiar with. See link below, but it basically is a forfeit of the deposit in the event of buyer's breach:

http://legal-dictionary.thefreedictionary.com/Liquidated+damages

Thank you for your responses. My lawyer informed me of liquidated damages where the only thing I would lose is my EMD in case I had to back out of a deal.
I do like the approach of finding investors first and asking their preferences before i even attempt to place a property under contract as I get to accurately match the property with the investors needs.

My next question is do I as the wholesaler have to place down the EMD at the time I get the property under contract? Can I have my end buyer put up the EMD before closing?

EMD is typically supplied either when you make the offer or when the contract is accepted. It cannot be delayed until closing. If you're dealing with REOs, you might be able to delay it for 48 hours or so after the contract has been accepted.

@Jon Holdman I know typically the EMD is at least 1% of the sale price. I have heard that some wholesalers have placed in the contract a EMD of $10 to have a equitable interest in the property. Is that usually accepted by sellers?

Originally posted by Isaiah Gaines:

Thank you for your responses. My lawyer informed me of liquidated damages where the only thing I would lose is my EMD in case I had to back out of a deal.

I would say it depends on the contract, and that may be what flies in NY, but not everywhere!!

Damages can and do exceed the EMD and sellers do go to court for the difference and many win!

Someone who enters into a contract to buy who does not have the capacity to do so, without disclosing an assignment may well be seen as not dealing in good faith and that contract or any terms as to limiting your liability exposure can be tossed out. So I wouldn't suggest someone rely on thier liability being limited and acting anyway they want to, like following some guru buy with nothing in it program. You need to CYA! Good luck

@Bill Gulley I intend in my contract to disclose that the contract will be/can be assigned to a 3rd party buyer. I believe that would cover me in regards to acting in good faith. If this is not sufficient is there any method that is utilized to inform buyer of this?

Originally posted by Isaiah Gaines:
@Bill Gulley I intend in my contract to disclose that the contract will be/can be assigned to a 3rd party buyer. I believe that would cover me in regards to acting in good faith. If this is not sufficient is there any method that is utilized to inform buyer of this?

Another clause I would put in there is "In the case of buyer's default, EMD is the sole remedy."

$10 EMD will limit your liability. Some sellers won't like it but just explain to them that that is your policy and you do that on every contract. If they don't like it still, tell them you will be moving on to another property. Simple as that. They aren't truly motivated if the EMD is a deal breaker for them.

Other than that, just be as upfront and honest as possible with your sellers. Honesty is the easiest way to go about it and will ensure that there are no surprises down the road to closing.

I am a bit disappointed to hear that there are wholesalers out there that do not understand their market and are offering poor deals to potential investors. This in fact does give an unfair reputation to those other investors who are starting out with wholesaling, me being one of them.

I just started this business a couple days ago and already I am getting so much insight on things that regular books do not mention. I'm grateful that this forum was create, so that way I know exactly what it is that I need to open and close my first deal. I will offer the most accurate numbers as possible and I wont get greedy so I will offer the property at the best discounted price. I will build strong trusting relationships with all my clients and investors.

Thank you Will for the post!

Juan A.

New problems with wholesaling:
Disclaimer - This post is regarding my local Southern CA area only, I have no idea if it extends beyond.

Since the inventory levels are at almost record lows, and the number of RE investors have seemd to rise, we have a huge void in supply vs. demand for RE here. This has caused many things. One: Investors at trustee sales are commonly paying 90% of market value, commonly over 80% on MLS, and now we are even competing with the hedge funds who are buing at full retail with intent to rent and hold. Combine that with the incredible demand of retail end buyers and no inventory for them all, it is slim pickings here.

Now that I set that stage, add in the numerous amounts of wholesalers in my area (many of which are newer and/or come from RE investment groups, they are pounding out offers blanketing the MLS. Many problems have occurred with this. For one, they bid up properties beyond what they should offer, then request repair credits or price reductions or cant find a willing and able rehab buyer and back out. Over 40% of escrows are falling out of escrow in my area! You may be thinking this is good, but it is actually bad. The seller (usually a bank REO or a bank approving a short pay) feels that if they received the offer amount once in this competitive market, they can get another. The truth is that the offer was artificially inflated. Secondly, there are simply too many who create these daisy chains, receive a wholesale deal, then send that very same deal out to their own buyers list with an additional inflated price. Not to mention that many of them do nott have equitable interest or permission to do so.

While this post is more of a venting avenue than anything else, it is an example of what not to do for you newbies looking to wholesale. Adding value to a transaction is essential, taking any deal from any email, re-sending out at a price $5k more is NOT adding value to the transaction.

I was reviewing a deal on the MLS and spoke with the list agent whom I have a relationship with. I was undecided if it was a deal for me or not. In the interim, another party locked it up and it went pending. (snooze, you loose, right!) Then I get an email with an offer of a wholesale opportunity and it was this very same deal. The problem was the lies in the email. It stated that the list price was not the price the bank would sell for and they tried to sell this deal at $100,000 over the list price!!!! Yes, that was not a mistake, 6 zeros for $100k! Are you kidding! At list price, it was tight, but doable if you had nothing else going on.

So be careful out there RE investors, do not be scammed and take these wholesale deal offerings and explanations with a grain of salt.

Lots of newbie "wholesalers" are feeding on newbie "investors". In my local investor's association there's newer wholesalers who are just throwing overpriced junkers out there waiting for someone to bite... and someone who is inexperienced will. I can find much better deals right off of the MLS.

There's some great wholesalers too though. They're usually the ones that have been around for years who are investors themselves.

It really doesn't matter where a rehabber or landlord gets their deals as long as they are deals. Do the math and the math will tell you what to do. I wouldn't prejudge any lead source.

After reading your unfortunate experience with a wholesaler, it makes me leary and want to change ships again. I'm a newbie, have not done any deals yet but was so hoping to start with Wholesaling as a means of supplementing my income. So now what in your opinion would be the safest, quickest, easiest way to start? Thanks in advance

Originally posted by Will Barnard:
@Jimmy & Morris - I did infomr them of the actual and true numbers and took it a step further. I informed them in writing (via email) that I would keep an eye on the property and any future public recordings (transfers of title) to make sure some other investor does not get taken.

I will wait and see if they ignore or act upon my advice, ball is in their court now.

Originally posted by Lucy Rowens:
After reading your unfortunate experience with a wholesaler, it makes me leary and want to change ships again. I'm a newbie, have not done any deals yet but was so hoping to start with Wholesaling as a means of supplementing my income. So now what in your opinion would be the safest, quickest, easiest way to start? Thanks in advance

Originally posted by Will Barnard:
@Jimmy & Morris - I did infomr them of the actual and true numbers and took it a step further. I informed them in writing (via email) that I would keep an eye on the property and any future public recordings (transfers of title) to make sure some other investor does not get taken.

I will wait and see if they ignore or act upon my advice, ball is in their court now.

Wholesaling is still the safest, quickest, easiest way to start. That situation does not apply to all wholesalers (just some.)

After reading your unfortunate experience with a wholesaler, it makes me leary and want to change ships again. I'm a newbie, have not done any deals yet but was so hoping to start with Wholesaling as a means of supplementing my income. So now what in your opinion would be the safest, quickest, easiest way to start? Thanks in advance
@Lucy Rowens - My posts are never intended to discourage one from wholesaling, only to educate others on problems we face and what mistakes others make so that you don't repeat them. With that said, the "safest, quickest, and easiest" is asking for your cake and eating it too! There is no such things as all 3 in one. Those that work hard and educate themselves to do thiings right are those who make money and that is certainly not the "easiset". Those who play it safe and take less risks often do not get the best higher returns, those who fail to mitigate risk often fail to make any money at all, and making money the "quickest way" has been proven over and over agin by the gurus on TV that such a thing is unlikely.

SO, if you want to start out in anything, you must learn the ropes first, then stick to that strategy, apply your knowledge, and time and your determination will prevail. If wholesaling is what you want to do, then you must first learn what buyers are looking for, where to find such deals, and how to structure them. Do that and you will have yourself the winning combination.

I think Will that many people do wholesaling merely as the way they need to start out and it's not their choice of an RE path.

Some might stay in that niche but many just use it as a jumping off platform.

Of course if you are already sitting on a bunch of cash then you do not have to go this route.

I hear what you are saying Joel, but like I have stated many times, just because you don't have money does not mean that wholesaling is the only way to get started!

For instance, my very first rehab flip project took over $375k in capital, yet I completed it with less than $5k of my own money and made over $90K profit! Not too many wholesale deals out there with that profit margin, granted it took me 4 months, but regardless, it was done with very little of my own money. Point being, just because one does not have their own capital does not preclude thjem from any RE strategy.

Originally posted by Joel Owens:
I think Will that many people do wholesaling merely as the way they need to start out and it's not their choice of an RE path.

Some might stay in that niche but many just use it as a jumping off platform.

Of course if you are already sitting on a bunch of cash then you do not have to go this route.

Well said Joel!

Originally posted by Will Barnard:
I hear what you are saying Joel, but like I have stated many times, just because you don't have money does not mean that wholesaling is the only way to get started!

For instance, my very first rehab flip project took over $375k in capital, yet I completed it with less than $5k of my own money and made over $90K profit! Not too many wholesale deals out there with that profit margin, granted it took me 4 months, but regardless, it was done with very little of my own money. Point being, just because one does not have their own capital does not preclude thjem from any RE strategy.

That's a great deal Will! I'm sure you were sold on the idea of real estate after that one..haha.

Regardless of the stunning cash on cash return on this deal, the bottom line is that it still cost you $5k. Although this is not a large sum, a lot of people trying to get started don't have $5k to spend and 4 months to wait. Wholesaling provides the opportunity to make 4 or 5 figures off deals with almost no money (or a few hundred bucks at that.)

Nevertheless, props to you Will on that deal.

Originally posted by Dave Savage:
Will Barnard how did you structure that first deal to minimize your down payment? Is that type of deal possible in today's market?
I utilized private funds with lump sum principle and interest payment at close of escrow on sale which eliminates mortgage payments, thus reducing the amount of out of pocket cash needed. 4 months is fairly quick for a rehab flip here in CA, especially when rehab is over $50k.

Correct, some have no cash to start, in which case I would recommend saving money from a job to get some. I would also strongly recommend going after those with funds to use as private lenders or JV partners. As long as you bring value to the table, the money lender or partner will be interested.

Kevin, you are correct, wholesaling is ONE means to making money in RE without any capital. Keep in mind that my example on my first rehab flip in CA was not my first RE investment. In my first 10 or so deals, I used no money of my own, excluding some very minor bills.

I believe the key is gaining the know how, locating others with the capital, and bringing value to the table. That combined with determination and drive delivers results.

Originally posted by Will Barnard:
New problems with wholesaling:
Disclaimer - This post is regarding my local Southern CA area only, I have no idea if it extends beyond.

Since the inventory levels are at almost record lows, and the number of RE investors have seemd to rise, we have a huge void in supply vs. demand for RE here. This has caused many things. One: Investors at trustee sales are commonly paying 90% of market value, commonly over 80% on MLS, and now we are even competing with the hedge funds who are buing at full retail with intent to rent and hold. Combine that with the incredible demand of retail end buyers and no inventory for them all, it is slim pickings here.

Will,

With inventory being so low here in SoCal what do consider a decent/good wholesale deal (% of market value)?

Also I've heard of Hedge funds buying properties at retail, have you seen or heard of wholesalers wholetail their deals to the hedge funds for a significantly better profit?