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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  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    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.

  • Towson, MD · Member since 2012 · 7 posts · 1 vote
    14y
    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.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    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

  • Wholesaler · Bronx, NY · Member since 2012 · 5 posts · 3 votes
    13y

    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?

  • Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    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.

  • Wholesaler · Bronx, NY · Member since 2012 · 5 posts · 3 votes
    13y

    @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?

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y
    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

  • Wholesaler · Bronx, NY · Member since 2012 · 5 posts · 3 votes
    13y

    @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?

  • Wholesaler · Chicago, IL · Member since 2011 · 219 posts · 38 votes
    13y
    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.

  • Wholesaler · New York City, NY · Member since 2012 · 13 posts · 6 votes
    13y

    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.

  • Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
    13y

    Yup, been there done that...

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    Juan Alvarado - Great post, glad you found this thread valuable! Hope to hear about your success stories soon.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    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.

  • Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
    13y

    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.

  • Renter · Grant, AL · Member since 2012 · 34 posts · 2 votes
    13y

    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.

  • Wholesaler · Chicago, IL · Member since 2011 · 219 posts · 38 votes
    13y
    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.)

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y
    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.

  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    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.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    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.

  • Investor · Rochester, NY · Member since 2012 · 316 posts · 102 votes
    13y

    Will Barnard how did you structure that first deal to minimize your down payment? Is that type of deal possible in today's market?

  • Wholesaler · Chicago, IL · Member since 2011 · 219 posts · 38 votes
    13y
    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.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y
    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.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    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.

  • Wholesaler · Orange County, CA · Member since 2012 · 53 posts · 9 votes
    13y
    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?

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    Michael, if you are selling to a rehabber like myself, I am looking for an all in figure of 75% of exit value and if the rehab is light and exit is easy, can go as high as 80% which means you have to lock it up for less than that to allow for your profit.

    Yes, many investors are selling their deals to hedge funds but you must know what they are looking for and in most cases, they are not heavy rehabs or old homes. We are even seeing hedge funds paying over ask price on a completed rehab flip, so yes, they will pay retail if the property meets their criteria.

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