What to Bring to Seller Appointment - Wholesale Real Estate

132 Replies

@Charlie MacPherson   Thanks so much for your reply to my comment, and especially for providing the example.  Call me naive (I'm not a real estate investor and probably never will be; my interest is from a business model and value creation standpoint), but it seems to me that embracing a major paradigm shift away from wholesaling in favor of options could bring more discipline, fairness, and respectability to the process.

Let me try to explain using your example.  Say an investor makes the same assessment as you did about the property's potential value.  Because there is some risk involved (the property will "probably sell at $335k - $340k"), the investor offers the property owner $1,000 for a 30-day option agreement to buy the property for $321k (this is your minimum valuation of $325k less the $4k needed for rehab).  Once the agreement is in place, let's say that the investor locates a buyer willing to pay $331k for the property.

The investor sells the option to purchase the property to this buyer for $10k. Buyer's cost for the property is $321k + the $10k paid for the option = $331k.

The investor receives $10k, which is a 900% return on the option investment (in less than 30 days!)

And the property owner receives $322k in total ($321k upon sale of the property, and $1k from the sale of the option).  Moreover, if the investor can't sell the property in 30 days, the option expires but the property owner still has $1k to apply against the carry costs they incurred while the option was in place.

Would you have any ethical or legal concerns with this approach?

@Charlie MacPherson

Did you read the State of CO PSA I posted above? They, as well as FL, are referring to those ripped off by these FRAUDS AND SCAMMERS as "victims". Note some post how they are going to operate "ethically" while breaking laws LOL. There is no way to be ethical and break laws at the same time. It is part of the delusion they suffer from.

@Alan Johnson Yes, I'd object for two reasons.  But my $325K minimum already considers the current condition.  Only the pool is a "must address" issue.  We have a $3,000 quote to demo it and fill it in.  The carpet can be cleaned and the backsplash can be fixed for peanuts.  

1. The fact that the "investor" found a party to pay $331K means that number is the minimum market value. By listing it on MLS, I will expose the property to millions of potential buyers as opposed to the investor's list of maybe 100. By definition, I will find the highest possible price.

Let's say MLS reaches 10 million possible buyers (probably quite a bit higher) and the investor has a list 100 people deep. The simple math means I will be 100,000 times more likely to find the person willing to pay the highest price.

Those are really bad odds for the seller.

2. What you're proposing is a license-required activity in Massachusetts, so without a license, it's illegal.  

As a result of similar questions here on BP, I've also recently looked up license law in MI and CA - the same is true in those states.  @John Thedford has done the legwork in Florida and confirms the same there.

The license laws are put in place to protect the consumer, not the Realtor.  That's because a home is very likely to be the single most valuable thing a person will ever own - and the states recognize that a fast-talking flim flam artist can convince an uneducated (in real estate) seller that their home is worth a lot less than it is and steal a bunch of the equity that should have gone in the seller's pocket.

For evidence, I present my current clients in Plymouth who received an offer that was $100,000 or more below the current market value.

If I were to screw a seller the way wholesalers commonly do, I'd get some combination of fines, license suspension or outright revocation.  A sharp seller would probably sue me for "fraud in the inducement" as well.

The most common excuse for wholesaling goes like this:  "I don't need a license because I'm not selling real estate.  I'm selling my equitable interest in a contract.  It's just a piece of paper"

Massachusetts law deals very clearly with this - and prohibits it.

From MA Law (emphasis is mine): "

''Real estate broker'', hereinafter referred to as broker, any person who for another person and for a fee, commission or other valuable consideration, or with the intention or in the expectation or upon the promise of receiving or collecting a fee, commission or other valuable consideration, does any of the following: sells, exchanges, purchases, rents or leases, or negotiates, or offers, attempts or agrees to negotiate the sale, exchange, purchase, rental or leasing of any real estate, or lists or offers, attempts or agrees to list any real estate, or buys or offers to buy, sells or offers to sell or otherwise deals in options on real estate,..."

There's not a nanometer's worth of wiggle room there.  Options, wholesaling, selling your interest in a real estate contract all require a license, which imposes a lot of consumer protection obligations.

The one and only legal way to wholesale in MA is to actually buy the property and then resell it - which isn't actually wholesaling at all.

Originally posted by @Carl Hall :

@Jon Allen Great point. I’ve come across so many distressed sellers who spoke with about 3-5 agents and none of them could help them out of their situation. I’m Not knocking agents. I am one myself. As an agent we are trained to get the listing. That’s all. We usually don’t have the tools for anything else.

 Then those agents must not be making any money ....  every agent I have worked with SELLS to the highest bidder.  That is the point after all- each and every one worked hard to make sure they earned the most possible on each deal   So my suggestion is that the agents you are discussing are just not doing their job 

Oh, and i am not a RE agent or broker - just someone that hates seeing people ripped off. 

@Charlie MacPherson Thanks again for the detailed reply to my comment.  I looked at the link to MA Law that you provided and must say that I have a different interpretation.  I'll offer my interpretation here, with the intention of contacting a few attorneys in MA this week to obtain a consensus of their legal opinions.  I am certainly not licensed to practice law or offer legal advice, but my thought process goes like this:

1) The definition of real estate broker in the link you provided contains the phrase "any person who for another person" (the emphasis is mine).  But in the example above, the option holder would be acting on his or her own behalf, not on behalf of another.  I see a difference between buying and selling an option I personally own, and trying to sell or market an option owned by someone else in return for a commission or fee.

2) You acknowledge that I can proceed with the purchase of real estate as long as I have the financing, close on the deal, and take possession of the property.  This I can do without utilizing a broker, correct?  I am representing myself as purchaser.  Once I own the property, I am free to do with it as I wish, including selling it to someone else.

3) Why then can I not enter into a different arrangement with the property owner?  Why cannot I say instead to the property owner "I am not sure that I want to buy your property, but I am very interested.  In return for $1,000 today would you sign an agreement to sell the property to me or anyone I designate for x$ anytime between now and the next 60 days?  If I decide not to proceed at the end of that period, the agreement expires and you have no further obligation to me.  In either event, you get to keep the $1,000".

Are you suggesting that if I want to buy the property flat out from the seller I can do this without a broker, but if instead I want to buy an option to buy the property from the same seller, my option transaction must be handled by a broker?  That doesn't seem consistent to me.

But as I said, this is getting very complicated and touches on points of law that I do not understand and certainly am not qualified to address.  So at this stage I think it best that I engage the services of an attorney to get a legal opinion.

Again I thank you for your views and for providing me with some serious food for thought and research.

Alan 

@Alan Johnson   The interpretation is that you're proposing to market a property that you don't own.  i.e., for another person.  The "other person" isn't the wholesaler or broker - in fact, the whole purpose of this chapter is to define who is required to be licensed.

Your interpretation would mean that you don't have to be licensed to sell real estate at all, because as a broker, you're acting on your own behalf in order to make a fee.

Again, remember that these laws are in place to protect the public, not the agent.

As to #2, yes. You absolutely can buy a property and resell it. However, you cannot market it for resale until you own it. Yes, you absolutely can do this without a broker. It's done every day and is what we call a FSBO (for sale by owner).

@Brett Snodgrass did a podcast episode on this - I think it's #231 or thereabouts.

The part about entering into a contract without both the intent and ability to perform to the terms of that contract is described by the tort called "fraud in the inducement".

In other words, you fraudulently induced the seller to sign a contract that you knew that you could not fulfill.

For #3, the straightforward answer is that this is a license-required activity.  Yes, you can flat out buy the property without a broker or real estate license.  But dealing in options is specifically prohibited in MA law.

For the record, I have run this by two people in great detail.  The first is a former business partner - Henry Rappa Jr, a Melrose MA attorney with over 25 years in the business.

The second is my broker who holds a seat on the MA Division of Professional Licensure - State Board of Registration in Real Estate.  This is the state licensing authority.

Both are in 100% agreement.  Wholesaling as it's commonly practiced, including options, is a license-required activity in MA.  The only legal way to do it is to close on the property and then resell.

BTW - early on, you mentioned "value add".  When it comes to the seller, wholesaling is a "value subtract" proposition.  The seller always gets less than actual market value.

BTW - early on, you mentioned "value add". When it comes to the seller, wholesaling is a "value subtract" proposition. The seller always gets less than actual market value.

Thats a great way to put it @Charlie MacPherson

In FL, the state says if you are bringing end buyers you are BROKERING. These FRAUDS AND SCAMMERS can push out all the propaganda they wish but they can't change the facts. Even licensed agents are getting busted if they aren't having all fees run through their broker. The only way to deal with unlicensed brokers is to continue to report them. I probably report five a week if not more. The state is also VERY aware of BP and has told me  it is a "hotbed of illegal activity". No doubt they make cases from the ads there along with CL. 

@Brittany Witt

Yes just 1 have them sign and as the other lady said if they would like a copy you can always send them over a copy but really it's just saying "your" offer and stating that you work with other buyers (which you do, when you sell the deal to another investor) for the amount they would like and boom! Deal. Good luck on your 1st deal!

Originally posted by @John Thedford :

BTW - early on, you mentioned "value add". When it comes to the seller, wholesaling is a "value subtract" proposition. The seller always gets less than actual market value.

Thats a great way to put it @Charlie MacPherson

In FL, the state says if you are bringing end buyers you are BROKERING. These FRAUDS AND SCAMMERS can push out all the propaganda they wish but they can't change the facts. Even licensed agents are getting busted if they aren't having all fees run through their broker. The only way to deal with unlicensed brokers is to continue to report them. I probably report five a week if not more. The state is also VERY aware of BP and has told me  it is a "hotbed of illegal activity". No doubt they make cases from the ads there along with CL.

What are your thoughts on BP creating, maintaining and encouraging wholesaling through their books, podcasts and forums that you support and participate in. 

Originally posted by @Tim Gordon :
Originally posted by @John Thedford:

BTW - early on, you mentioned "value add". When it comes to the seller, wholesaling is a "value subtract" proposition. The seller always gets less than actual market value.

Thats a great way to put it @Charlie MacPherson

In FL, the state says if you are bringing end buyers you are BROKERING. These FRAUDS AND SCAMMERS can push out all the propaganda they wish but they can't change the facts. Even licensed agents are getting busted if they aren't having all fees run through their broker. The only way to deal with unlicensed brokers is to continue to report them. I probably report five a week if not more. The state is also VERY aware of BP and has told me  it is a "hotbed of illegal activity". No doubt they make cases from the ads there along with CL.

What are your thoughts on BP creating, maintaining and encouraging wholesaling through their books, podcasts and forums that you support and participate in. 

 If it is done legally no issue though I still dislike the practice because it is a blind transaction and the sellers have no idea what the "service" is costing them. The State of CO went after a licensed agent with criminal charges for "wholesaling" misdeeds. 

Originally posted by @John Thedford :
Originally posted by @Tim Gordon:
Originally posted by @John Thedford:

BTW - early on, you mentioned "value add". When it comes to the seller, wholesaling is a "value subtract" proposition. The seller always gets less than actual market value.

Thats a great way to put it @Charlie MacPherson

In FL, the state says if you are bringing end buyers you are BROKERING. These FRAUDS AND SCAMMERS can push out all the propaganda they wish but they can't change the facts. Even licensed agents are getting busted if they aren't having all fees run through their broker. The only way to deal with unlicensed brokers is to continue to report them. I probably report five a week if not more. The state is also VERY aware of BP and has told me  it is a "hotbed of illegal activity". No doubt they make cases from the ads there along with CL.

What are your thoughts on BP creating, maintaining and encouraging wholesaling through their books, podcasts and forums that you support and participate in. 

 If it is done legally no issue though I still dislike the practice because it is a blind transaction and the sellers have no idea what the "service" is costing them. The State of CO went after a licensed agent with criminal charges for "wholesaling" misdeeds. 

 I just had a quick follow up question to those in states where it is illegal to wholesale.  In my area, where it is legal, we are over run with wholesalers.  In addition, due to overwhelming number of amateur hour investors/flippers, those properties that are wholesaled are bid up to the point of no profit or a loss if you flip the house.

So, since it is illegal in many states, has that created an OPPORTUNITY for investors coming in with a large line of credit who can actually do the purchase and sell to flippers or on MLS? It is true that certain houses need a wholesaler's touch, like bad neighborhoods, hoarders, someone needing cash in 48 hours, etc. It would seem to me that there would be a void in the wholesaler's normal market, making it ripe for a real estate investor who is a disruptor who could come in and make some money, instead of flipping for a loss in other areas.....

@David S. The HGTV crowd is one of the challenges we face in this market.  You know - they watch Flip This House and figure that they can rehab a house in 30 minutes, including commercials.

I have looked at many homes where actual investors get outbid by the amateurs.  I know that the amateur has bought himself a festering boil that's going to be sold at a loss when the time comes, but if they're not my client, there's not a lot I can do to help them.

If wholesalers are in competition with each other and bid a property's price up to the actual market value, I'd be a lot less concerned because the seller isn't getting screwed.  I have not seen that happen though.

I disagree about homes needing a wholesaler's touch.  Especially when that "touch" is designed to rip off the seller.

Every property has a price - or as we say in the business, there's a butt for every seat.  It could be the absolute worst home in a horrible part of town.  If all that is reflected in the price, it will still sell - especially in this very hot seller's market.  And by the way, this is how bad neighborhoods gentrify and turn into GOOD neighborhoods.

By definition, an MLS listing is the single best way to get the maximum price for every property, regardless of location or condition.

@John Thedford Regarding my reference to value add/creation, wouldn't $331k from a cash buyer in my example be of more value to the seller than netting $323k after deducting 5% commission from a selling price of $340k?

Originally posted by @John Thedford :

@Charlie MacPherson

Did you read the State of CO PSA I posted above? They, as well as FL, are referring to those ripped off by these FRAUDS AND SCAMMERS as "victims". Note some post how they are going to operate "ethically" while breaking laws LOL. There is no way to be ethical and break laws at the same time. It is part of the delusion they suffer from.

 Going 46MPH in the 45 can be described as "ethically" breaking the law...just saying, it can happen :)

@Alan Johnson   A couple of points about that scenario.

1. There's not enough profit for a wholesaler to make a deal out of that, so in principle, yes.  The seller would net more - but a wholesaler can only make an amount equal to the sales commission, or the seller is again getting screwed.  

When the wholesaler go to sell or assign it, it will be at retail price and that's just not going to work.  Their model is to buy at a large discount.  

In fact, I spoke with one of representatives from the company that low-balled my sellers.  He stated to me that their model is to offer 65% of the current market value for a property.  When I heard who they were and what they offered ($228,000), I did the math - ($228,000 ÷ 0.65 = $350,769) and told the sellers that the actual market value would be about $350,000 - and without even seeing the property, I was spot on.

2. If the seller has signed an "Exclusive Right to Sell" with the brokerage which is very likely, the seller is obligated to pay the full commission regardless of to whom or how it is sold.

3. And of course, if you approached the seller directly and put it under contract with the intent of assigning it, that's a license-required activity in MA.

Hello @Brittney Witt,

First, a full disclosure. To-date I personally have not attempted to wholesale a property, although I have plenty of investor friends and acquaintances who have. I am a licensed real estate investor and a private money lender and I have a very large network of both licensed agents and non-licensed investors. Also, I am not familiar with the real estate laws or contracts required in Florida, so I am speaking very generally here. 

This is my answer to your question: I would bring two contracts filled out the same way, leaving blank the offer price until you agree on a price with the seller. If they agree to sign, everyone should sign both and you should leave them a copy. I would have several blank copies with you as well, just in case either of you makes a mistake or you need to start all over. If they do not sign, leave them a copy of a blank contract so they can read it if they have not done so before, as well as your card (or something with your contact information). If you can, bring a CMA or other examples of what comparable properties are selling for for your discussion. Also, if you have access to something that gives you generally pricing for repairs and replacement (roof, flooring, paint, etc.), bring that so you can start to estimate what it would cost to fix the place up. This will both help you with your negotiations, and give you some idea of what the investor who purchases from you will need to spend to improve the home. Remember, you are there to solve a problem, so spend most of your time listening and asking questions so you can be sure you are solving the correct problem.

Hope this helps. 

Hello @Brittney Witt,

First, a full disclosure. To-date I personally have not attempted to wholesale a property, although I have plenty of investor friends and acquaintances who have. I am a licensed real estate agent and a private money lender and I have a very large network of both licensed agents and non-licensed investors. Also, I am not familiar with the real estate laws or contracts required in Florida, so I am speaking very generally here. 

This is my answer to your question: I would bring two contracts filled out the same way, leaving blank the offer price until you agree on a price with the seller. If they agree to sign, everyone should sign both and you should leave them a copy. I would have several blank copies with you as well, just in case either of you makes a mistake or you need to start all over. If they do not sign, leave them a copy of a blank contract so they can read it if they have not done so before, as well as your card (or something with your contact information). If you can, bring a CMA or other examples of what comparable properties are selling for for your discussion. Also, if you have access to something that gives you generally pricing for repairs and replacement (roof, flooring, paint, etc.), bring that so you can start to estimate what it would cost to fix the place up. This will both help you with your negotiations, and give you some idea of what the investor who purchases from you will need to spend to improve the home. Remember, you are there to solve a problem, so spend most of your time listening and asking questions so you can be sure you are solving the correct problem.

Hope this helps. 

Originally posted by @Tyrell Perry :

 Going 46MPH in the 45 can be described as "ethically" breaking the law...just saying, it can happen :)

 I'm not sure what point you're trying to make here.  

There's no moral equivalence between going 1 MPH over the speed limit and illegally preying on uninformed, gullible and/or desperate homeowners and stealing thousands of dollars with of their equity.

Originally posted by @Charlie MacPherson :
Originally posted by @Tyrell Perry:

 Going 46MPH in the 45 can be described as "ethically" breaking the law...just saying, it can happen :)

 I'm not sure what point you're trying to make here.  

There's no moral equivalence between going 1 MPH over the speed limit and illegally preying on uninformed, gullible and/or desperate homeowners and stealing thousands of dollars with of their equity.

There is no mention of moral equivalence in my comment...simmer down bud

I wonder if @John Thedford and @Mary Mitchell  and all other miserable haters realize that the owners of biggerpockets have used wholesaling as one of their exit strategies? Not only have they wholesaled themselves but they also teach it and BUY contracts from wholesalers.  I've heard both Joshua Dorkin and Brandon Turner say it on Podcast and in books.  If you didn't know, now you do. With that said, every second you continue your account on this website is a clear example of your hypocrisy.  BEAT IT!

@Charlie MacPherson   Once again you have provided me with valuable insight....  It's hard for me to comprehend that a 900% return on investment within 30 days isn't enough profit.  More food for thought, I guess...  

I feel like the critics of wholesaling have a different view of the kinds of houses most commonly in that market space than I do. How easy is it to get a realtor to list a house that needs new EVERYTHING, that the seller won't have the funds to spruce up at all prior to listing, to hold open houses in a place that reeks of cat urine, that will only bring in a tiny commission due to its disrepair? Does that seller want to sell it by owner and take the better part of a year or more showing the place and hearing the criticisms and disappointment? Not every place lends itself to getting multiple offers on the MLS.

Maybe realtors should do what some other professions do and take on some listings pro bono.

@David S.   Hope all is well in Prairieville (I used to work at the BASF plant in Geismar in the mid-80s).

Your comment about an investor as a disruptor is hitting close to the point I was trying to make about options.  Rather than committing a 'large line of credit' to actually make the purchase and hope to come out the other end with a profit, executing an option contract with the seller instead on a distressed property could be done with 10% or less of the capital commitment, plus provide the investor with breathing room to determine if they can actually make the deal work out.

This used to be called 'speculating'; now it all seems to be lumped under the general category of 'wholesaling' and considered to be the equivalent of swindling... 

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