Expectations when buying from wholesaler

12 Replies

Hey BP!

I've got a friend who just started wholesaling and got a off market deal under contract that's also a great deal for me to be a BRRRR or flip home run. It's his first wholesale deal as well as my first time buying a wholesale property, so a bit of blind leading the blind... I'll ask an agent I worked with tomorrow, but I wanted to hear from the BP community: when you're buying a wholesale property, what is your expectation for the buying process from the wholesaler to perform, and what I would be responsible to do from presentation to close? Thanks in advance, I'm excited to get my first BRRRR and wholesale deal under my belt!

2/2, 980 sq ft bungalow with newer detached 800sq foot block studio (converted garage). Both structures have metal roofs, located in Bradenton, FL.

Wholesaler got it for $75k, presented to me for $85k, with ARV of $140 with $5-10k remodel needs (will vett in due diligence). Comps I pulled in area are between $160-$162k.

@Daniel Brown yes he actually said only needs new central AC system (only has window units now), and $5k cosmetic buffer. I’m leary as well but he has it in contact for 30 days so I will be able to inspect it myself in the DD. Any knowledge on the process though?

Originally posted by @Andrew DeWeerd :

@Daniel Brown yes he actually said only needs new central AC system (only has window units now), and $5k cosmetic buffer. I’m leary as well but he has it in contact for 30 days so I will be able to inspect it myself in the DD. Any knowledge on the process though?

Whether it's brrrr or flip. There's no such thing as a cosmetic buffer. With brrrr, you're looking to add value by forcing appreciated value so you can refinance at 75% LTV (Usually). The same goes for flipping so you can resell it at those comps at 160.

Not too mention, running a new hvac system is very costly. The live in flip I’m working on, I’ve had costs up to 10-12 on a whole new system.

My best suggestion for you is to take a licensed contractor out with you, (pay for his time) so you can get an accurate idea of what it’s going to cost and fix up. This way, you’re not stuck with a property that you thought was a homerun and turns out to be a dud. Good luck!


 

@Andrew DeWeerd ,

He's new, so he doesn't know a lot about what to do, so be prepared for that. Make sure you work through a title company as you would with any other purchase, and make sure all of the i's and t's are taken care of.

But, it's all about the numbers. If he's found a deal that works for you and you're happy with it, then go for it. Do your DD of course. His estimate of ARV and rehab costs are good numbers for deciding to take a look at the deal at all, but it's YOUR estimate of ARV and rehab costs that are important.

You say this is a friend.  I assume there's some level of trust there.  That's a great start.  Work with him.  When you do your walk-through, help him to see what you don't see.  If it turns out not to be a deal, help him understand what he did wrong.  You'd be helping to make him a better wholesaler, and a better source of deals for you.  Win-win!

Good luck!

Hey Andrew, congrats on getting started! With that said, take the relationship and friendship out of the equation first so you can simply vet the deal and do your due diligence as this is business and about money.  In my experience, many wholesalers have a bad rap as they often underestimate rehab costs and overestimate value.  Your friend is new too, so he is really not that familiar with the process either and I don't think he is taking advantage of you asking for a $5-10k premium for finding a good property, provided he has left some room for you to make more than that.   There are some good wholesalers out there, offering good deals with realistic numbers, though they tend to be fewer and harder to find. You also mentioned it as a either a rental or a resale, so which way are you going to go??  That will impact how you do this deal and whether or not it is a good one as well.  Have you signed the contract or are you doing your due diligence first? If you signed it and it is not as he said, do you have an exit clause?

He thinks the value is $140k, and you think it is around $160k, that is a big difference and can at times be the difference between a good deal and a not so good deal. You should confirm this right away with a realtor in my opinion. At the same time, as @Daniel Brown said, you need to check the property out up front, and with someone that knows what they are looking at and how to estimate rehab costs. HVAC if none was there, means adding; Ductwork throughout the house, Framing to box it in, drywall, and finishing.  It also means new equipment and whether you do electric heat pump or gas furnace, there will be electrical or gas requirements.  You may also need to vent the property into the chimney if an 80+ unit or to the exterior if a 90+ unit.  Even if you get a great deal on the HVAC, that could easily be $5500-8500 depending on system, types, size, etc.  Now you add all the other stuff I mentioned, and you could end up at $10k just for the HVAC.

In Baltimore, on rentals, we have lead paint, so that is a consideration, you need hardwired smoke and CO2 detectors, among other code requirements.  If you are selling it, some of these become moot, yet in order to get the highest value, you need to provide a fully renovated property with new kitchens, baths, paint, carpet, updated electric, plumbing, HVAC, windows, roof, etc. the list goes on. As Danial said, there is no cosmetic fluff job on a resale, rental maybe.

As for the process, you guys will need to be in touch with a title company and provide them with the contract which should stipulate the conditions for the sale and time frame. Did you already sign a contract and if so, are you aware of what you committed to? Who pays the transfer taxes? Are they split or does buyer pay? The title company will then do the title search to check if any issues and if any liens. I assume your friend, the wholesaler, checked title to make sure his buyer has provided correct info on any mortgage balances or liens?? If there are liens, who is responsible? Seller or Buyer? Typically, you will have 30 days or so to settle, and I assume you will want to finance the property, so you will need to find financing as well and get that in place. Everything depends upon the contract. The wholesaler is to provide you with a free and clear of any liens or title obstructions property at whatever price is agreed upon and be able to close within time. Your responsibility is to simply perform at settlement with the funds to close the deal. I hope this helps a little.

@Michael Krupp Thank you sir, great inputs! I am not in contract myself yet, and will be bringing my contractor through for the DD process, with a weasel clause in the contact I'll sign for condition, etc, when I do sign. That last paragraph is what I was looking for - so wholesaler should be responsible for bringing clear lien/title. Some of the other items like who pays all costs associated with the title work, etc doesn't sound like there is a standard/default?

Yes, seller/wholesaler is responsible to transfer clear title or contract should be null and void. Typically, wholesalers ask the buyer to pay all closing costs. Of course, anything and everything can and should be negotiated or least attempted to.

The expectation is to be misled about repairs costs and ARV. Whether this is from in experience, desperation, or being malicious to make a paycheck depends on the wholesaler.

Getting into the specifics of this property, you mentioned it's a bungalow that needs 5-10k of repairs. Bungalows were going up through the 1940's for the most part, unless this property has been recently rehabbed there is always deferred maintenance on old houses that will need done. You mentioned it needs central AC and it's on window units now. So it will also need ducts run, even the cheapest AC guys are going to be north of 5k for this job. Also the electric panel will most likely need upgraded to handle the larger ampage of the central AC. That doesn't leave a lot of budget left for cosmetic work; paint, flooring, kitchen and bathroom upgrades, lights fans blinds and fixtures, etc... 

We remodel a lot of old bungalows here in west Florida, decades of humidity and termites are not kind to them. The repairs costs are always around 20-30% higher than newer block structures with similar square footage. 

@Michael Krupp wrote
Typically, wholesalers ask the buyer to pay all closing costs. Of
course, anything and everything can and should be negotiated or least
attempted to.

To add to that,  What is negotiated should be in the contract. The contract rules the terms of the deal.
Presuming he is assigning you his contract, You are  not buying a house from the wholesaler you are buying a contract. Make sure you read it and understand it.

Amen to what @ned carey says above and if anyone knows, he does!  In the future, you should make sure to read and know what the contract stipulates prior to signing it.  With that said, do your due diligence first, inspect the property, before signing any contracts as well!