Rental Property Investor · San Jose, CA · Member since 2019 · 15 posts · 14 votes
Hi BiggerPockets,
I'm aware that purchasing deals from wholesalers is risky. However, I'm wondering what the difference is between a deal from a wholesaler vs. an off-market deal from a realtor. Are off-market deals from realtors still regulated?
If anyone does purchase from wholesalers, what "checks" do you have in place to protect yourself before you decide to close? Please let me know if you know of any resources out there that answers these questions already.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
6y
As the buyer in purchasing from a wholesaler:
1. Make sure you only pay into escrow and never direct to the wholesaler, they get paid when the deal closes, not before that.
2. Always get a title insurance policy and read the title prelim carefully. Make sure you also get the actual seller disclosures as well.
3. Never trust the ARV or the rehab figure from wholesalers, about 98% of the time, they are off to make the deal look better than it really is.
If you are buying from a licensed real estate agent via an "off market deal", there can be numerous reasons why it is off market / "pocket listing" but these may very well be changing real soon as NAR (National Association of Realtors) has passed a rule that will go into effect in January, 2020 that states that no "pocket listings" are allowed. The moment any advertising is done on a property by an agent, they must have it on the MLS within 1 day. This rule is really stupid and hopefully gets reversed as it only hurts real estate agents in the long run. I understand they are trying to protect agency but this rule hurts it in my opinion as it gives sellers less options when using a licensed realtor and more and more may very well go about it without an agent when they do not want it on the MLS or signs in the yard.
Specialist · Atlanta, GA · Member since 2014 · 179 posts · 100 votes
6y
Buying real restate is not without risk no matter who you buy it from. You're only true protection is to know what you're doing and doing your Due Diligence. Even then, things can go sideways and Murphy's Law can get you.
Good wholesalers have deals that move so fast that they will just cut to the chase when communicating--they will give you a list of their inventory, containing: - Property address - Purchase price - Estimated rehab cost - After repair value
First, realize that wholesalers are not rehabbers. Their repair estimates cannot be trusted. These are just ballpark. So when you see one with a good spread between purchase price and ARV, and its in a neighborhood where you can get good financing and rents, call the wholesaler and ask to go see the property.
Be aware that other investors who already have a history with the wholesaler will probably start buying property sight unseen, and so that may be who you are competing with, but when you are just starting, take someone experienced in estimating rehab costs with you to verify the repair estimate.
If you want to gauge how well the wholesaler knows what they are doing, check the county records office online or go down in person to browse all documents filed against the property. Good wholesalers will have filed a Memorandum of Notice of Contract or something similar, warning everyone that the seller may only sell to them.
Less professional wholesalers with no money or no knowledge will try to tie you up as the buyer instead, because they actually have no security with the seller. For example, they may ask you to sign a non-disclosure/non-compete agreement before you can see their listings. If they had security in the property, they would not be afraid to show it to you. In fact, it would benefit them to tell the most people about the property so they can sell it faster. This also means instead of assigning you their right to buy, which is personal property, they are selling you the real estate, which they do not own, which makes them an agent, and because they do this often, a broker. That means they have committed the crime of practicing real estate without a license. This is either a misdemeanor or a felony offense, depending on the state, and how many times they've been caught doing it before.
Just remember that a wholesaler is someone who finds distressed property. Often, they are beginners in real estate. You cannot expect them to always have performed a title search, or uncovered back taxes owed, or HOA fees going back for years, etc. You still need to do your due diligence as with any property that you might have negotiated by yourself.
Regarding off-market property, the Realtor only has off-market deals when the buyer wishes to remain private or keep the sale price off the MLS to avoid hurting his neighbors resale value. That happens in short sales sometimes. Unless they are an Investor/Realtor, they're not getting pre-default/pre-foreclosure distressed properties, like a wholesaler is. The wholesaler will have the better bargain most of the time.
Buying real restate is not without risk no matter who you buy it from. You're only true protection is to know what you're doing and doing your Due Diligence. Even then, things can go sideways and Murphy's Law can get you.
Hi Mark,
Thanks for your reply. Is there anything you could expand on what you think due diligence should include, that most investors might miss?
I personally would:
- Ordering an inspection
- Checking public land records for liens
- Using title insurance and checking the title report
Rental Property Investor · San Jose, CA · Member since 2019 · 15 posts · 14 votes
6y
@Mike S. This is really practical advice for vetting wholesalers -- thanks so much for such a detailed and thoughtful response! Are you a wholesaler yourself, or do you tend to purchase from wholesalers?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
6y
As the buyer in purchasing from a wholesaler:
1. Make sure you only pay into escrow and never direct to the wholesaler, they get paid when the deal closes, not before that.
2. Always get a title insurance policy and read the title prelim carefully. Make sure you also get the actual seller disclosures as well.
3. Never trust the ARV or the rehab figure from wholesalers, about 98% of the time, they are off to make the deal look better than it really is.
If you are buying from a licensed real estate agent via an "off market deal", there can be numerous reasons why it is off market / "pocket listing" but these may very well be changing real soon as NAR (National Association of Realtors) has passed a rule that will go into effect in January, 2020 that states that no "pocket listings" are allowed. The moment any advertising is done on a property by an agent, they must have it on the MLS within 1 day. This rule is really stupid and hopefully gets reversed as it only hurts real estate agents in the long run. I understand they are trying to protect agency but this rule hurts it in my opinion as it gives sellers less options when using a licensed realtor and more and more may very well go about it without an agent when they do not want it on the MLS or signs in the yard.
Rental Property Investor · San Jose, CA · Member since 2019 · 15 posts · 14 votes
6y
@Will Barnard
Great tips! I wasn’t aware of the rule for realtors — some of the ones I am in touch will work with wholesalers to provide deals. I’m guessing this funnel won’t be allowed either?
Great tips! I wasn’t aware of the rule for realtors — some of the ones I am in touch will work with wholesalers to provide deals. I’m guessing this funnel won’t be allowed either?
I am not sure how exactly it will impact realtors other than the fact that once they publicly market a property, they have 24 hours to place it on the MLS or be in violation. This is IF this rule comes into play, I have not heard any updates on it in the last 3 or 4 weeks though.