Hello, i am new to real estate looking to get into wholesaling. My biggest hangup with this model is that it seems almost all the “gurus” teach to lie to homeowners and say that I am going to buy the property which is simply not true and I wouldn’t tell them something which is not truthful.
However, I know there are plenty of amazing wholesalers who do things with integrity and transparency, so I’m here to get some advice from you awesome wholesalers!
How do you position yourself to property owners so that you can get a deal done? I’d appreciate advice from the perspective of not actually having any capital to close the deal myself. How do I turn “Hey, I don’t have any money to buy your property but I have connections with people who do. I’d like one of those people to buy your property while I get a cut of the profits for having found the property” into something that actually sounds good and closes deals?
China, ME · Member since 2014 · 3k+ posts · 4k+ votes
5y
@Michael Yates It's good that you're asking these questions. Sadly, the answer is that you can't.
For the record, I no longer sell real estate. I've migrated into business brokering, so I have no dog in this hunt. I just hate seeing people getting screwed.
Start with the law. In every state that I know of, an unlicensed person cannot market a property that he doesn't already own - meaning that your name is already on the title.
Real estate license law is put into place to protect the public from unethical practices, whether that's from a wholesaler or a real estate agent.
Wholesalers and guru courses will tell you that by putting a property under contract gives them equitable interest. I have personally run this by a real estate attorney and by the real estate commissions in the two states where I still hold a real estate license - Massachusetts and Maine. They all agree that even discussing a property like this being available for sale or assignment is a license-required activity.
Look at how wholesalers operate. Typically, they put a property under contract with a vanishingly small EMD so that they have nearly zero skin in the game. While the homeowner thinks their property is about to be sold, the wholesaler tries to find a buyer. When he fails, he walks away and shatters whatever plans the homeowner had. But hey, they get to keep that $10.00 EMD, right?
Wholesalers make their profit by stealing equity from homeowners who are either not aware of the fair market value of their home or are in such a desperate circumstance that they have to take a bad deal (well below fair market value) so that they can get out of a jam. The fact that these things are making you question the ethics of wholesaling is encouraging. It means that your conscience isn't completely dead.
Here's a little icing on the cake. Entering into a contract like a P&S without both the intent and ability to fulfill the obligations therein is a tort known as "fraud in the inducement". https://dictionary.law.com/Def...
Wholesalers like to yell and scream "but the contract says it's assignable and that makes it legal!" That's true if it's a contract to buy a truckload of apples, but state governments make an exception for real estate transactions. Again, they do that to prevent unsavvy (and desperate) people from being taken advantage of - which is the wholesaler's stock in trade.
The weird thing is that wholesalers do a lot of the same things that Realtors do. Find someone who wants to sell. Market the property. Find buyers. Show the property. Get the deal across the finish line - which involves a LOT of work.
The difference is that the Realtor works within the law and more important, the Realtor is a fiduciary to the seller. That means that as a matter of law and ethics, the Realtor puts the seller's interests first and foremost. The wholesaler puts his own interests first to the detriment of the homeowner.
If you want to wholesale ethically, close on the property and then resell it after you own it. That's known as "wholetailing". Better yet, buy dilapidated properties, rehab them and then sell them for a profit. You improve the neighborhood, the seller gets out of a bad property, the town sees improved tax revenues, the buyer gets a nice home. Everybody wins.
Rehabbers add value. Wholesalers steal value.
Of course, the best solution is to get your real estate license and subject yourself to all the regulations that are in place to protect consumers. There is literally nothing that a wholesaler can do that a Realtor can't. Realtors will list a home on the MLS and expose the property to probably 100,000 times the number of potential buyers that a wholesaler can. By definition, that means more money in the seller's pocket and more protection during the process.
China, ME · Member since 2014 · 3k+ posts · 4k+ votes
5y
@Michael Yates It's good that you're asking these questions. Sadly, the answer is that you can't.
For the record, I no longer sell real estate. I've migrated into business brokering, so I have no dog in this hunt. I just hate seeing people getting screwed.
Start with the law. In every state that I know of, an unlicensed person cannot market a property that he doesn't already own - meaning that your name is already on the title.
Real estate license law is put into place to protect the public from unethical practices, whether that's from a wholesaler or a real estate agent.
Wholesalers and guru courses will tell you that by putting a property under contract gives them equitable interest. I have personally run this by a real estate attorney and by the real estate commissions in the two states where I still hold a real estate license - Massachusetts and Maine. They all agree that even discussing a property like this being available for sale or assignment is a license-required activity.
Look at how wholesalers operate. Typically, they put a property under contract with a vanishingly small EMD so that they have nearly zero skin in the game. While the homeowner thinks their property is about to be sold, the wholesaler tries to find a buyer. When he fails, he walks away and shatters whatever plans the homeowner had. But hey, they get to keep that $10.00 EMD, right?
Wholesalers make their profit by stealing equity from homeowners who are either not aware of the fair market value of their home or are in such a desperate circumstance that they have to take a bad deal (well below fair market value) so that they can get out of a jam. The fact that these things are making you question the ethics of wholesaling is encouraging. It means that your conscience isn't completely dead.
Here's a little icing on the cake. Entering into a contract like a P&S without both the intent and ability to fulfill the obligations therein is a tort known as "fraud in the inducement". https://dictionary.law.com/Def...
Wholesalers like to yell and scream "but the contract says it's assignable and that makes it legal!" That's true if it's a contract to buy a truckload of apples, but state governments make an exception for real estate transactions. Again, they do that to prevent unsavvy (and desperate) people from being taken advantage of - which is the wholesaler's stock in trade.
The weird thing is that wholesalers do a lot of the same things that Realtors do. Find someone who wants to sell. Market the property. Find buyers. Show the property. Get the deal across the finish line - which involves a LOT of work.
The difference is that the Realtor works within the law and more important, the Realtor is a fiduciary to the seller. That means that as a matter of law and ethics, the Realtor puts the seller's interests first and foremost. The wholesaler puts his own interests first to the detriment of the homeowner.
If you want to wholesale ethically, close on the property and then resell it after you own it. That's known as "wholetailing". Better yet, buy dilapidated properties, rehab them and then sell them for a profit. You improve the neighborhood, the seller gets out of a bad property, the town sees improved tax revenues, the buyer gets a nice home. Everybody wins.
Rehabbers add value. Wholesalers steal value.
Of course, the best solution is to get your real estate license and subject yourself to all the regulations that are in place to protect consumers. There is literally nothing that a wholesaler can do that a Realtor can't. Realtors will list a home on the MLS and expose the property to probably 100,000 times the number of potential buyers that a wholesaler can. By definition, that means more money in the seller's pocket and more protection during the process.
3) That you'll make sure the seller won't know the true buyer AND
4) That you'll make sure the seller won't know what the true buyer is paying
And, pleeeeeeeeeeeeeeeeease, stop with the "I'm really helping the seller" bromides.
title of the thread is an Oxymoron. LOL.. poor wholesalers getting bashed these days..
many states are finally enforcing their laws that are currently and have been on the books for decades.
IE anyone that brings a buyer and seller together for compensation in real estate transaction needs to be licensed every state laws read virtually the same verbatim if folks take the time to actually read them.. But of course wholesale how to gurus are not going to sell courses if the students have to follow the laws. :)
Essentially, if you want to operate ethically and honestly, then just do it.
I ask people if they're willing to sell. I don't say right off the bat anything about buying their house. If the conversation goes anywhere, I tell them that I have a network of investors that I work with who would be interested in buying their house. I might even explain that I will get the house under contract and then assign the contract to the right investor. I do not say this stuff from the beginning, of course. They don't want to know the details if they're a truly motivated seller. They just want to get rid of the property. On a few occasions, I've been asked what my fee is. When they ask, I tell them that they won't be paying any fee. I work that out with the end buyer. At this point, I've never had anyone pursue it any further.
It's true you need to operate within the laws in your state, but contrary to what some might say, that's not difficult. Be sure you know the laws and follow them. Illinois, for example, will let you wholesale once per year. That's the most extreme state. Others might follow suit, at which point you might want to get a license. Having a license doesn't prevent you from wholesaling. You just need to follow those rules as well.
As for stealing equity from a homeowner when they don't know the value of their house, I couldn't disagree more. Investors (wholesalers, rehabbers, etc.) are always looking to purchase properties at a discount. Some (very few) sellers are ok with this. Again, be honest. I tell them from the get go that I'm looking for properties at a discount. Motivated sellers have a reason they're willing to sell at a discount. Maybe they don't have the time and/or resources to fix up the property enough to sell it at retail. Maybe they're an investor who is unhappy with the property. IF they are willing to sell at a discount, then that's someone you can work with. In fact, I always tell the seller that they can get more money going with a realtor. If the house is in really poor condition, I explain that they're most likely going to have to fix it up before they can list it. The last two people I spoke with contacted me BECAUSE I was a wholesaler. In both cases, the property was in distress and they didn't want to deal with it. They knew exactly what I did and they wanted to sell through me.
Bottom line... be honest and open about what you're doing. If what you're saying doesn't work for them, then wish them luck and drop it. Of course, follow up in a few months and ask them how it's going. They're motivation may have increased over the months and they might want to discuss it with you further. If not, move on.
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
5y
"As for stealing equity from a homeowner when they don't know the value of their house, I couldn't disagree more. Investors (wholesalers, rehabbers, etc.) are always looking to purchase properties at a discount. "
I couldn't disagree more - IF a seller knows what a true buyer is paying, I'm OK. Most wholesalers refuse to disclose this.
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
5y
On a few notes, I would disagree.
First, when you get the house under contract, you don't yet know what the end-buyer is going to pay. You might have an estimate, but you don't know. It depends on their exit strategy and other factors.
As the wholesaler, you have multiple exit strategies available. More uncertainty. I also work with hard-money lenders who are willing to come up with other plans if we want to.
And of course, the seller knows you're going to make a profit that's to-be-determined. They have to be ok with the price they're getting and that you're going to make a profit. If they're not, and they want more for their house, they can sell retail. I had one person ask why they couldn't go directly to other investors, and I told them that they certainly could and that would get them more money - maybe as much as $10K. They asked some other questions about how they could sell their house and I suggested FSBO. I've actually only had such a conversation once, and it didn't seem to matter in the end. I didn't get that deal. He did sell it FSBO and made just about what I offered him.
A vast majority of people who sell their homes do so retail. They want top dollar and they are willing to do what they can to get that. Some people want to get rid of a property that's causing them distress (financially, emotionally, etc.) and they're willing to give up equity for that. They're hard to find, which is why wholesaling is difficult.
I once sold a car through a private sale. I ran ads and negotiated with the buyer. It was a bit of a pain, so I decided just to trade my car in next time. Do I know what the dealer sold it for? Nope, and I really don't care. I traded equity for convenience.
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
5y
It seems to me that the solution here is to team up with your buyers. If, as a wholesaler, you truly have a list of buyers (not just a hope and a prayer that buyers will magically show up once you have a deal) you can offer the buyers your services for, say, a 5%-10% interest in an LLC in which you are both members or, if you lack cash to form an LLC, a general partnership. In this way, you get your cut for every property you source that actually gets purchased by that buyer, which is what I understand the practice is all about. This strikes me as a wholly ethical and legal arrangement.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
5y
I have wholesaled deals that aren't a fit for me. I am honest with the seller and tell them as much. I then get a non-exclusive option to buy the property that allows the seller to continue marketing to a new buyer.
If I find the buyer first, we go under contract. If not, the seller has not wasted time and they are no worse off having met me.
When I sign a purchase agreement, I am signing that I have the intent and ABILITY to close. That's where the 'fraud' lies. Right under the earnest money amount, the broke wholesaler warrants an ability they don't have.
I lean "both" ways when it comes to wholesaling. Let's be honest here. I would guess that 90% of wholesalers don't have a clue what they're doing. They don't know how to run a business. They have no idea how to calculate "true" rehab costs. They lie about the ARV. They lie about the rehab costs and they just have no clue what's going on! However, there are good ones out there as well. Here's what we tell sellers: "We work work with a private group of investors and our job is to find properties that meet their specifications and that's why I'm contacting you. I evaluate the homes and if we can agree on a fair price, then an investor will purchase your property." People say that wholesalers take advantage of people. Some do but many don't. Let's talk about realtors for a minute. Do you know how many times we see low cost homes listed that have NO pictures and barely a description? Do you know how many times it's been like pulling teeth to get a listing agent to show us the property? Why? Because their commission is minimal. They don't want to be bothered. Yet the seller is paying them good money to sell the property. Does that sound fair to the seller? My realtor has a heck of a time just trying to get a lock box code from listing agents, on lower priced homes. My point is, there's good and bad people in both industries.
Charlie wrote: "Realtors will list a home on the MLS and expose the property to probably 100,000 times the number of potential buyers that a wholesaler can. By definition, that means more money in the seller's pocket and more protection during the process." Some of that might be true but what's a seller suppose to do, that has a house that needs $30k in work and no one wants it? What's a seller suppose to do when it's like pulling teeth for realtors to show their house? What's a seller suppose to do when no on wants to buy their home? That's where wholesalers come in. If someone agrees to a price, then it's a deal. We don't push people into selling. They either want to sell or they don't. But I don't know how many times we've bought run down houses that were on the market for months on end. So what good is the exposure that the realtor "supposedly" brings, that the wholesaler doesn't? The exposure didn't do one bit of good! All that matters to the seller is that the house gets sold.
I understand everyone's point of view and bad wholesalers do give the business a bad name. But every business has "bad" people in it. It's just a shame that there's so many of those bad apples in wholesaling.
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
5y
To be good at wholesaling, you have to know your state law first. What can you legally do, like really, not how can you avoid the legalities. Then you need to be transparent about your role in the process, what it's like to a middle person and that you are not buying the house (unless you have the money and will), but bringing another buyer to the table (which is why @Jay Hinrichs point is correct, this is brokering a RE deal). You need to know and be sure about the repair costs and you need to have access to the MLS so your ARV is based on real comps from within a half-mile and 3 months' time. If all wholesalers were transparent, most sellers would not sign a contract with them and that's the point and the problem.
Many great points made here and I appreciate all of your perspectives.
I feel that transparency and pure intentions really go a long way no matter which business you’re in. To say that wholesaling in its entirety is unethical seems a bit off to me though. Just because there aren’t laws saying that a wholesaler has to look out for a homeowner’s best interest doesn’t mean that the wholesaler won’t do just that. If we’re being completely honest, most of them probably don’t. But that doesn’t mean all of them don’t.
Ensuring that the homeowner gets exactly what works best for them, from my perspective, should be the foundation of how to run the business. Not trying to convince them in any way but rather a legitimate curiosity to find out what it is that would best help the homeowner out and an understanding that most homeowner’s best option is NOT a wholesaler.
But I’m open to hearing more from those who insist wholesaling is unethical in its entirety and even suggestions of what would be a better route to start in real estate in your eyes. Thanks a ton!
Do I know what the dealer sold it for? Nope, and I really don't care. I traded equity for convenience.
Difference is the dealer took title. Something as big as a piece of real estate is NOT like a used car. You seem morally confused in your justification of less than ethical behavior.
For most sellers, this is their primary source of wealth. When a wholesaler ties up a property with a false promise of buying and then goes thru the rigor of hiding what the actual price is - Doesn't that raise the hackles on the back of your neck?
If they are so ethical and honest, why go thru all the trouble of hiding pertinent information that a legitimate broker would share.
At least with a legit broker, the more he gets in price the more the seller gets.
But I’m open to hearing more from those who insist wholesaling is unethical in its entirety and even suggestions of what would be a better route to start in real estate in your eyes. Thanks a ton!
I don't have a problem driving a hard deal, my issue is disclosure with these guys. Why can't they tell the seller what the true buyer is paying? Why do they need to go thru the subterfuge of stuff like dual escrows? Why do they avoid putting $0.01 of their own money in a deal?
If they disclosed any of this or just took title and resold it, I wouldn't have an issue. It's just the no-money hiding stuff aspect that screws over a seller that is unethical.
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
5y
@Steve Morris So what you're saying is that if I get the property under contract and then sell that contract to another investor, but I don't tell the seller what I sold it for, I'm being dishonest.
But, if I get the same property under contract from the same seller for the same price, take ownership of the property, and then immediately turn around and sell it to another investor, I'm being honest.
From the seller's perspective, how is either of these situations different from the other?
You're saying that for most sellers this is their primary source of wealth. You're neglecting to mention that most sellers are going to sell through a realtor, as it should be. They've taken care of their primary source of wealth, and when it comes time to sell it, they're going to sell it the way you would expect them to. These people are not going to be dealing with wholesalers. If a wholesaler does manage to trick them to selling their house for less than they could get through other means, that wholesaler is the operating WITHOUT integrity and transparency, which is what this question was about. So, to the OP, I say Don't do that!
You're saying that the seller doesn't know the actual price. No, they do. The price they've agreed to - after they've been told they can get a lot more by going through a realtor, possibly after making a number of repairs. They know that they can go this route and they've chosen not to. Again... if the wholesaler is operating with integrity and transparency.
You're saying that the wholesaler is tying up their property with a false promise of buying. No, they're not. The promise is no less real than if a rehabber or landlord were making the same offer. All offers come with a due diligence period where they buyer can inspect the house in detail. Say they discover a major foundation problem during the inspection. If that happens, the buyer will either re-negotiate so that they can get that fixed and not go under in the process, or they will back out of the deal saying that the property did not pass inspection. Now, if a wholesaler is repeatedly getting properties under contract and backing out, or they string a person along forever in hopes they can make the deal work (when it probably can't at this point), again - no integrity and no transparency.
A realtor is a commissioned salesperson. He makes a percentage of the purchase price and negotiated up front. An investor or business owner (of any kind) is someone who is looking to make/purchase goods and services and sell them at a profit.
Any business owner or investor can act with integrity and transparency. Or they can choose not to. Wholesalers fit into that category. They are a business owner or investor, and they can choose to act with integrity and transparency, or they can choose not to.
You're confusing those who choose the ethical path with those that do not. And to be honest, I can't really blame you since there are a lot who choose the latter. Those who choose the first path are smeared with the stench of those who choose the second.
I think the difficulty is that a vast majority of people should and do sell their property through a realtor or at least go the FSBO route, and there are a lot of "wholesalers" who listen to the less-than-ethical gurus who tell them the can make fat stacks of cash just injecting themselves in the middle of the sale. Wholesalers shouldn't even be talking to these people. They should be asking the seller, "Why aren't you selling through a realtor where you can get more money?"
The OP asked how a wholesaler can act with integrity and transparency. That's what I was trying to convey.
Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
5y
Wholesaling is always going to be something that is highly scrutinized. If you just take the approach of being a problem solver over everything else and treat the sellers like you'd like to be treated.
When a seller sells with a realtor, do they get full price? Most of the time they don't. So the realtor is NOT getting them full price so why aren't you upset about that? If the realtor can't get full asking price, we ALL know there's no way they're lowering their fee. Why Not? You said wholesaslers low ball and why don't they give that price to the seller. Because we found the other buyer!! Just like the realtor found a buyer. They get paid for their services, just as I do. I work my butt off to find a buyer and I'm sorry, but I don't work for free. Neither does the realtor. If the seller wants a higher price, then they need to go out and find that person who will buy it for that higher price. That takes time, effort and patience. That's why I get paid what I do. Do you knowhow many people buy "products" from other people and then resell them at a higher price? It happens everywhere! I should also note that I've sold properties for much less than the 5% the realtor gets. There's been times when I've sold a property for $500. I can GUARANTEE a realtor won't do that. So who's the "bag guy" in all of this? No one. It's business and you get what the market bares.
From the seller's perspective, how is either of these situations different from the other?
First situation, you took title with full disclosure. Nothing hidden.
Other you didn't take title and hid stuff from the seller like what you actually got. If I did that as a broker, I'd lose my license in OR.
If you want to wholesale with full disclosure, go ahead. It may be legal, but that doesn't make it ethical.
For the first and second situation, the buyer doesn't care. All he cares about is what he's getting - just like I don't care what the dealer is getting for more car. More accurately, I don't want to know because I know it's more than I got. But I made that choice.
As for losing your license, of course you would. Your license is to act as an agent of the seller. That term, agent, isn't random. An agent is someone who acts on behalf of, or for, another person. That's the specific relationship you're entering into in order to earn your commission. If I want to buy someone's house, as an investor, homeowner, wholesaler, etc., I'm not acting on behalf of the seller. I'm acting in my own personal best interests. If I can get the seller to come down a few thousand dollars, I'm going to do that. What home buyer doesn't do that? That doesn't make me bad. It just doesn't make me an agent.
The last house I owned and lived in, I sold through an agent. The buyer negotiated through the agent and got us down several thousand dollars. The buyer wasn't dishonest. He was just trying to get a good deal. The agent was kind of useless. He didn't even work on finding another buyer or anything. He just told us we should take the offer. In the end, we took the offer because we just wanted to move out and on and didn't want to deal with the whole process.
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
5y
"For the first and second situation, the buyer doesn't care."
Well, once again you're wrong if you're speaking categorically. A legitimate broker doesn't get to decide if a seller cares or not - He engages in full disclosure.
That's my main issue is you guys are not honest (nor ethical) and refuse to disclose anything that may make them look bad. The amount of self-delusion and rationalization and deceit is breath-taking. If I hid stuff from a buyer, I'd lose my license.
However, tell you what, do a deal in OR and give me the details. I'll call the REA here and get their reaction. I've turned in wholesalers before, I'd love to let you plead your case.
Wholesaling is always going to be something that is highly scrutinized. If you just take the approach of being a problem solver over everything else and treat the sellers like you'd like to be treated.
I actually really like this answer. Problem solver over wholesaler or any other terminology that could put me into a box. How can I solve their problem or point them in the direction of someone who can.
After reading this thread and others I feel like there are some people who just dislike wholesalers because of how shady many of them are. And it seems some people are also blinded by the supposed purity of being an agent. That’s just the feeling I get though, could be wrong. I don’t think the act of wholesaling in and of itself is shady as long as there is full disclosure. But I think I’ll do better having wholesaling be a tool in the toolbox rather than the one and only tool I have.
I think I’ll greatly benefit from partnering up with more experienced people who are competent in more than just wholesaling so that I can have a list of ways that I can solve a homeowner’s issue rather than being limited to only being capable of doing a wholesale.
Do I know what the dealer sold it for? Nope, and I really don't care. I traded equity for convenience.
Difference is the dealer took title. Something as big as a piece of real estate is NOT like a used car. You seem morally confused in your justification of less than ethical behavior.
For most sellers, this is their primary source of wealth. When a wholesaler ties up a property with a false promise of buying and then goes thru the rigor of hiding what the actual price is - Doesn't that raise the hackles on the back of your neck?
If they are so ethical and honest, why go thru all the trouble of hiding pertinent information that a legitimate broker would share.
At least with a legit broker, the more he gets in price the more the seller gets.
This is correct about the car. If a car wholesaler pays a dealer for a trade in and "flips it" to another dealer for a profit without putting his name on the title it is illegal and will get his dealer license yanked. This is called "Jumping title" and sounds a lot like what most wholesalers are doing.
