Wholesaler vs Actual Buyer

Help your leads sniff out the bad apples of the investor group! I originally created this post to help our leads (homeowners) determine who was an ethical investor and who was not. I hope all the honest investors out there are educating their leads so, even if they can't buy the property, the lead won't get taken advantage of by a crook!

What if I told you thousands of property sellers are misled every year by so-called “real estate investors”? These dishonest investors claim they are the ones buying your property when in fact they aren’t buying your house, but selling your house again to another buyer for a fee. In the real estate game, they call this wholesaling; putting a house under contract then selling that contract to another buyer for a fee.

So why should you as the property seller care what the real estate investor (wholesaler) does with your property after you have a contract at an agreed upon sales price? If the wholesaler fulfills on his/her promises outlined in your contract, then there shouldn’t be any problems. The big problems occur when the wholesaler cannot fulfill on his/her promises in the contract.

Since the wholesaler isn’t the one buying your property they have to find another buyer to actually purchase your house, plus a fee to the wholesaler. These fees can range anywhere from $2,000-$90,000 in ADDITION to the contract price you have with the wholesaler.

Here’s an example; you (property seller) decide to sell your house to a “real estate investor” for $100k, but the “real estate investor” turned out to be a wholesaler. Now the wholesaler sells your property, or the contract to purchase your property, to another buyer for $120k. Netting the wholesaler a cool $20,000.

Now, you may be thinking “how often does this really happen?” It’s hard to come up with an exact figure since most of these transactions occur off-market but I assure you there are thousands of these transactions that happen each year in Houston.

The real question you’re probably wondering is, “how do I prevent from becoming a wholesaler victim?”

Back to the problem with a wholesaler buying your property. After the wholesaler has a signed contract with you, they will need to find the end buyer. Again, if they find a buyer then there are no issues, you still get your money. But, if they don’t find a buyer, and the wholesaler can’t buy your house (99% of wholesalers can’t afford to purchase your property), then you’re back to where you started, with a house that you’re still trying to sell. You wasted hours of your time with paperwork and meetings, potentially several headaches with price reduction requests from the wholesaler because “the repair bid was more than we thought”, etc.

Another major issue with wholesalers is there are few barriers to entry and no credentials are needed, meaning any Joe Schmo off the street can say he/she is a wholesaler. Would you want your doctor or attorney to have no credentials? As you can imagine this unregulated part of the business leads to uneducated/untrained wholesalers who make mistakes that can cost you (property seller) thousands of dollars.

The real question you’re probably wondering is, “how do I prevent from becoming a wholesaler victim?”

Here is a list of four things you can do to ensure you’re not a victim of a sketchy wholesaler:

1. Ask to see proof of funds. Demand from the “investor” that you see his/her proof of funds BEFORE you sign a contract. If the investor is really an investor then this shouldn’t be a problem.
2. Check for language in the special provisions like “equitable interest” or “can convey said interest according to Texas law”. Sneaky wholesalers use confusing language in the special provisions to protect themselves wholesaling. Remove any language you don’t understand or contact an attorney for review.
3. Have the investor put in the special provisions that they cannot assign the contract without compensation to you. Contact an attorney to get all the verbiage correct to protect yourself by law.
4. Flat out ask the “investor” if they are a wholesaler or if they’re the ones buying the property. Sometimes wholesalers will admit they aren’t the ones buying the property. I would look more favorably on someone who is upfront and honest about wholesaling than someone that is intentionally trying to deceive you.

There you have it. Implement any or all of those four points and you’ll be protected from the sketchy wholesalers of the world.

Let’s recap.

• Some real estate investors are really just wholesalers who are trying to sell your property to another buyer for a fee.
• Not all real estate investors are wholesalers.
• The two biggest problems with wholesalers are; (1) if the wholesaler can’t find a buyer and, (2) anyone with no credentials or experience can say they’re a wholesaler. These two issues can waste a lot of your time and lead to costly mistakes.