The Unsustainable Wholesaling Business Model

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fishy real estate dealsIt all started with a simple question. BiggerPockets.com founder Joshua Dorkin sent me an email with a link to the BiggerPockets property directory. It contained several wholesale listings in Phoenix. Joshua asked, “can you check them for me?”

After searching the Arizona Regional Multiple Listing Service and tax records I didn’t find anything out of the ordinary. The person that posted these listings didn’t own any of the properties, but that’s not unusual. He probably had them under contract and was looking to assign the deals to a wholesaler buyer. Of all the listings, just one was on the MLS and it was a HUD home showing pending.

None of the owners of record lived in Arizona, but that’s not unusual either. Obviously, the guy listing these deals on BiggerPockets was marketing to out of state buyers. Not a bad strategy given the all the competition for good deals here in Phoenix.

Still, something smelled fishy.

The following day I got an email from a Phoenix wholesaler. His website contained many of the same listings that were on the BiggerPockets property directory. I called this wholesaler and asked him if he was advertising on BiggerPockets. He said no. I asked him if he had hired someone to post his properties on the BiggerPockets property directory. Again, he said no.

As it turns out the person posting these listings neither owned nor controlled the properties. Worse, he didn’t have permission from the wholesaler that did have controlling interest to advertise these deals on BiggerPockets, or anywhere else. This phony was just trying to build a buyer’s list using someone else’s inventory.

That, my friends, is an unsustainable wholesaling business model.

The funny thing is none of these listings, the ones on BiggerPockets or on the actual wholesaler’s website, were very good deals. The after repair values were overinflated and the repair estimates were underestimated.

That, my friends, is also an unsustainable wholesaling business model.

If you have to lie about the houses you have, or don’t have, in your pipeline then you won’t be in business for long. Likewise, if you’re fudging on comps and repairs you won’t get many repeat buyers. You’ll constantly be marketing to the next sucker, err, buyer to come along. Eventually word will get out that your deals stink and you’ll have to move into your Mom’s basement.

Don’t move into your Mom’s basement.

Sell good deals with decent profit margins and the buyers will beat down your door. No phony BiggerPockets listings or fancy websites will be necessary.

Note from Josh Dorkin, BiggerPockets CEO: I noticed that the user described above had been posting dozens of properties on our site in a very short period, which seemed unusual given that the poster appeared to be an average investor. I don’t know many investors or even small investment companies that can manage that kind of deal-flow. Since I knew that Marty could help trace these properties, I turned to him for help.

When we learned from Marty that at least several of the posted listings were posted without permission from their owners, we immediately removed them from our website and banned the poster’s account here. Unfortunately, this is something that is prevalent across the web and is unfortunately something that site’s like ours MUST stand against. We at BiggerPockets believe that the tactics described by Marty in this post are deplorable and agree that they are not only unsustainable, but also completely unethical. We won’t have that nonsense here, and ask anyone who comes across someone that is using these kinds of tactics to make sure they know that other investors will NOT support them. Don’t do it. There are other ways to build your business.

About Author

Marty (G+) is the Chief Financial Officer for Rising Sun Capital Group, LLC, a real estate investment firm based in Gilbert, AZ. His firm purchases homes at the courthouse steps and public REO auctions. They have two exit strategies, either fix and flip or seller financing.

18 Comments

  1. Jason Grote

    I do not want to live in my mom’s basement!

    Thank you for exposing such practices… This is the main reason I was drawn to Bigger Pockets. The bar has to remain high, and there is money to be made with high standards. I don’t know what it is about some people’s personalities or mindset that would think they will be successful using such practices. It is deception and as you so well put it, “unsustainable”. This blog topic, in my opinion, is just as if not more important than “How to find money for your flips” or “10 Successful Rehab Techniques”. Many new investors are picking up “get rich quick” mentalities from somewhere, but God forbid from Bigger Pockets!

    • No problem, Greg. I hate that this happened here on BP, but I’m glad that I recognized that something was funny and went with my gut to look deeper into it. Of course, having Marty to help certainly made it easier to figure this out.

      The last thing I want is for our site to be overrun by people who drag the industry down.

      Thanks for reading and for the comments!

  2. I get stuff like this sent to me all the time. I’ll get the same deal from multiple people who just pile on fees, haven’t seen the property, have no valuable info on the property and just remarketed others deals.

    The best is when someone tries to wholesale a listed property, they don’t have control over and that’s still active on the market.

    • Curtis – I’m with on you on this one.

      Recently had one where the original wholesaler was offering the home for $7k, and then got the listing from other wholesalers, except with the added on fees, it was now up around $15k for the SAME property.

      I buy from wholesalers, but at the end of the day, you need to do your OWN research and make sure it is a good deal, and not just rely 100% on what the wholesaler is telling you.

  3. BP Nation is not the ONLY place that this occurs. Unfortunately, such occurances are common across the net and in email blasts. Buyers beware! I would guestimate that well over 50% of “wholesalers” are not true wholesalers at all, just those with unsustainable business models as mentioned in this post.

  4. Not only is the model unsustainable, but due to new economic realities it may be practically obsolete, if not illegal. Promoted as a way for individuals without funds or licenses to get into real estate investing, it attracted energetic entrepreneurs willing to work hard to land a deal. It works in an appreciating market, but not so well in a declining or flat market. The model also was largely eclipsed by the Internet, which gives rehabbers and other buyers full access to the list of potential and actual distressed properties, eliminating the need for the “middleman.” And consumer protection laws in states like California, as well as stepped-up enforcement of licensing requirements, put a lot of the traditional wholesalers on, or over the edge of the law. Thanks for showcasing some of the downsides of this practice.

    • In honest truth, I always question anything where licensing is involved, because licensing is no guarantee of protection. You might have someone to sue (assuming you didn’t sign an arbitration clause), but doesn’t guarantee the licensee you are hiring isn’t incompetent. So in the end, I don’t know how much benefit licensing provides vs. weeding out potential go-get-’em people that would actually bring me valuable prospects, but just couldn’t handle the nightmare of red tape. Either way, fraud is still illegal whether someone is licensed or not.

    • The author was not “showcasing some of the downsides” of wholesaling. He was showcasing a liar who advertised himself as seller of properties he did not have the power to sell and could not speak for. Wholesaling is controlling properties, not reposting other people’s listings.

      Sometimes legitimate wholesalers will repost, and I’ve done it myself. But only when I have an explicit agreement with the people who control the property. And even then I usually get them to drop their price to make room for my cut so I can market it at or below their price (which by then has already failed to attract a buyer).

      The most unethical and fraudulent activity I have come across has been from licensees, and I have seen a licensee who was decent lose his license over a vindictive ex-wife and the simple fact that he hired non-licensed people to manage his rentals. I am one wholesaler who will never be licensed, and will do business regardless. My business depends on my honesty and the quality of my deals, and I will not subject it to the permission of bureaucrats. Licensing is a racket: the bureaucrats get to parade themselves in front of a public expected to re-elect them, the licensing board gets the thrill of controlling other people, and the licensee gets to limit his competition. It is grossly unfair to honest non-licensees, and the bureaucratic meddling exemplifies why so much of the world is heading to economic collapse.

      • Chuck,

        The problem with people who wholesale, have no equitable interest in the property and not having a license is people do things out of ignorance that can really affect other people.

        Buying a piece of real estate is the biggest transaction in someones life and just because someone finds a property for sale doesn’t qualify them to mark it up and try to sell it to someone. That falls into the lesser fool theory of business.

        This is not at all meant as a personal insult to you. You may have experience, may know what escrow is, title, how to read a contract, understand state mandated disclosures, able to help guide someone in a purchase but MANY do not EVEN after having a real estate license.

        BTW I don’t do any brokerage anymore but getting my license was the best thing I ever did. One of the biggest fights my wife and I had was that I was spending all my time trying to buy properties and she wanted me to get my licenses so I could get steady income. I didn’t want to because I thought it would restrict me.

        I purchased 4 properties from the time I started until I got my license (99-01) from 01-05 I purchased 40+ properties 100+ units BECAUSE I had my license and was always on the lookout and the deals I couldn’t buy or didn’t match my criteria I could broker to others who could.

        I never made less than 6 figures while doing (commercial) brokerage and actually ended up being a partner in the brokerage company I started with (don’t own a brokerage company, just be a realtor. much better).

        I retired from brokerage a couple years ago to focus 100% effort on syndicating investment partnerships.

        here is an article that was published by the local business journal here in san diego that goes into a little more depth https://docs.google.com/open?id=1IqNhWJoWayUvTzCbCBLSAZI7OwoAZ7PEw0jjAT1H-vyM3vHPjndHiUzmYtzT on why getting a real estate license may be a good idea.

        • Curtis, there may be some confusion here. Contracts are sellable commodities, and wholesalers simply find properties we can negotiate a contract for, then find buyers who want to actually own those properties. We do not represent anybody but ourselves and the purchase contracts we sell. We are not anybody’s agent, we do not have any obligation to look out for anyone’s interest but our own, and we do not “guide people in purchases”. We couldn’t if we wanted to, since our inventory is always very limited. (I only have 1 property available right now, but may be re-adding a small mobile home park in a day or so, because the sellers finally learned what I was telling them 2 years ago.)

          Wholesalers do not need an equitable interest in a property, and there is no reason we should take risks. We’re not trying to buy the property, and we have no business saying otherwise. We’re just trying to get a secured position so we can be paid for our work if we can get the job done, and trying to get the deal already negotiated so our buyer can just walk up and pull the trigger. That’s only fair. When somebody I don’t know says, “Aww, just bring me your seller/buyer and I’ll pay you a finder’s fee when it closes, I won’t cut you out”, I can safely presume I am dealing with someone who INTENDS to cut me out. If he won’t put it in writing, he doesn’t mean it. Hence, the contract.

          The only “qualification” we need to mark up a property is to get the seller’s signature on that line and the buyer’s signature on the closing docs. But what qualifies us to do THAT? Our skills and the quality of our deal. That’s what often disqualifies us, too. Wholesalers are paid for what we know and who we know. If the seller is aware of better options or the buyer is aware of better properties, then we won’t get those signatures in the first place. We have to offer both seller and buyer something they cannot get without us.

          I’m glad your business model worked for you, but the licensing itself is always an impediment. For instance, my own business model heavily uses referrals from other investor-types for raw seller leads for which I pay finder’s fees, and occasionally receive them. Licensees can’t always do that.

          Your skills are what worked for you. The license was just a government permission-stamp allowing you to use them. It granted you passage into a special class with certain status – which you very probably could have earned on your own anyway, had the license requirement not barred your entry until you acceded to their demands. You weren’t wrong to get licensed; they were wrong to demand it of you. Nobody should have to get permission from a protectionist power-mad bureaucrat just to do mutually voluntary trade with sovereign adults. One day the world will understand this, and the bureaucrats will have to do something productive for their paychecks rather than the destructive restricting of their fellow man’s activities. And the sooner the better.

          I’m sure you’ve encountered even more incompetent and unethical licensees than I have. I’d bet from time to time you’ve been plenty uncomfortable knowing that legally, they are considered your ‘peers’ simply because you both met the same minimal standard in the eyes of a committee of bureaucrats.

          I saw that in the early days with one of my mentors, an extremely knowlegeable investor and licensed agent – who later lost his license over someone else’s vindictiveness and protectionist rules. He was considered the ‘equal’ of those several morons who I had to tell, “go ask your broker and call me back when he tells you the same thing I just told you.” Made me sick.

  5. Amen, brother. I have very mixed feelings on wholesalers right now. Too many times, like 99% of the time, they waiste my time. I’m happy to pay a finders fee. I’ll take a property from anywhere but I find so many wholesalers just don’t have real deals when they call you. A lot of money can be made but it takes a ton of work to be a good wholesaler.

  6. Geez, yet another icky story associated with wholesaling. I do hear all the time about all the weirdness associated with wholesaling, much from the buyers that I work with everyday because they are all smiles when they work with someone like me 🙂 Just do things the right way and your reputation will EASILY will shine against folks who are spamming properties like this guy.

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