Why I Stopped Listening To Wholesalers

In This Article

“Buyers are liars and sellers are worse.” Pretty harsh statement to insult the clients in a real estate transaction, isn’t it? The phrase bore from the measurement of trust each party has in the other, though, so should it be any different in an off-MLS transaction?

Wholesaling isn’t a bad word. In fact, people love the idea of buying below cost. Big box stores do exceptionally well in this arena because they buy in such quantity, they can cut out the retailer and offer savings to the end customer. And it doesn’t just apply when you need a 5 gallon drum of peanut butter. It can apply to diamonds, electronics, cars….and real estate.

Who’s Hustling Here?

So when someone proclaims, “I wholesale properties”, the natural assumption is that you’re going to be buying below the cost than if you’d purchased the home through an agent/MLS. The discount comes into play because the wholesaler has purchased a bulk tape of homes at a reduced price, or the deal was acquired substantially below market value and there is room for the dealer to make money, and the end user to still purchase the property cheaper than they could through a Realtor.

The difference is, when buying a wholesale widget, the cost comparison is pretty simple. Heck, I’ll stand in the isle somewhere and look it up on Amazon or Google and see if I can buy it online for cheaper and avoid sales tax. If it’s near the same price and I can buy it now, the convenience is worth it. Point is, it’s easy to do “price checks” when buying electronics, household items, etc at a perceived discount price.

With real estate, the value is somewhat subjective. Are you purchasing to re-sale quickly? Will this be a long-term rental? How much will repairs actually cost? This will obviously influence your purchasing decision.

So, how do you know if/when you’re really getting a good deal? In my experience, wholesalers purchase 70-ish% or below market value and can sell to Fix & Flippers around 72-76% of full market value. If it’s a house that is nearly or rent –ready, they can sell up to 82-90%.

The Real Deal

Here’s where the numbers can get sticky and where you could wind up paying retail for a “wholesale” property:

1) Condition

Depending on who you’re purchasing from, they may or may not give you any sort of dollar figure for amount of repairs that need to be done. Most will outline repairs that will need to be addressed. For example “Place needs carpet, paint, and new A/C to make rent-ready”. This leaves the cost estimate to your discretion. It also leaves the opinion of what the property “needs” up to the source, though. Although I take into consideration what they may say it needs, I always do a site inspection and itemize what I know will need to be done to get the property retail or rent ready. What was advertised as “needs paint and carpet” could/does well end up being “needs paint, carpet, roof, major stucco work…”(…and that 3rd bedroom we advertised isn’t permitted and is barely standing.)

So, what’s advertised as needing to be done vs what the home will require may be vastly different. As well, be wary of anyone else’s soft bid of how much the repairs/updating will cost. Again, although I can appreciate their attempt to be more thorough, it’s up to you to know the numbers, not rely on a guess or someone else’s knowledge. Always do a thorough inspection before agreeing to purchase.

2) Full Market Value

Most wholesalers are not licensed, and may or may not have access to the MLS. More importantly, if they have no formal training in pulling comps an appraiser may use, the information they send can be incorrect or inadvertently misleading.

Which is why I stopped listening to wholesalers opinions of what the house is worth. Now, the question is, what is the house worth to ME? That could be a different number then the next person, depending of course on our end goal with the property. Just like an appraisal, it’s an opinion. But, I’ve found many wholesalers use outdated information, comps from too far away, don’t take amenities or differentiating neighborhoods into consideration, to name a few.

In a market like Phoenix where there is limited inventory and prices are rising, people are over-paying for properties. But, they may have a long-term strategy and are banking on powerful appreciation during their ownership. But, they may not. It’s not for me to judge, I just personally can’t and won’t pay retail for a property that will then require more funds to make rental/retail ready, plus holding costs, etc. I rather stick to my “juicy” deals and avoid the night-terrors that I overpaid for a property.

I’ve worked with wholesalers from around my area, and some won’t provide comps; it’s just up to you to do the due diligence and decide. I agree! I know how to pull thorough, useable, viable, real-time comps, and would not rely solely on someone else’s insight. Heck, with dealing with short sales, appraisals, BPO’s in an ever-changing market, I know it’s an art and a science, and so should you. Crunch your own numbers.

The Wholesaling Credo

I feel like with the amount of push for people to start wholesaling, this will strike some cords with both newbies (trying to wholesale) and seasoned vets (buying deals).

It can really be a win-win proposition pairing an exclusive property with the right buyer for an all-cash, quick close. The takeaway is, wholesalers, after you’ve tied up the property, send a concise breakdown of the property address, condition, price, terms, access details, link to pictures, and any other pertinent details. If you’re not sure, reach out to some bigger wholesalers or retailers in your area as you are getting started. They may at least give you feedback on what they will buy and help you improve your criteria, and may even buy the deal from you.

Buyers, be quick to perform your due diligence behind the desk, preview the property, estimate your costs and close on time. (And no, what the wholesaler makes on the deal is not of consequence if you are happy with the price.)

Buying from wholesalers and wholesaling properties can be a nice stream to add to your acquisition channels. Done right, it could be a happy relationship, instead of one of adversity.

What do you think?

Photo: Keith Daly

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.