Good idea to buy from a wholesaler for first flip?

Question

I'm new to all this, but my goal is to flip houses. I have been binge listening to the podcasts, and someone (unfortunately can't remember which episode) said that they think it's a good idea to buy from a wholesaler for your first flip. I had been pondering that, and when he said that, my ears perked up. Assuming I find a good wholesaler, I think that it can relieve some of the pressure and anxiety when starting out. Has anyone done this, and do you recommend it?

Ned Carey · Answer

Others covered this, but I will put it in the simplest terms.

It doesn't matter who you buy from, it matters how good the deal is.

Ryan R. · Answer

Do not trust the wholesaler's numbers or analysis. Most wholesalers don't have any idea what they're talking about. Some do, but most don't.

Establish the After Repair Value. Subtract your rehab and closing/holding costs from this ARV. Then subtract your desired proft and I would also subtract a 15% cushion since this is your first one. This final number is what your purchase price should be. Don't let the wholesaler persuade you of anything different. The wholesaler will tell you anything to get paid.

Nereo Mendoza · Answer

In our case we look for houses located in a  quarter mile radius, typically there will be 5 to 20 (depending on the area) and we look for the average to be around 30 DOM, that is a really hot area, were you will sell quickly if you rehab and price accordingly with the neighborhood, we try to price a little bit lower to move it faster, and we calculate this from the beginning even before buying. If the 3 rooms 2 baths SFH of 1200 sq ft are selling around 250k we price ours in 245k and try to have at least the same features and some nicer details.

Its a mistake to compare with bigger or more luxurious houses to get your comps. or to try to over expend in things your market will not absorb

Try to think like the bank will do when analyzing the loan of your future buyers, if your house is above the recent sales they will not approve it easily, the smother the loan process goes for your future buyer the faster you will close and get paid

best regards

Nereo Mendoza

Nereo Mendoza · Answer

Hello @Raven Parmer

The key here is check a recheck the numbers of the property before jumping in and also analyze the area to be sure you will not be getting stuck on a property with no profit or longer than expected

I suggest you to get your own comps from and unbiased source (a Realtor, a comp website, etc to see how many houses has been sold recently and for how much, the days on the market (DOM) are very relevant, if the average DOM is high the area is slow and chances are your property will be sitting there for a while after you rehab it. Just don't trust only in the comps supplied by the wholesaler

Also check and have different estimates for the rehab work and materials and time necessary to complete, be sure you have the right contractor and the right numbers ready before committing

Also take into account apart from financing costs you will also have: closing costs when you buy and when you sale later, Realtor commissions to pay (5 to 6% of selling price), holding costs (utilities, taxes insurance, mowing the grass, removing snow, cleaning, small repairs, etc) meanwhile you wait for closing the house (once under contract it can take 2 to 4 months to your buyer's bank to close), so be prepared to have the property under your wing from 2 to 6 months, even if you repair it in 3 days and find a buyer immediately

The older the house the bigger the contingency you have to build into your numbers, there will always be something unexpected with a very old house

hope this help

best regards

Nereo Mendoza

Jim M. · Answer

Well, you need to make sure the wholesaler knows what they're doing.  I've had wholesalers contact me but in the last four years but have only been brought one good deal I think You need to verify all numbers on your own cause you can't just go back to the wholesaler for your money back.  Find a good realtor who has experience with rehabs, then a contractor.

Ben G. · Answer

@Raven Parmer  a good way to determine whether or not a property is a good deal is to start out wholesaling yourself.  With the proper amount of effort you'll learn the numbers that apply to your specific market.  This is something you are going to need to know regardless. If you start out as a wholesaler you are able to learn how to find sellers, how to estimate repairs, determine value, and market properties.

Jason Fraser · Answer

@Nereo Mendoza Nereo, great answer. How do you determine what's considered a high DOM for an area?

Nereo Mendoza · Answer

I will say is a good thing the have but it doesn't come for free

Here in DC if you get a real estate license you need to work for a Brokerage,  typically there you get training and can share experiences with some other agents. The commissions go to them from the title company at closing and they give you a part of the commission  (it varies depending on the agreement between each agent and the brokerage, but typically can be between 5% and 50% of the commissions until you reach certain amount in the year, that way they cover their operating expenses). I also heard the fixed costs of being a realtor can be between 1,500 and 3,000$ a years for accessing the MLS, paying the license and some other things, but a probably is better if somebody from your area can tell us how much it cost to be a realtor there.

If you have access to the MLS you can see the data of properties active, sold and under contract in a certain area and period of time, and you can also get into the properties without waiting for anybody to open the door for you, that is a really good advantage

Finding properties in the MLS is possible but the better deals are taken before they get listed, typically the investors build relationships with realtors, wholesalers and even the sellers to get better deals and less competition

if somebody knows better please share

Raven Parmer · Answer

@Nereo Mendoza - wow thanks for all the excellent information! I hadn't thought about the holding costs during the closing period. If I do decide to use a wholesaler, I will definitely run my own numbers. My fiancé is a general contractor, so I feel confident in the construction budget and timeline at least.

I have another question that maybe you, or anyone else, could answer. I plan to get my Realtor license. Would you recommend doing that before jumping in (we are waiting until we finish renovating and sell our home), or waiting until we are comfortable with the process? Part of why I think it is a good idea to use the wholesaler is to cut out some of the analysis paralysis that I keep hearing about. If I get licensed before we start, I am worried that I will have more information than I know what to do with. However, I know that information could be really helpful for analyzing deals. Or would it be a good idea to get licensed, but still use a Realtor at first to gain from their experience?

Thanks!

Good idea to buy from a wholesaler for first flip?

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