What to look out for when purchasing from a wholesaler

Question

I'm about to purchase a rehab home from a wholesaler

Wanted to ask if theres any tips or things to look out for when purchasing from a wholesaler.

Not so much about the property but what things do you look out for in their contracts or any fine print stuff that I should pay attention to.

Worried that I might get scammed in someway that I don't know about.

Thanks everyone,

- Gerald

Tsipora Smith · Answer

I'm not sure about the laws where you are but in Texas wholesalers do not have to be licensed so we always say trust nothing. I verify everything with outside sources such as my contractors, real estate agent, PM, etc. In addition, make certain it's going through a title company. Contact the title company to make certain they're on the up and up and only send money (earnest) to the title company.

Bruce Lynn · Answer

This is the area where you probably want to do double the due diligence.  Almost every deal I see has ARV way too high, rehab way too low...and there can be plenty of other gotchas, like no title insurance....fine until you have a problem....or you find out the comps across the street are in a better school district, or they forgot to tell you about the foundation problem, or that the gas has been turned off by the provider and won't be turned back on until all piping is replaced....or that the sewer lines have collapsed on and on and on.   Typically your earnest money is non-refundable, so if appraisal doesnt work or you can't get your financing or whatever, you loose the $5000-$10,000 or more deposit.

Not always a scam, that's just how it works....virtual wholesalers may have never seen the property or been inside?  Normally the picture they have is blurry...you may have a different set of glasses.

Peter Walther · Answer

Make sure the title policy amount of insurance includes the assignment fee, it's part of your purchase price.  If you don't and it turns out your seller (of the property not the assignment) didn't actually own the property, the most you'll recover from the insurer will be the lower number.  In addition, consider asking the title agent to issue the policy for the expected ARV.  If you don't, and it turns out the seller didn't own the property after you've put $50k into the rehab, you're probably self-insured for that loss.

In my experience wholesale deals have a higher risk of title problems than non-wholesale deals because of the nature of the property sellers.

Matthew Irish-Jones · Answer

@Gerald Perez if you are buying from a wholesaler the most important thing to watch out for is everything.

Dwayne Poster · Answer

wholesales are discounted properties. Its up to you to discover what triggered the discount, and what it means to your investment. There is no free value in any market.

Lucia Rushton · Answer

@Gerald Perez for me personally I caution new investors who have never done a deal before to have people they can trust in their corner. There are professional and experienced wholesalers and then there are those who, like you, have never done a deal before. Because you do not have the opportunity to have an Option period and do any due diligence, in my opinion your risk is greater than for someone who has done several or has experience in other areas of RE. If you have never done a deal before, you don't know what you don't know. Best wishes and let us know what you decide to do.

Kristen Haynes · Answer

I agree with Bruce Lynn- their properties are usually dogs, with unknown / unseen, expensive problems that the seller didn't have the money to fix, so they dump them to a wholesaler, who has ZERO representations. You are also stripped of all of the 'normal' protections under a typical Offer to Purcahse and Contract / Agreement of Sale. We usually see MAJOR issues in these houses like big-time foundation issues (can be fixed but lots of helical piers eats up the majority of any profit that you may plan on making), some have title issues- and many times, the wholesaler doesn't even OWN the property yet- they just have an 'option', which they execute right before YOUR closing. And you have zero representations from the seller or wholesaler about the property, the home itself, the land, the ability to get good, clean and marketable title, the mechanical and structural systems, the roof, etc.- this is definitely a case of Quadruple due diligence and Caveat Emptor- BUYER BEWARE!!!

Stephen Keighery · Answer

@Gerald Perez it's important that you read the underlying contract. Some wholesalers want to assign you your contract without seeing the underlying contract. This is dangerous as you are agreeing to all those terms so need to understand them.

Jay Hinrichs · Answer

Not sure if your deal is in the Texas Dallas market .. but what Bruce describes is pretty much SOP of how the wholesaler inventory will be with all those issues being pretty universal and very common especially foundation and then broke plumbing in the slabs.. That market you need to be UBER cautious when buying..  There is a reason a wholesaler has it and not a top flight realtor there are 90% chance some serious warts on the property.

What to look out for when purchasing from a wholesaler

Most Popular Reply