Dumb Wholesaling Questions: Please Explain

[Andrew Taylor]

I have a vague understanding of the concept of wholesaling properties - i.e. the wholesaler finds a distressed property and/or motivated seller, puts it under contract with the right to assign, and then finds a buyer willing to pay more than the contracted price, thereby collecting the difference. So far, so good.

I have some questions about the nitty gritty, though. Had someone tell me yesterday that buying a deal from a wholesaler means paying twice the closing costs - one for the wholesaler's closing, and one for your own. That makes no sense to me, as I don't believe the wholesaler actually ever closes on anything. Correct?

Have also heard from multiple sources not to put a non-refundable deposit down on a wholesale property. But I don't think I've ever seen a wholesale lead that didn't say, "$X,000 non-refundable deposit secures this deal." So which is it? I don't think I'm willing to give anybody $X,000 of money I can't get back if I can't inspect the property.

And what are the mechanics of the transaction? Where does that deposit go? To the wholesaler? To a lender? Escrow/title company? If I was able to go by and look at a property, decided I liked the deal, and wanted to pull the trigger...how would I actually do it? (Assume I have cash and/or hard money already lined up.)

Finally, knowing that the general rule of thumb for BRRRR is (70% of ARV) - (Rehab cost) = MAX OFFER, why do none of the leads I see meet that criteria? Is that purely a function of what the market (I'm in the Houston area) will bear? Do wholesalers know that formula and not care? Do they not know it? Is 70% the minimum acceptable target, or is it the ideal, pie-in-the-sky target?

Thanks in advance for your input.

[Joey Sullivan]

@Andrew Taylor

I have some questions about the nitty gritty, though. Had someone tell me yesterday that buying a deal from a wholesaler means paying twice the closing costs - one for the wholesaler's closing, and one for your own. That makes no sense to me, as I don't believe the wholesaler actually ever closes on anything. Correct?

In a way, yes you could be paying for it - albeit indirectly.  When the wholesaler does a double close (also known as 'transactional funding'), he will have to pay for closing costs (title insurance, etc).  This is the A-B side transaction of the double close.  Then when he sells it to you (the B-C transaction), there's another round of closing costs.  If the wholesaler wants to make $10,000, but the A-B side closing costs are $2,000, he will raise the purchase price of the B-C side by $2,000.  But as far as you are concerned, there is only one initial purchase price without considering the costs of the double close.

Big wholesaler companies like New Western or Net Worth will.  But small-time wholesalers are usually more flexible.  But you can understand that wholesalers deal with a lot of flaky buyers and the non-refundable fee helps separate the flakes from the serious players.

The non-refundable part could be paid to the wholesaler.  Any other payments will go to the title company.  

Use my spreadsheets to determine if the deal is good ;)  For a young house with minimal rehab and in a hot market, flippers might take a skinny deal (i.e. less than $20,000 profit and above the 70% rule).