Why Would Someone Sell to a Wholesaler in this Market?

Question

Hey all - I have a few questions about wholesalers. This is a bit lengthy, but I appreciate you reading through and considering my questions, perspectives, and thoughts.

This is not meant to knock the process, but rather to educate myself in what I perceive to be some gaps in my knowledge of the wholesale purchase process and why it works. I also have a few ethical questions.

First, as it pertains to Arizona, with property the greater Phoenix metro appreciating at national-record pacing, why would someone choose to take a haircut on their sales price and sell to a wholesaler, versus directly to an investor or a homeowner? Does this stem from a market education bias, or what? Take the most dire example you could imagine - a deteriorated home in the worst neighborhood in Phoenix, with a highly-motivated seller who needs to get out of their home... why would this person not just list their property on the MLS, with a Realtor, and price it accordingly knowing that some flipper or investor (or owner occupant) will come along and see the value?

Having never purchased from a wholesaler, I am trying to wrap my head around this concept in this environment. I could better understand how this process might work in areas of the country where the market dynamics are dissimilar, but here, now, in the greater Phoenix metro...is this really happening? Are wholesalers being honest with sellers, telling them what they do and that these owners could almost certainly sell their property to a final buyer for more money, probably just as quickly?

I was listening to the Bigger Pockets Real Estate Rookie Podcast (#51 - Kevin Christiansen) last night, and the guest (from Pennsylvania, I believe) was recounting an anecdote of how he stumbled upon a FSBO (sign in the yard type of deal). The owner was asking $290k, the home was valued around $260k+, and the homeowner ended up selling the deal to this guy for $190k - Mr. Christiansen stated it's because he built rapport with the owner and that the owner "liked" him more than other wholesalers he had visited with.

This sounds insane to me...why would someone purposefully sell their home for $100k less than asking, and at least $70k less than fair market value, when the property was obviously getting interest (as demarcated by the prior wholesalers he cited that had viewed the property recently), and the fact that real estate commissions would have only been $17.4k? This has got to be information / intelligence / negotiation disequilibrium and it sounds to me like this guy basically took advantage of an elderly couple... not the way I'd personally want to acquire my portfolio or make money, at least if I wanted to sleep at night.

So if that perspective is in fact accurate - is it really ethical to "take a property" off someone's hands because they are elderly and don't know any better? I found myself cringing listening to this guest, despite his consistent theme throughout the narrative of being a good guy, here to help the people, etc. etc.

Now this is just one glaring example, but my primary question still stands - in most cases (or in all) why would someone take a haircut on a property to sell to a wholesaler, assuming they have full information and know what is going on? It dis-benefits them to the tune of 10's of thousands of dollars, and if a wholesaler is interested, a final buyer would be too, especially at a discount that by virtue of the process isn't as steep, and makes both parties (seller / final buyer) better off. This might just be my background in economics talking, but this ' wholesalers market' seems ineffective and inefficient, and I'm struggling to see how it works.

From a personal experience, wholesalers call me incessantly about my properties, asking if I wish to sell them. On one curious occasion, I engaged in a dialogue with one of these callers to understand what they were trying to achieve (this was before I really understood wholesaling). The person on the other end of the line basically tried to offer me around $300k for a property worth $450k. I kept asking why I would sell for that discount when I could easily put it on the market and get full price (assuming I even wanted to sell), and he struggled for an answer, trying to redirect the conversion and frankly "sell" me on the "ease of the process" and the "guarantee of the sale"... Needless to say I found myself scratching my head at why these folks waste their time...

Lastly - does anyone have data on how much market supply wholesalers generally pick up, on average? Another way of saying this is - what percentage of homes for sale at any given time go to wholesalers? Or, am I thinking about this question incorrectly and wholesalers actually create additional market supply through their door-knocking/flyering/incessant calling parties/etc.

Again, don't mean for this to knock wholesalers as I know this is a process that is alive and well. I just don't understand why...

Rick Pozos · Answer

Hey @Steve Furst people see things in different ways. Some people need $20 for their next heroin fix. They will literally do ANYTHING for $20 so they can get through the next few hours. For me to even get out of my house to go see a property, it better have 30k to 40k potential profit. Some people will work at McDonald's for $10 to $15 per hour. Would you?? If you make $100 per hour, what do you think you look like to someone who makes $200 per hour?? Kinda like the guy who works at McDonalds!! Everybody is different. And has different motivations for doing what they do.Not all people have the same knowledge about the market that you and I do. Some people may not know that they can call a realtor and that the realtor will do a market analysis for them. AND they may not want 20 people going through their house. As mentioned above, they might be embarrassed about the condition. They might have lost someone and they dont want to see more people about the house. My aunt lost her husband 5 years before she approached me about her house. I told her what the value of the house was. She said that she wanted to give it to me at a discount because she was still so emotional about losing her husband of 40something years. He was everything to her. She did not want to deal with anything. I tried to get her to list it, nope. I tried to get her to put a for sale by owner sign and I would take care of everything for her so that she could make more money, nope. She finally said, "The price is well below market, don't you want to buy it?" She did NOT want to deal with anything. She bought a newer house and did not want to look back on all the memories that were slowing her down. She had a pension, money in the bank and was able to qualify for a new loan without this house. I bought it for about half its value.Sometimes people inherit houses and they dont know what to do. They get behind on taxes and procrastinate until just before the tax sale. Denial. Shame. Embarrassment. Lack of Knowledge. Repairs. AND 1000 other reasons people will sell for below market price without manipulation.

Yoann Dorat · Answer

@Steve Furst there are a lot of interesting questions in your post and I'm going to try to provide some answers. Wholesalers are pro-active in their outbound marketing efforts, most investors/flippers/landlords would be able to get far better deals if they had the willingness to improve their skills on how to market to motivated homeowners, unfortunately very few do that. Even though it's very difficult to quantify the amount of Off-market supply coming from wholesalers (as there's no public registry of such thing) I personally believe it is an essential component of the market. A homeowner can decide to sell to a wholesaler instead of through the public market for several reasons, some people live in hoarder houses and are such ashamed that they don't want to allow any showings, some others don't want to deal with all the paperwork involved in listing a house, all the disclosures, compliance, etc... Some people are so much distressed that they can't even pay for their moving, has an example last week my Acquisition guy had to go rent a Uhaul and move the seller's furniture himself and give him an extra $1000 to wait until his proceed check clears! an agent or an investor would never go that far, we deal with probate attorneys who need to sell the house fast in order to get their fees paid, and with squatters, non-performing tenants, etc... a lot of things agents don't want to deal with. The truth is, 99% of agents are not willing to go the extra mile they want to deal with a good-looking property easy to sell to a pre-approved buyer, hence why we got so many referrals from agents. You were right to notice in your example that building rapport with the seller makes a huge difference, sometimes we have to nurture the relationship for 6 to 12 months to get a contract, it's the way marketing and sales works... people always do business with people they like! The part where I disagree with you is your accusation of being unethical or stealing equity from the seller, I have worn many hats over the year and I can tell you that as an investor, landlord, flipper, developer, wholesaler, or whatever title you put on your business card you should ALWAYS be looking to get a DEAL otherwise you're not investing, you're just parking money by paying retail and you would probably be better of staying out of this industry. I hope that answers some of your questions

Nick C. · Answer

The reason people sell to wholesalers is simple - they convince the seller the property is worth less than it really is.

Mike Delprete · Answer

Steve, I agree this is lengthy and there are a lot of great questions which I think we would have a great conversation about. In my learned opinion homeowners who sell at a discount NEED to sell not Want to sell. They're at a point in their life where they're in a pinch due to a life-changing experience, numerous bad decisions etc. Where the quality of life is more important than money. I've worked with homeowners who were ashamed of the houses condition and the situation. I've had owners say they feel like the world is on their shoulders. They are just at a point where they're ready to throw in the towel. I agree it sounds crazy that someone would unload the American dream but it does happen and often. Tracking wholesale transactions will be tuff as assignments arent recorded. However yes these are going down every day. Title agents can probably give you a good indicator as to how many wholesale deals come through their company.

Mike Delprete · Answer

@Steve Furst look forward to it see you soon.

Steve Furst · Answer

@Nick C. , @Mike Delprete, and @Yoann Dorat - thanks for your responses.@Nick - That makes sense, which alludes to my earlier point I suppose. @Mike - I enjoyed your panel at AZREIA earlier this month; it was my first time attending and I learned a good deal. Also, your reasoning makes sense and I can empathize with someone who was so overburdened that if they get a call offering them a tow-line, they might take it since it's an option today. I'd like to chat with you at the next AZREIA meeting - I'll come introduce myself.@Yoann - Thanks for your reply. I think you and Mike had similar points about the degree of distress some sellers are in, which I concede, I may be underestimating. Your point about RE agents/brokers not wanting to deal with these homes, and lazy investors, makes sense too. Finding a deal is always key, but it should work for both parties. I've never purchased a property wholesale, and I do exceedingly well on the SFRs I own by any measure, so I think there are many ways to buy deals, esp. in an appreciating market like Phoenix. That said, I would personally have a tough time engaging with an owner who was in some form of distress and essentially taking advantage of their situation to lowball an offer on their home. Now, if they truly couldn't sell it otherwise that might be one thing, but scenarios where they're just underwater a need a safety line; well, I think it would be tenuous for my consciousness. I suppose like everything, it's situationally dependent. Again, I appreciate you weighing in and maybe I'll give it a go to form a direct opinion from some experience! Thanks!