How to manage risk buying wholesale properties?

Question

I am interested in buying wholesale properties. However, it is seeming to me that it is extremely risky for those who are not essentially experts in rehab. Most wholesalers are asking for all cash, no inspection offers. They will allow the buyer a quick walkthrough but nothing more. How are you all dealing with this? How do you manage risk when there are no inspections?

Dustin P. · Answer

Become an expert. Learn how to comp accurately, and quickly. Comp the property before you even go see it. Get good at estimating rehab. If you run the numbers with an estimated rehab based off pics before seeing it and it doesn't work, tell the wholesaler what your ballpark number would be and make sure it's possible before you see itEssentially you're saying that you don't know what you're doing and want to know how you're going to buy properties. You do as much learning as you can, and then you jump into the best deal you can find, and hopefully break even or make a little bit of property. Or you just spend years learning and doing nothing lot a lot of investors do. There's really no middle groundIf it comforts you, most people go over budget on their first few flips, a lot of people don't make a ton of money their first few flips, think of it as an education. But there are hundreds and thousands of investors buying properties from wholesalers every year and it's pretty unlikely they are all losing money on themI'd also recommend getting multiple contractor bids. It'll help you understand the rehab numbers better and you can have guys ready to do the work once you finally lock a deal down

Jonathan Greene · Answer

Why are you interested in wholesale deals if you want to manage the risk? That's part of off-market buying and most will be cash so it's a big risk if you don't know how to calculate tight rehab in a short showing window. Most people who say they want to buy wholesale deals think they want to because the deals are better, but they aren't when you don't know if the numbers the wholesaler is slinging are even realistic.

Dave Schmidt · Answer

@Daniel Overby My suggestion is to never buy a house without someone from your team taking a look at it (unless of course it is a ridiculously low price, but then again why would a wholesaler be giving up such a great deal? Get good at figuring out rehab pricing on the fly, get access to your local MLS so that you can learn how to most accurately comp the properties and also figure out which local wholesalers understand what a good deal looks like. Unfortunately in my opinion there is a lot of noise in the wholesaling game, people are always bringing "deals" to investors but they are not always necessarily a "good/great deal" and most of the time I see properties in my area from wholesalers their numbers are completely off.

Will Barnard · Answer

Good advice above. I would add that a good wholesaler will lock a deal with decent terms. Terms can be just as important as price. Since you are likely assuming a contract from the wholesaler, said contract should have an inspection period. If not, I would only buy IF I had the ability to look over the property with my own eyes upfront. If you do not know how to do this on your own, bring an expert with you. I would not even make the offer until after I had the inspection completed so I know what I am buying. Then and only then would I proceed with the deal.Regardless if it is a wholesaler or not, you need to know how to obtain accurate numbers (ARV and rehab) so that your purchase price makes sense.

Evan Polaski · Answer

@Daniel Overby, wholesaler properties are often only deals for the wholesaler, not the end buyer. I have bought a couple properties from wholesalers and made money, but I have also bought properties from the MLS and made money. The source of a deal does not make it a deal. For the record, I am a cash buyer and can ballpark a rehab budget in 10-15 minutes of walking a property. I also only buy in specific neighborhoods, so know the comps and ARV pretty well before I even drive to a property. I have only ever purchased 3 out of probably 40 wholesaler properties I have actually toured. And I only tour ones that seem somewhat reasonably priced, which means I hit delete on 90%+ of the emails I get. Wholesalers list too high, under budget the Reno and overstate the ARV, 99% of the time. 2 of the 3 I have purchased were from the same wholesaler, who I generally trust his numbers, but still confirm. And I have only bought 2 because he doesn't get that many deals because he is realistic with numbers.Moral of the story, don't buy anything until you feel you get a full grasp of it. And regarding finding deals, if you are not doing this full time with the resources to market yourself as a buyer through direct mail, phone calls, knocking on doors, than simply identify your neighborhoods and then look at stale listings on the MLS.

Grigory Pekarsky · Answer

If you are looking to invest in low-cost properties, whether they be commercial or residential, it is very important to consider the risks involved. It is easy to get swept up by the excitement of owning a property and not think about what could go wrong. In order to avoid common pitfalls that can happen when buying wholesale properties, you need to have a proper exit strategy. Make sure you know the reasons why you are buying a property and what your overall goal is. Maybe you want to make a quick buck by flipping it, or maybe your plan is to hold on to it long-term as an income-producing asset. Regardless of the reason for purchasing the property, have a clear exit strategy in place before getting started with your investment. If you don't have one, then emotions may take over and lead to bad decisions being made. An example of this would be putting more money into a project than originally planned because of positive news about the area where the property is located.