In real estate, do wholesalers actually buy the distressed property?

Question

I'm trying to look into Wholesaling, but I'm a little confused. Does a wholesaler buy the property with his/her cash and owns it temporarily while he/she finds a rehabber/investor that will buy the property for a higher price? Does he/she find funds from a private lender in order to fund the deal first? Or does the wholesaler just put it under contract "pretending" or "lying" that he/she is buying the property when in reality he/she will assign it to an end buyer?? How does it really work??

Jon Holdman · Answer

That's the dream being sold by gurus who teach wholesaling. Here's my take on the reality. You spend hundreds or thousands of dollars a month on marketing - direct mail, billboards, tv ads, whatever. You get a lot of calls, e-mails or web site hits. Most want retail price for their house. Some want more. After a lot of time and effort, you manage to cull one or two deals a month out of the hundreds of contacts. If you're thinking of wholesaling because its quick money you can make with no cash, little time and little effort you're falling for the dream these gurus are selling. If you're willing to invest considerable time and effort and no small amount of money with the understanding you may never do a single deal, then proceed.

Matt Devincenzo · Answer

Ok so you have a few distinct scenarios there so let's address each. Usually the wholesaler is not closing the deal with their own funds, though that is an option. There are different "types" of wholesale transactions, assignments and double closings. In an assignment you have a contract on the property and are selling your rights in that contract, not the property per se. Your end buyer is paying you to allow them to now take over your position in the contract. In a double close there are two closings, the wholesaler would be on title for a few minutes/hours whatever and they are actually selling the property that they "own" for that short period of time. Double closings can be done either "dry" or "transactional funding". In a dry closing the title company closes the deal with the seller then closes the deal between the wholesaler and the new buyer and the new buyer's money is basically passed through from them to you to the seller, so you don't have to bring funds to the table. In a transactional close, you would have a transactional lender fund your closing for the day and then be immediately paid back when you close the second transaction. They usually charge a flat fee for this, so that obviously eats up some of your profit but is necessary if you have/need to close that way. Also double closing either way requires two closings so the costs are higher, again eating up profits but that is just a cost of doing a transaction that way. As to the lying....I personally believe a wholesaler should be upfront and honest about what they plan on doing with the property. If it is to wholesale it, then very simply explain the process without getting into the weeds too much. I don't wholesale, but have bought from them. I had an angry property owner who lived 3 doors down from a townhouse they sold come and yell at me about money after the closing and asking "who was I!!!" and didn't know the deal had closed because they hadn't got their check yet. Turns out they didn't know about the wholesale deal, we got the wholesaler on the phone and everything was resolved but it was definitely not the way I wanted to start a rehab the first day in. A really motivated seller will not care as long as you're getting their house sold. Now if you intend to possibly keep the property and later instead decide to wholesale it, I don't see that as dishonest as things can change, but what you represent initially should be what your goal is going into the deal. Some people do advocate the "keeping the seller in the dark" approach, personally I don't feel it's the correct way to do business though legally there is nothing preventing you from doing so.

Britt M. · Answer

@Luis Gutierrez Wholesalers work with sellers of distressed properties to get below retail price for a property. Distressed sellers will work with a wholesaler if they are motived and want to be rid of the property and want cash to walk away without doing any improvements. Ethical wholesalers state to the seller that they may keep the property for themselves or one of their partners will purchase the property. This lets the seller know up front, how the transaction will work. Wholesalers don't own the property, they have an assignment contract. They will sell their interest in the property to their end buyer. There are many, many blogs and podcasts on how Wholesaling works in BP. I recommend you check out @Mike Nelson and @Sharon Vornholt Hope this helps.

Britt M. · Answer

Exactly! Wholesaling is a J-O-B! My partner had an unusual big sale for her first deal. This isn't the norm by any stretch of the imagination. Our REIA leads, said, don't expect this to happen to you. :-) We work hard to find leads and deals. It's a grind but what job isn't? There's no magic pill or system...you have to work. I get very frustrated with the guru get rich quick systems; they seem to lure the innocent into thinking they'll be working on a beach in Maui in a few months. This why most stop REI after a few months - the "system didn't work". No, you didn't work! :-) Stepping off my soapbox now. Anything worth having, is worth working for.

Adrian Tilley · Answer

I think @Jon Holdman has basically the right idea - you need to temper your expectations with a lot of reality. However, if you look around the forums, you will see a lot of people succeeding in finding deals. However, you can't just sit on the couch and expect them to drop in your lap. It will require work.

Luis Gutierrez · Answer

Thank you guys so much for that feedback. I really appreciate it. It was really useful and helped me understand it a little better. And yes I think the wholesaler should be straight up honest in the beginning of the deal. So basically as an example for starters in wholesaling, starting, one can be a couch potato that has no job, little money, decides to put in some work for a while and make a first deal. So one day searches for distressed homes on Craigslist, stumbles across a good offer, contacts the seller, puts it under contract per se $55,000, finds a buyer asap, assigns the rights to the buyer for $60,000. Deal is done, netting a $5,000 profit.