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What Are the MAIN PROBLEMS with Wholesalers?
I recently got my first property under contract in the St. Louis, MO. market (Florissant, MO. to be exact). I do not have a buyers list but yet I have managed to make some great connections regarding my area where i intend to market. Though i know and understand that we all make mistakes especially as newbies, I am one that strives to do things the proper way to avoid the common mistakes. My question to the experience wholesalers and cash buyers is What are some problems and pitfalls that you have experienced dealing with wholesalers and how did you avoid or correct those issues? Thanks!
I account it to not having serious cash buyers, that you know and have worked with. I have 2 cahs buyers and i know exactly what they want, where they want it and how much theyll pay for it. So i only target those areas. I never say anything about repairs, or ARV, i give them an address and aprice. As TRUE investors they do their own due diligence and get thier guys to inspect the property. Neither of my buyers can give 2 cares for my estimates on repairs or ARV...As my only role is to bring them off market deals at a discount....
Theres bad whoelsalers, thier even worse cash buyers, who want a steal, i reahced out to a new buyer and this guy is trying to give me a $1000 fee on an equity deal with over 85k in it...We spend double that just marketing every month....It can both ways guys....
REI is cut throat and everyones out for their piece of the pie...Its just the way it is...And now that the internet has taken over and we have info at our palms, theylle be even more and more mess in the business...
Hey Andre,
If you really want to set yourself apart from the majority of wholesalers, get yourself a team together and offer the whole package. I've done over 100 wholesale deals and all but a few of them I have done this way. Find a good referred contractor and buy him lunch and have him give you a REAL estimate for the cost of rehab of your property. Assure him that you will not waste his time and get your buyers to use him. Offer your buyers to check in on the rehab, take and send pics of the progress. Get a good Realtor on your team, a newly licensed one perhaps. There ARE deals on the MLS, most of mine came from there. You can still make a low offer, especially if it has been on the market a while. Find a local Hard Money Lender that you can refer.
Now you have 3 professionals involved in the transaction to back up what you tell your buyer. Especially the HML, they won't give you money if the deal is not solid. You, your buyer, and everyone on your team will make money and look to you for more deals......that's a HUGE motivating factor !!!!!
BTW....I live in Nazareth, PA....Home of Mario Andretti and I used to live in Easton, which is a just a few miles from Nazareth, about 2 blocks from Larry Holmes.....met him several times at his bar "Ringside"....very nice and very approachable, would always joke with you. He actually sings in a local cover band, horribly, but they're fun.
A lot of people have commented that wholesalers are way off on their ARV and rehab costs. I have a few questions to ask regarding this;
First off, given their comps are really accurate comps, how are they off on their ARV and how do you develop a correct ARV?
Secondly, how do you determine what the rehab costs should be? I use the 15/20/25 method but it seems my rehab estimates have been relatively high.
Lastly, have ya'll tried explaining proper techniques and ways to determine the ARV and rehab costs with the wholesalers? In my opinion, it may be worth teaching them the methods to accuracy in hopes they will retain and use the information to bring in true deals and no longer waste your time.
Hello @Andre Vaughn
Speaking from my experience with wholesalers in the Cleveland area here are the biggest problems:
They are trying to wholesale already listed deals on MLS, Zillow and Craigslist at a higher price
Not enough information is provided when they email cash buyers: Taxes owed, repairs needed, how many beds and baths...
They are not providing pictures or video of the good and bad points of the property
Cash buyers rarely run out of leads so a wholesalers job is to go above and beyond by providing as much info as possible to set them apart from the other 100's of wholesalers in their town
This topic has been beaten to death about a million times. The answer is....WHO CARES?
If you buy a property from anyone you are going to do due diligence, aren't you?
That means: run your own comps, determine your own rehab numbers, etc.
If the numbers work, great, you got a deal. If not, then move on.
Leave real estate aside for a moment, and imagine this hypothetical.
If you walk into any business school in the the country, grab a professor, and say, "My intention is to buy widgets from people who have widgets they do not need, and sell them to people who need widgets. What sort of business is that?" Chances are high that the reply will be "wholesaling."
If you say to that professor, "My intention is to find people with widgets, pay them a small sum to make the widgets available to me, and then market the widgets or sell them to my already-found buyers. What sort of business is that?" Do you know what the answer will be?
"Brokerage."
The problem with most wholesalers is that they are not wholesalers, they are unlicensed brokers.
Originally posted by @Thomas Loy:
A lot of people have commented that wholesalers are way off on their ARV and rehab costs. I have a few questions to ask regarding this;
First off, given their comps are really accurate comps, how are they off on their ARV and how do you develop a correct ARV?
Secondly, how do you determine what the rehab costs should be? I use the 15/20/25 method but it seems my rehab estimates have been relatively high.
Lastly, have ya'll tried explaining proper techniques and ways to determine the ARV and rehab costs with the wholesalers? In my opinion, it may be worth teaching them the methods to accuracy in hopes they will retain and use the information to bring in true deals and no longer waste your time.
Well assuming they have good comps is a HUGE assumption to make. First most deals presented to me don't actually give their comps (Which I am fine with) so hard to say if what they used were any good. However when they do give me something I often find that the comps aren't good or the analysis of them is highly flawed.
For example I have been given "comps" that are over a year old, ones that were over 10 miles away from the property (in an urban area), houses in other nearby towns (that are much nicer, never in the ones that aren't as nice), had someone use a 4/2 2100 house on a full acre to comp a 3/1 1200 place on a 0.15 lot and the list goes on.
Now since these guys actually said what their comps were I will give them credit for disclosing that info and caulk it up to ignorance and inexperience rather than trying to pull a fast one.
So this is a matter of semantics?
To the best of my knowledge (albeit limited) , contact law allows someone to place ________ under contract and also allows one to sell their equitable interest in said contract to another party, yes?
I agree with you that this is not "wholesaling" in the most fundamental of terms. That said, it is convenient terminology for the sake of discussion because it has worked it's way into the lexicon of REI to be synonymous with the above scenario. It probably leans more toward "brokering", but what about the investor who works repeatedly with a single "wholesaler" (and vice versa) to acquire properties based on the above model? If there is no overt advertising, can this still considered "brokering"?
Until contract law changes, (again, to the best of my knowledge) this practice is perfectly legal, and can be performed with a wide variation in underlying ethics. Some people choose to use this model to run a reputable business, others (the focus of these repeated threads) choose to be a combination of lazy, ignorant, and greedy.
"Until contract law changes, (again, to the best of my knowledge) this practice is perfectly legal, and can be performed with a wide variation in underlying ethics."
Not necessarily true, and this is another thing wholesalers need to realize. General principles of contract law do not automatically trump other law. For example, brokerage licensing laws.
I'm not saying that wholesaling as commonly understood is illrgal in any state. i am saying that any state could make it illegal, without doing violence to contract law.
If I have a handful of oxy pills, contract law says I have the right to sell them to you for consideration in the form of cash. The DEA and my local police department will, I assure you, not agree with an argument that I can therefore sell them to you and criminal law does not apply.
Real estate agency and brokerage has really, really low barriers to entry. It just isn't that hard to get a license. Just do it, if you are going to broker properties, rather than try to construct elaborate rationales for why you don't have to.
Let me give you another example. I can buy stocks. I can even buy options on stocks (the equivalent of the "equitable interest" some wholesalers seem to believe is magic ju-ju). And I can sell stocks. Through a broker. I cannot broker them myself without running afoul of securities licensing laws.
As to why this all matters:
I'm not a big fan of regulation. I think you can make a very good argument that real estate should be less regulated. HOWEVER, once a regulatory scheme is in place, I am not in favor of people evading it. Market actors are relying on the regulatory scheme. If it didn't exist, they would act much differently. So if we are going to have rules (other than caveat emptor) than it is important that everyone follow them.
I don't fill out credit card applications from finance companies I have never heard of that spam my email inbox. I would encourage my daughter to never get into a gypsy cab in a bad neighborhood, but instead to find one with a medallion. And I won't buy real estate from someone whose business model is predicated on avoiding licensing laws and their accompanying financial disclosures and ethical standards.
Buy something and then offer to sell it to me. Or become a broker. Either way, I am interested. Do neither of those things, not interested.
My advice is think from the perspective of the investor a few months down the road when he is selling the house after repairs are done, his end buyers will go the a bank for finance, the bank will lend the money based in the market value determined by an appraiser, the appraiser will look for RECENT sales of SIMILAR properties located CLOSE BY
Many wholesalers sent you comps from houses located a mile away when there has been cheaper sales in the same block or cheaper sales earlier in time, or compare with bigger or newer houses or with luxury renovations
Typically a bank will like comparables of similar properties in a quarter mile radius in the last 3 to 6 months (they adjust it depending on the neighborhood and the property but in general this protects the bank from mistakes)
Your investor typically want to rehab and resell quickly (to avoid hard money interests and other expenses), so he will not price it at the top possible price in the area because he wants it to be attractive to possible buyers and realtors.
Also don't forget your investor has to pay closing cost (4 to 6%) on the purchase and the resale and Realtor commission on the resale (5 to 6%), that can easily eat up 20k in a 200k sale
As @Eddie T. said before, a 60% of ARV typically will give the investor room to pay for: the rehab, closing costs, commissions, interests and have a reasonable profit after 3 or 4 months of waiting for the end buyers and his bank to close. Note that If the rehab is massive the purchase price needs to be even lower
Good luck and keep way from the dark side of wholesaling
I wonder why real estate agents get upset when someone asks to see their real estate license and E & O insurance could they be hiding something.
Joe Gore
Originally posted by @Tim G.:
I don't hang in the forums dedicated to agents (do we have those)?
But, I don't see terrible wholesalers doing much different than listing agents do. Same overvalued exit prices, overpriced deals with unrealistic repair values etc...
I just hope people are as vocally harsh on those folks as they are on wholesalers, I've yet to see it though.... A lot of it stems from the buyer themselves not understanding how wholesaling works. Wholesalers should close a deal with their money then sell? What? Why? That eliminates the entire purpose of wholesaling!
Some sales people suck, who likes a car salesman? Wholesalers are no different, some of them aren't any good.
I wondered if someone was going to mention this. Agents are supposed "real estate professionals". They often have VERY little knowledge of what a rehab entails. Most aren't landlords and don't own rentals. But they'll happily miscalculate or underestimate repairs, resale values and rents every day of the week. They'll happily list a property for way more than it will sell for.
There are way more crappy agents out there than there are wholesalers in any market. But somehow we don't have weekly threads here on BP titled "the real problem with agents" or "the truth about agents". Most of us have learned to ignore or avoid bad agents. So why not just ignore or avoid wholesalers. I would never take another person's word or opinion on ARV or repairs or rents. So I don't offer those numbers to my buyers. When a buyer asks my opinion of ARV and repairs, it's usually because they don't know what they are doing. I list a lot of what I sell now, stuff that I previously would have offered to a buyer's list. I come out ahead, even when paying commissions. And I don't have to hand hold any buyers.
One of the wholesaling gurus has a video on her YouTube channel regarding repair estimates. She says she doesn't do them with her wholesale deals because she has no idea how to figure out what repairs costs and simply submits her wholesale deals to her buyers "as is". They have to do their own estimates and due diligence anyway, so she doesn't bother.
Does anyone any experience with doing this?
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@Account Closed
Agreed that's why 10% of all Agents and Brokers make 90% of the commission income.
1. they don't understand ARV -probably have never done a flip
2. they don't understand repair/ rehab costs
3. They find deals on the MLS instead of sourcing direct deals
I want to offer some encouragement to Andre. Andre, the fact that you are asking the question means you will likely be a better potential business partner than 90% of those I have come across.
Originally posted by @Gary Shaw:
One of the wholesaling gurus has a video on her YouTube channel regarding repair estimates. She says she doesn't do them with her wholesale deals because she has no idea how to figure out what repairs costs and simply submits her wholesale deals to her buyers "as is". They have to do their own estimates and due diligence anyway, so she doesn't bother.
Does anyone any experience with doing this?
The variables on repairs are huge. The buyer's plan or exit make all the difference. A buy and hold landlord may estimate only $10K for repairs, where as a flipper wanting to sell retail may estimate $30K. There's also paying retail for repairs as opposed to having your own crew that works fast and cheap. You can get the same roof for $4K or $12K, the same HVAC for 3K or $7K. Depends on who you call. Then there's the profit issue. A buy and hold landlord in one of my farms will pay $100K for $130K ARV property needing only $10K repairs and with a $1500 rent. The rehab buyer wanting to make $25K on that same property will pay $75K. Why would I sell it for $75K if I can sell it for $100K?
I've sold some deals to an agent group that buys, rehabs and resells properties for their investors. Their investors are happy to make $10K on a $150K house. They get their money back in 3-6 months. Many of them are using their IRAs, and if they do a couple of deals a year making that kind of return, they are thrilled. Rehabbers trying to make a living cannot compete with cash buyers who are happy making those kinds of returns.
I know repair costs, and I'm pretty good with comps and ARV, but I still don't do them for my buyers. I tell my buyers everything I know about condition and disclose what I know in my purchase agreement. But I would never put a price on the repairs or provide the ARV.
I think the frustration we see in these threads is the mistaken idea that wholesalers should be offering discounts that aren't reflected in the rest of the biz. The word wholesale might be to blame. There is no true wholesale price for real estate. There is what the market will bear.
Do you get any negative feedback for not providing comps/arv's for your buyers?
I was recently contacted by a wholesaler trying to sell a property who, after talking with him had no idea about how the property was valued and had it under contract with only 30 days due-diligence expecting a quick flip. We had to tell him that 90% of the time someone purchases the property type he was trying to sell they get a loan which requires 60-75 days due-diligence. He also had the seller under contract and was probably fooling him into thinking he was a legitimate buyer when he, in reality, could not afford to purchase the property, which in my opinion is unethical. I am positive if it falls through he will be unable to purchase property from this seller again in the future. If you are going into wholesaling it seems very easy to fall into unethical practices and easy to ruin your reputation.
In one of the early podcasts, a wholesaler who's name I forget made the very important point that wholesalers actually need to get better deals than say a flipper because there needs to be profit for both the wholesaler and the flipper instead of just the flipper. Many wholesalers seem to miss this point and don't leave enough in the deal for it to still be worthwhile.
Other issues sometimes include too many properties in war zones and dramatically underestimating expenses.
I agree with the people saying that they don't give ARVs or repair estimates since the investor is going to confirm the numbers anyway, and for repairs that number can be all over the board (And if you do vastly different levels of work that can effect the ARV as well).
However I do like to get those estimates from a wholesaler. Not because I trust them, I would not trust them fully no matter no much I respected the intelligence and integrity of the person giving me the deal. It is mostly because I have never found one of these good wholesalers that I KNOW finds good deals that are worth looking into.
So when the new inexperienced wholesaler finds a deal I'd like to know the number they had in their head when evaluating it. More than half the time I can look at those given numbers and tell it won't work for me. So I don't want to spend any real time figuring out an ARV and going to see it to figure out repairs. If their numbers at least pass that sniff test I will then do the ARV at my desk and will eliminate at least half of the rest when it is clear they are way high on that.
If I find a @Account Closed /really good wholesaler/ Sasquatch riding a flying unicorn in my market I would be more than happy to just get an address and the asking price.
Originally posted by @Shaun Reilly:
I agree with the people saying that they don't give ARVs or repair estimates since the investor is going to confirm the numbers anyway, and for repairs that number can be all over the board (And if you do vastly different levels of work that can effect the ARV as well).
However I do like to get those estimates from a wholesaler. Not because I trust them, I would not trust them fully no matter no much I respected the intelligence and integrity of the person giving me the deal. It is mostly because I have never found one of these good wholesalers that I KNOW finds good deals that are worth looking into.
So when the new inexperienced wholesaler finds a deal I'd like to know the number they had in their head when evaluating it. More than half the time I can look at those given numbers and tell it won't work for me. So I don't want to spend any real time figuring out an ARV and going to see it to figure out repairs. If their numbers at least pass that sniff test I will then do the ARV at my desk and will eliminate at least half of the rest when it is clear they are way high on that.
If I find a @Account Closed or @Tim G. /really good wholesaler/ Sasquatch riding a flying unicorn in my market I would be more than happy to just get an address and the asking price.
What about listed properties? Do you put those through the same sniff test? I'm guessing you do your ARV and have no real idea about repairs until you've seen it. Why would an FSBO or wholesaler's asking price be any different than a listed prop? You'd probably go see a listed prop where the asking was out of whack and still make an offer.
BTW, you'd likely be very disappointed by my offerings and my asking prices. I sell them for what the market can bear. I have a couple of regular buyers and I list everything else. On top of that, I don't consider very many offers with hard money, and I require full proof of funds from cash buyers. You'd have all kinds of names for me if you were in my market. :)
This is just one part of a cycle. Some day the cash buyers will dry up and there'll be a backlog of inventory. Then I'll have to provide ARV comps, repair quotes, discounted listing services and throw in some gift cards to get it sold.