4 reasons wholesaling is bad, and 2 reason why its good

[Ron Thomas]

I know I’m probably going to get some hate thrown my way for this, but….well, its nothing I can’t handle.

Wholesaling seems to be really fashionable in real estate at the moment. A decade or so ago, I was about 20 years old and interested in real estate, and I don’t remember ever hearing about Wholesaling back then. At that time, the gurus with something for sale seemed concerned with more traditional (but risky and/or difficult) investment strategies like no money down deals, tax auctions, short sales, ect…

But as of lately wholesaling seems to be all the rage. Every investor meeting I’ve been to in recent memory is flooded with wholesalers, many of whom have never done an actual deal. Even my good friend in North Carolina, whom has no experience in real estate, decided he wants to become an investor so he’s mailing yellow letters to out of town owners down that way.

All of this interest is great, but I’ve observed some things I thought were worth sharing on the topic of wholesaling. I will say, the following are simply my observations and thoughts.

• 1.Its not really investing.

At a basic level you aren’t taking capital and using that capital to generate some sort of return. I know you are investing your time, and maybe spending some money on marketing, but to me that is not a real estate investment. Good wholesalers can, and often do, provide value to investors but the wholesaler him/herself is not investing. Nobody thinks that real estate agents are investing when they arrange a transaction and wholesaling seems more closely related to that then actual investing.

• 2.Low barrier to entry so the market is flooded.

This ties back into the popularity I alluded to earlier. If you believe what most people say, it takes practically nothing to become a wholesaler. Maybe some money for mailers, and some knowledge that you can pick up along the way helps, but no substantial control of capital or real estate education is required to get started. Just plug in a DVD and put up a bandit sign. As such, it's become the vehicle of choice for lots of people wanting to get involved with real estate. The problem is, that flood of people all seeking to perform the same tasks makes the market more competitive and lowers any would be profits. I don't think I'm going out on a limb when I say that any investor who attends local meet ups probably have stacks of business cards from wholesalers with ample mediocre deals. My one investor friend even has a wholesaler trying to sell him a deal off the MLS!

• 3.Just like no money down deals….but with none of the upside.

No money down investment deals vary widely but the basics of it usually go something like this. You find a deal good enough to be profitable, you prove that profitability to someone with money, and you negotiate respective ownership/payouts in return for their capital invested in the deal. Often the money source is the seller, often it’s an investor. In any case your upside isn’t limited to the spread at closing but rather you have a stake in the deal’s lifespan. This is arguably still not investing, insofar as it’s not a capital investment on your part anyway, but the returns, structure and upside more closely resemble a bona fide investment. With wholesaling, if all goes well you get your check at closing and on to the next one. Which begs the question, if you are already finding the deal and arranging investor financing why not attempt to carve out a portion of the long term proceeds and enter into a ‘no money down’ investment deal rather than simply trading your value for a quick (taxable at earned income rates) payday?

• 4.Few of the benefits real investing offers.

Actual real estate investing has many benefits. Often the income is considered passive so its taxed more favorably than earned income. Actually owning real estate gives you the right to depreciate a portion of its value each year, another great tax benefit. You can leverage other people’s money, in addition to your own, to control larger value assets which amplify your returns, assuming you put together a good deal. You can cash-out refi deals with adequate equity for a tax-free payday or to reinvest earnings. The list goes on and on, but none of these things are options for wholesalers. As a wholesaler, especially if you are going to be good at it, you need to do much of the same sorts of tasks as actual investors but what you stand to gain isn’t nearly as significant. If you are already going to these lengths and you find yourself enjoying the ride, why not invest? In fact, why not just seek to invest from the start, leveraging your knowledge to gain access into low or no money deals, and wholesale on occasion when a particular project calls for it?

Ok, now that I’ve probably made every wholesaler that read this far mad at me, Ill mention the couple of things that I think are good about wholesaling.

• 1.You get experience in real estate transactions.

If you are going to learn from making mistakes, wholesaling is probably a good place to do it because your money, and investor’s money, isn’t at stake nearly as much. From what I’ve observed (I’ve never actually wholesaled or attempted to btw, it doesn’t add up to me) you can learn a decent amount of things that may benefit you if you continue to pursue a professional life in real estate beyond wholesaling.

• 2.Its the shiny object that seems to spark interest.

Real estate is a fascinating, diverse industry full of challenge and opportunity for those who earn it. If wholesaling plays the liaison that helps people to realize this, then all the better.

What do you think? Am I dead wrong or have I made valid points?