Discussion: The Ethics and Marketplace Use of Wholesaling

[Allan Smith]

I wanted to open a discussion about wholesaling and see if anyone has some insight or input. First, my case study for context:

I followed up with a seller today who is inheriting a house with a best use of tear down and build 2. He has bids up $125k from where we were talking 2 months ago. It made me feel useless as a wholesaler. Suppose I line up a top-paying buyer, and I manage to woo the seller into picking me for a little less than the top bidder. The seller gets a few grand less, and my buyer pays what any other developer would have paid. At first glance, I have brought no value to the marketplace.

I rack my brain for my "value." Perhaps I find myself more trustworthy and more interested in the well-being of the seller than the other "sharks." That's great to bring to the marketplace, but if I can't find a buyer, I'll end up being a shark when I have to back out of the contract. Or, perhaps I provide more of a creative solution. One of the other disabled heirs needs somewhere to live, so I help find somewhere for him to rent or buy and work it into my wholesale fee. This last scenario is the only true value that I can think of, but it muddies the water for wholesaling. Buyers don't want baggage in deals.

I'm starting to see that wholesaling is only ethical and useful when applied properly. Wholesalers reach people who don't know of a solution to their problem until a letter pops into the mailbox. That's a win for the seller, the wholesaler, and the buyer who makes money. In this hot market in Nashville and many metros across the U.S., it seems the wholesaler is moot. They aren't needed. Investors are going straight to the seller, and if a wholesaler got a contract, they probably simply out-bid other investors who were actually going to take title. What's the point?

What do you folks think? Are we currently abusing the role the wholesaler plays in the marketplace? Can market cycles really potentially void an "investing" strategy such as wholesaling? What do you think is the proper application of wholesaling, all laws and ethics considered?

[Ryan Stahr]

@Allan Smith i agree with your OP 100%. The role of wholesaler is being abused right now and could be considered moot in many situations. I work with a virtual wholesaler and we have closed only two deals so far this year in Nashville and both have been with myself as the end buyer (so we paid a little more to the seller) and also very unique situations (probate, inheritance, etc.). 

Most of the offers I make to traditional sellers with high equity positions are seen as lowballs....the sellers regularly have 5 people bidding on their property, driving prices up to the point where it might as well BE retail. Sure, it benefits the seller in theory, but hinders the two other parties involved. 

What's driving me crazy is that sellers very rarely know when the other offers are being made by unscrupulous wholesalers or true investors. They don't ever know who can actually close! How do you convince them you are an honest businessman who is making a fair offer that will close no matter what?

I've talked with enough sellers who have experienced a sale falling through that part of my negotiation discussion is to explicitly say "this number is low because I will guarantee a close at this number". I've started offering even LOWER than normal so I can make that promise. I think that's a true value add. The sellers will eventually get tired of BS offers.