New to wholesaling. Is this a plausible deal?

Question

Wholesaling a property in IL. I can get it under contract for $196K, the (as is) comps are selling for about $240. The property its self it pretty turnkey for a rental property, although 5-10K could make it look nicer (landscaping, repainting etc). The property is located a few blocks away from a downtown chicago suburb with a (Metra) train station that'll take you downtown.

The major complication is that it has tenants with 6 months left on the lease at $1500 that is managed by a professional property management company. Property management can be terminated, but lease cannot.

Is it realistic that an investor will buy it for $30K below market, with that lease in place?

Will Barnard · Answer

"I'd say there is only one way to find out ;-)  I would go ahead and lock the property up under contract and blast it out to see what sticks."

I think this is not good advice. Lock it, blast it, and hope is not a good business practice and this advice likely violates RE licensing laws in the state.

To be a successful wholesaler or to successfully wholesale a deal, one must add value and one must perform the transaction legally. Locking it up, blasting it out and assigning the contract for a fee likely violates the law. Advising someone to violate laws is never a good idea.

Tom S. · Answer

@Thomas Kelly  It's fairly standard that investors buy rental properties with leases in place.  Here in VT, it's the law anyway, the lease comes over as is, and actually can be helpful because it's easier to qualify for financing with a lease in place.  I wouldn't worry about that part of it.

I think the issue here is there's no money to be made for the investor, and therefore no motivation to buy. If you can get it under contract for $196k, and say turn it around and sell for $205k.  If the investor had to sell right away for $240k, with closing costs and commissions, they would most likely lose money.

The other key point is without any improvements, the new appraisal will be $205k, the price you sold it to an investor for, not the $240 comps in the area.

Wholesaling works best if you can find an off market fixer and the rehab the investor puts in forces a significant improvement in value.

James Wise · Answer

A license being required to broker real estate isn't a new thing by any stretch of the imagination.

Will Barnard · Answer

Jennie,

Most states, including IL has real estate licensing laws. Not verbatim, but basically they state that if you negotiate and contract a purchase price for real estate, then market that RE publicly, locate a buyer and bring buyer to the table, and receive a fee for that, you are "brokering without a license". This is precisely how a vast majority of wholesalers do business by getting a contract with an assignment clause in it and then bring the buyer for a wholesale fee. Any such transaction violates the law and that is what Jonathan suggested the poster do. So I reiterate, "not a good business practice" to suggest to others to violate the law. Additionally, even if it was not illegal, these numbers provided by the original poster do not show enough spread to allow for a middle man to make a profit and therefore it would likely lead to the wholesaler having to use some type of contingency clause to back out of the contract when they cant find the buyer at a price that delivers them a fee. This leaves the seller high and dry and having to start over again. That too is not a good business practice as I for one would want to be known as a closer and a person who follows through with my purchase commitments.

Jonathan Klemm · Answer

@Thomas Kelly - I'd say there is only one way to find out ;-)  I would go ahead and lock the property up under contract and blast it out to see what sticks.

Having a tenant in place isn't ideal but even if you could make the bare minimum of $5k or something that is still a win, especially if it's your first wholesale deal.  You can also always work on getting the tenants out with cash for keys if you find a buyer that doesn't want them, now is definitely a better time to move than in the winter.

Just curious what Chicago suburb is the property in?

LeDarrius Burgess · Answer

Make sure you're aware of Illinois laws on wholesaling

Rob Hayes · Answer

@Thomas Kelly sounds like too small of a spread to me... especially since the investor may need to wait until February (or later) to get possession of the property.   So Thomas, instead of wholesaling this property... why don't you just do the deal yourself?   I don't think there's enough meat on the bone for 2 people to make money on this deal... but maybe there's enough for one person to make money!

New to wholesaling. Is this a plausible deal?

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