The Role of a Wholesaler: It's More Complicated Than You Think!

I drive by roughly 500 houses each week while looking for properties in disrepair in Orange County. I see innumerable rehabs, home improvement projects, home disimprovement projects, and other general repairs and maintenance tasks being performed by contractors, handy persons, and homeowners alike. Almost all of these endeavors are started with the intention of increasing the value of one's property. But what happens when property values begin to reach their apex and buyers expect to see more than what the typical flip or remodel can provide? You need to get creative.

Casual rehabbers, or those who follow strict formulas when rehabbing homes don't have the time or desire to come up with new money making strategies for their business. They might say this, "I like my houses with 1400 square feet, I pay no more than 65% ARV, and I pay no more than $75 per square foot to rehab them." They know what works for them and are satisfied with sticking to it. So, as prices climb, and both retail and off-market buyers get squeezed out of their ideal locations, wholesalers must find creative ways to keep feeding their buyers properties. 

I recently negotiated with a property owner for a home that had been a rental for the last 11 years. It hadn't been updated, the kitchen was tiny, windows were broken, and the dead roach on the floor had me wondering what other surprises we might find lurking in the walls. Not to mention it's located in a B- (at best!) neighborhood. What's more, a 2000 square foot home down the street that was freshly rehabbed just sold for $320 per square foot. My seller was asking nearly $350 per square foot. No can do. 

But, this seems to be the story, at least in my market. Home prices are beginning to top out and there are looming questions as to whether certain neighborhoods, like the one referenced above, can sustain such high prices. I'm skeptical. The good news is Orange County is home to more than 3.1 million folks, all of whom need a roof over their head. 

What is a wholesaler to do... Become a jack-of-all-trades.

Everyone knows that successful wholesalers must be experts at marketing, negotiating, valuation (pre and post rehab), estimating rehab costs, and managing loads of paperwork. The one thing that is most over looked by those folks trying to get in the game is becoming an expert in identifying rehabbing trends, and then presenting those to apprehensive rehabbers like the one I mentioned above. We like to knock those who buy McMansions, but the "cozy" 950 square foot homes of the 1950's that once sufficed for a family of 6 will soon be obsolete. 

Don't believe me? Here's an anecdotal story from Corona Del Mar, California: 

In 2010, my wife and I lived in one of four original homes built in the 1920's. These were tiny houses on very long lots. It measured a mere 700 square feet, but was a neighborhood legend for the 40 year-old lemon tree in the front yard that produced giant, juicy lemons year-round. We loved that house, but it was old, cold, and full of mold. 

The home was inherited by an east coast family who was not related to the owner who had passed away (couldn't we all be so lucky), and they leased it to us while they figured out what to do with it. The property was surrounded by 2,500-3,500 square foot duplexes and triplexes that produced 2-3 times the rent that we paid.

Just before our lease ended, the property was sold to an investor for $900k and the new owner was thrilled to learn we would vacate the property a month early so they could assume control of it. They almost immediately tore it down and, within a year, built a two-unit luxury home that is now valued at more than $3 million. Good for them.

Wholesalers must be able to identify neighborhoods where this type of situation can occur. Orange County, and other neighborhoods with homes built post World War II, will inevitably undergo this type of transformation. The question is, "when?" The sooner we wholesalers are able to sell rehabbers on this notion - that they need to spend more to make more - the more opportunities we will have to present profitable deals to buyers.