All Forum Posts by: John Chapman

@Ben Roberts, the wholesaler actually had a decent reputation and was pretty experienced.  Here's what he did wrong, in my opinion.

• His contract with the seller did not mention a simultaneous closing or that he would be immediately reselling the property.  This was not required under Texas law, but it gave the seller grounds (in his view) to claim breach.  I've seen contracts where the wholesaler is very clear about what he intends to do, which I think is advisable.
• The wholesaler told me in writing that my contract with him (which did reference simultaneous closing) would be identical to his contract with the seller.   This is where I screwed up.  I saw the "final" unsigned version of the contract with the seller, but I did not see the signed contract with the seller until after I had signed.  I was on vacation and the wholesaler had a good reputation.  Totally dumb on my part.
• When things started going south, it was very apparent the wholesaler was doing everything to cover his own butt.  He didn't step up and basically tried to do everything in his power to avoid taking responsibility (and liability).   Bad customer service on his part made me much more likely to sue him.
• He used a one-page custom contract.  I've used them before in the past and never had a bad experience, but they leave too much open and unaddressed.  I would probably feel fine using one in a straight buy/sell deal.

@Fernando Parker I don't really have any pointers for buying from wholesalers other than make sure they are putting up their own earnest money with the seller.  In my case, I think the wholesaler made a few mistakes and did a few things that were not completely above board, but at bottom this was a crazy seller situation.  I think even if the wholesaler had done everything right, he could have still ended up in a world of hurt.  

@jd 

@JD Martin Thanks for the compliment.  The irony of the whole experience is that I really didn't even want the home.  I'm kind of burned out on rehabbing at the moment and it just fell into my lap (lucky me).  

This is a kind embarrassing/bizarre story, but I figured I'd share it since everyone and there brother is getting into wholesaling.  Basically, I was approached about buying a buy-and-hold home from a wholesaler in a decent area.  I wasn't super excited but didn't have anything else going on.  Long story short, we agreed to do a double close instead of an assignment and, despite assurances from the wholesaler that the seller was on board with this, the seller absolutely freaked before closing when he found out the wholesaler was selling the home to me for an instant profit.  He accused the wholesaler of breaching the contract because there was a title insurance premium pass through doc he had to sign that identified me as the end buyer.   Days on the phone trying to save the deal, and it ultimately falls apart and seller refuses to close.  What makes matters worse is that the seller then demands my $5000 earnest money.  (The seller was a complete crook and had pulled this type of scam before, tying up earnest money to extort some sort of settlement.)  

I had enough, had the wholesaler assign me his claim, and sued the seller in state court.  I'm a litigator so I did it myself.  In the end, the seller settled with me and sold me the home, but this was only after I aggressively litigated the case.  (Attorney fees would have easily been $15,000 if I had paid someone else to do it.)

Here's what I took away from the lesson:

• Wholesaling sure seems like a lot of work to avoid licensing requirements.  All of this likely could have been avoided if I could have simply directly paid the wholesaler a referral fee, but I couldn't do that because he didn't have a license.  
• Even if a wholesaler fully discloses that he is reselling the home or assigning the contract for a fee, there is going to be a certain percentage of sellers who are going to freak out and be pissed.  This blows up deals and leaves the wholesaler in a bad place.
• The chances of a wholesale deal blowing up are higher simply by virtue of the fact that there are additional parties involved.
• Wholesaling should only be done by sophisticated and experienced investors who are selling to other sophisticated and experienced investors.  There's just too much that can go wrong.  Yes, many wholesale deals will go through and maybe my experience was just a "one in a million" type experience, but I suspect a higher percentage of these deals go south than straight buy/sell type transactions. 
• When it goes bad on a wholesale deal, it can go really, really bad.  If my lawsuit hadn't gone well against the seller, I would have absolutely sued the wholesaler.

I left out a lot of details but I should qualify that I made mistakes as well, the biggest one being that I agreed that my earnest money could be pledged to the underlying contract.  

I should also add that I'm not bashing wholesalers.  There are definitely good ones out there.  Just thought I'd share my experience and observations since I see so many people wanting to get into this field.

@Brien OConnor, no, you can't use conventional funding. Most people use private money or hard money. (I use private money from a buddy). I wouldn't waste my time with a bank for a short term loan like that unless they have some sort of product that converts from short term to long term financing. (Would be a portfolio product of some sort.) I like the private money because it's fast and flexible. I've got enough of a track record that my lender will even amend the note if I want to increase the balance. The trick with a conventional refinance is that you want to be just refinancing the note, not pulling cash out. You'll get a better rate and higher LTV (75%) if it's a straight term note refi.

@Brien OConnor, the only other observation I would make is that it seems like you have a lot of money into each of these deals. That is, you're putting 25% down and then funding the repairs out of pocket. Obviously, you're free to do it this way, but most investors I know are buying with some sort of short term financing, rehabbing, and the refinancing based on a fixed up ARV. (I believe BP calls it the BRRR strategy, but it's been around a long time.) This way you finance at least some of the repair costs and don't have so much cash tied up in each property.

@Andrew Herrig, that's actually not a bad idea   I've toyed with going to other markets (particularly ones without our murderous property taxes, like Colorado, Arizona, Carolinas, etc.)  It's my perception that those markets pretty hot just like ours.  Not too interested in the rust belt as I believe you really do want to be in growth areas for the long term.  (Which is why I'm not too keen on pulling out of Texas despite the issues.)  Have you gone too far down the road of exploring other markets?

This is probably more directed at some of the guys who have been doing this for a while. At what point (if ever) did you just get bored or hit a wall with real estate? I've been doing buy and hold for almost 9 years, and I used to be super excited about chasing deals, fixing houses, and leasing them up. Now, I'm just kind of bored with it. I've got about 30 properties under management, and I've read/heard that this the point where a lot of people stop expanding in the SFR world. Personally, I think my general discontent is due to a confluence of events:

• After you have enough SFRs, adding a new one or two (or six) simply doesn't move the meter that much from a wealth building perspective.  
• The amount I'm personally managing is now to a point where I'm starting to notice the burden because there are now houses going vacant every month and more frequent repair requests.  The truth is that property management is pretty monotonous.  Not too bad in small doses but it's hard to think I want to keep adding to my responsibilities in this area.  (Yes, I know you can hire PMs but it's way too expensive for SFRs and no one will care as much as you.)
• Having held some properties for a longer period, I'm starting to get a taste of the cap ex that comes from long term buy and hold, particularly with SFRs  I think that being in Texas is particularly difficult because of settlement/foundation issues.  Fortunately, the homes have gone up in value enough that putting money into them only adds to their value and allows me to increase rents.  
• The SFR market in my area (DFW) is super hot, and it is hard to see the appreciation and rent growth that we've got continuing. (I think homes will still go up in value in my area due to population growth, just at a more modest pace.) It's really hard to justify working harder for deals that aren't as good. (Yes, I realize I got spoiled during the foreclosure crisis.)

This post may sound a little whiny, particularly to newer investors who are brimming with enthusiasm, but my sense is that many investors burn out or get bored with SFR investing after a while (maybe sooner, maybe later). They then do other things like pivot to notes or multi-family or whatever. Or maybe they find their groove again after looking around? I should qualify that I really have my systems down, and I'm not overwhelmed or anything. I'm just not that enthusiastic anymore and kind of curious what others have done when dealing with this.

I will answer your question about your concern that you are spending too much on your rehab because most people brag about $10k rehabs.  Here's the truth.   If they are doing a true rehab (like what you are doing) then there is no way they are spending only $10K.  I think I've had only one or two $10K rehabs in my career and they were homes in great shape.  If you're working on a 1500 square ft home, a $10K rehab is only $6.67/ft.  That's a light cosmetic rehab.  Nothing more. 

Once you start addressing mechanical and structural issues (which is what I do when I purchase a new rental), the costs easily escalate to $20-$30k and more.  To me, it seems like you are fixing what needs to be fixed.  Keep doing that and it will serve you well in the long run.

I think what many people in my area doing are buying and doing a $10K rehab, but leaving a lot of deferred maintenance.  That bill will come due eventually.

@Josephine S. have you considered just getting your real estate license?  A lot of wholesaling appears to me to be a lot of work to avoid licensing requirements.  Frankly, I think for a lot of people just getting the license would be worth it from a time and financial perspective. 

I put off getting my license for a long time, but finally got one this year.  The biggest downside is having to disclose you hold a license, but I have not found this to be an issue with sellers. (I'm buy and hold as opposed to wholesaling, but it's not much different from a purchasing perspective.)