July 27, 2018

How to Buy Properties from a Wholesaler

Ever heard of the Latin phrase “Caveat Emptor”? It means “Buyer Beware”.

There are so many newbie wholesalers in the market today who want to sell houses... so much so, that a lot of “deals” are just not deals at all. Some are just plain dangerous to take on. The current wave of multi-level marketing is “educating” wholesalers and unfortunately, setting them up for failure. I’ve been strung along by some pretending to be a “friend” of the seller, and unethical middlemen who never declared to the seller that they, the wholesaler, will not be buying the property. I’ve had quite a few wholesalers actually lie to me to complete a deal. I’ve even almost been to court because of bad wholesalers selling properties unethically.

Good Wholesalers of Realty in Texas

The wholesalers that I work with are highly ethical and provide a very valuable service. They are an indispensable part of my real estate investing business, and make it so that I don’t have to go out and hunt real estate as much as I used to in the past.

The good wholesalers are the ones who:

• disclose to the seller that they are seeking to wholesale the property, and/or
• are cash buyers who can close on the property if an end-buyer is not found on time for the target investments property
• disclose the complete wholesale process to the seller, so that there are no tricks, no cons, and no misunderstandings with the property sale

Evaluate the Investment Property

As an investor, your main job in buying from a wholesaler is to evaluate each investments property to make sure it is profitable for YOU.

Don’t allow the fear of potentially unethical wholesalers deter you from buying wholesale deals. Think about it, when you are dealing directly with a motivated home owner or seller, do you know if they are ethical? Of course not. I have personally come across quite a few motivated sellers that were not very ethical themselves. For instance, I once had a seller tell me that they owed $50k on a house, and when I pulled the title report there was over $150k in liens against the subject property.

When you hunt real estate bargains, look at a wholesaler just like any other home seller in the field; no better, no worse. You don’t try to buy a house from a homeowner, and ask them to tell you whether it’s a good deal or not. It’s like asking a car salesman if you should buy a new car. Their answer is “Of Course!”. You expect them to advertise the best points, and then you will make the decision, based on your own due diligence, if it makes sense or not. Always approach buying wholesale properties in the same way.

Do Your Due Diligence 

When you receive a wholesaler’s ad for a property, your first job is to decide whether to pursue it further or not. Quickly weed out those that do not meet your investment criteria or that of your investor group. If you are not interested in the deal at this point, there is no need to verify any of the info.

If you want single family rehabs and the ad is for an apartment building, you can quickly rule that property out. But, if the property does meet your criteria, then verify all the information. Use your own investment formulae, and create the offer that makes financial sense for your investing business.

How Much Profit Should Wholesalers Make on Properties?

When buying from a wholesaler, find the buying price that works for you.  Don’t worry about the size of the assignment fee that the wholesaler is making.  As long as the deal works for your numbers, and you close on the deal, the wholesaler will be eager to bring you business again and help make you a little wealthier.

Sometimes it may seem like the wholesaler makes a lot of money for taking none of the financial risk and without doing anything to the house (usually not even taking title). But, you have to take into consideration the marketing effort that goes into attracting the motivated sellers, and the time requirement to sift through all of the properties, inspect all the houses, and negotiate all the deals, just to find the few that provide significant profit for all parties.

An investor I know recently shared this:

“I’ve purchased quite a few wholesale deals in my career. I’ve never cared what the wholesaler made because I negotiated a deal that worked for me and my business. Regardless of what the wholesaler made, I was happy with my profits. I didn’t care if he made hardly any profit, or if he made a huge profit. It was irrelevant to my calculations. All that mattered was that 1) I was getting a good deal, and 2) that it fit my property investments goals.”

If you can purchase at a price that makes financial sense, the wholesaler’s profit margin does not matter to you. If it is large, that just means that he or she did a good job locating and negotiating a great deal which made it possible for you to have this opportunity to make money from the deal. But, if you balk at the wholesale assignment fee or try to nickel and dime them down a few more grand, you may very well convince that wholesaler not to do business with you in the future. I have already scratched a couple of investors off my list just because they tried to change the deal at the closing table because they didn’t like that I was making $4-5K on the property; as much money from the deal as a realtor would have just for listing it.

Creative Closings for Property Investments

If you are bringing a lender into the picture to provide financing, you may have to work with the wholesaler to structure the deal to pass through some lending requirements. There are creative ways to avoid seasoning issues and assignment fees on the HUD1, and you will need to work with the wholesaler and the seller to get it done. Cash is king in this business, but a good wholesaler will work with you if you have all your T’s crossed and I’s dotted to have your financing in place on any real estate deal.

Good Luck & Happy Investing!

Erudite Investments, LLC