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 who want to sell a house in 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 setting them up for failure. I’ve been strung along by some pretending to be a “friend” of the seller, and unethical middlemen who have never declared to the seller that they, the wholesaler, will not be buying the property. I’ve had wholesalers lie to me to complete a deal. I’ve almost been to court because of bad wholesalers selling properties unethically.
Good Wholesalers of Real Estate
The wholesalers that I work with are very 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.
The good wholesalers are the ones who:
Disclose to their seller that they are seeking to wholesale the property and/or they are cash buyers who can close on the property if a buyer is not found on time for the target investments property. A good wholesaler will disclose to the seller what they are doing so that there are no tricks, no cons, and no misunderstandings with the house they are wholesaling.
Evaluate the Investment Property
Your main job in buying from a wholesaler is to be able to evaluate each investments property to make sure it is profitable for YOU.
Don’t allow the fear that a wholesaler may be unethical deter you from buying wholesale deals. Think about it, when you are dealing directly with a motivated homeowner, do you know if they are ethical? Of course not. And, a lot aren’t. I’ve had sellers tell me they owe $50K on a house, and when I pull the title report there’s $150K in liens.
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 the 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. Approach buying a wholesale house in the same way.
Do Your Due Diligence on Real Estate
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 formulas, and create the offer that makes financial sense for your investing business.
How Much Profit Should a Wholesaler 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 deals, inspect all the houses, and negotiate all the deals, just to find the few that provide significant profit for both 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 again. I’ve 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 realtors would have for listing it.
Closings for Property Investments
If you are bringing a lender into the picture and having to get financing, you may have to work with the wholesaler to structure the deal to get passed 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 your T’s crossed and I’s dotted to have your financing in place on any real estate deal.