It seems that it is becoming more and more difficult to find great properties to purchase to flip or rehab and rent. Anything that hits the MLS that is priced appropriately seems to fly off to an investor. If you are struggling to find properties to purchase, you are not alone. It’s the times we live in.
Enter the wholesaler. If you are unfamiliar with what a wholesaler does, let’s bring you up to speed. A wholesaler is a hunter. They knock on doors, send out letter, make cold calls, and do all of those ugly things that most people don’t want to do. They, themselves, would probably be real estate investors themselves if they had money. There are many ways that wholesalers work, but usually they will find a person that is willing to sell their home at a great price and then they will enter into an “assignable” contract with them. The assignability allows them to transfer the contract to a third party buyer for a fee. Sometimes, they will borrow the money to close on the home, but they will immediately sell the property (sometimes the same day) to an end buyer. The bottom line is that the wholesaler will hunt properties and then, when they get one under contract, they will bomb out marketing package to investors that they know to find an end buyer.
Buying from wholesalers can be quite lucrative, but there are five things that you should really know before working with one.
- Valuation: Wholesalers will prepare a marketing package to entice you to buy. Of course, if you just read the package, you’ll come away thinking that you got a steal, but you have to step back a bit and do your own math. Wholesalers tend to over-inflate the ARV (as repaired value) of the property. They will often use inappropriate comparables to justify their pricing. For instance, just this week we were presented with a wholesale property with great looking single family home comparables in the area. When we did our own due diligence, however, we discovered that the home the wholesaler was trying to unload on us was a modified mobile home. Never use the value that a wholesaler gives you. You must do your homework before buying.
- Rehab Budget: Just as wholesalers will over-inflate the value of a property, they will underestimate the rehab budget that you will need to pour into it. In most cases, the rehab budget that they use to come up with their figures is usually laughably low. We always have one of our contractors tour the property to provide us with a more accurate budget figure. We suggest that you do the same.
- Timelines: Real estate contracts are filled with critical dates. A buyer must complete their inspections by a certain date and they need to close by a certain date. The issue is that the wholesalers usually enter into a contract before they market it to buyers. Although it might take them some time to find a buyer, those dates don’t change. Be sure to pay attention to all aspects of the contract that they enter into. You are assuming all of the terms, including the closing and inspection dates, if you purchase the property.
- Does the Seller Know?: In many cases, the wholesaler represents to the seller that they will be the end buyer. More often than not, the seller isn’t even aware of the assignability clause. It’s not that they’ve done anything illegal, but it could complicate matters when they find out that they are selling the property to someone other than they agreed to.
- The MLS: A wholesaler will usually wait until they have a property under contract before they send out the marketing package. We’re seeing an increasing number of cases where the wholesaler has yet to lock up the property. We often see properties that are presented to us that are still listed as “active” on the MLS. You have a moral decision to make in this instance. Do you work with the wholesaler that brought it to your attention or do you go directly to the seller and cut the wholesaler out of the deal? That is a question that only you can answer, but the scenario happens more that you might think.
Wholesalers can really be a great way to find water in the desert. When you are struggling to find great deals, wholesalers might be able to help. We rarely tell a wholesaler not to run deals by us. We don’t buy from them often, but we have found that they can be a good source of deal flow provided we do our own homework.