or How to Buy a house. . .. . . . . from a wholesaler.

Ever heard of Buyer Beware? 

There are so many newbie wholesalers in the Richmond market who want to wholesale houses that some deals are just not deals at all.  Some are just plain dangerous to take on.  A current wave of multi-level marketing is "educating" wholesalers and setting them up for disastrous results.  A recent testimonial in my email inbox:

Two months he strung me along…never to close on his contract. I turned down to other offers after I signed with him. Oh Well — A Richmond seller.

I’ve also been played 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 dealers.  So, some are unscrupulous and will take advantage of unwary buyers and unsuspecting sellers.

Good Wholesalers

Most wholesalers that I work with in this industry are very ethical and provide you a valuable service. I can name several that come to mind. 

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 anyway, even if a wholesale buyer is not found on time. 

A good wholesaler will disclose to the seller what they are doing so that there are no tricks, no cons, and no bad taste. 

Evaluate the deal

Your job in buying from a wholesaler is to be able to evaluate each deal 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 home owner, do you know if they are ethical? Of course not.

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 the homeowner to tell you whether it’s a good deal or not. You expect them to advertise the best points, and you’ll determine, based on your own criteria, if it makes sense or not.

Approach wholesale buying the same way.

Due your own diligence

When you receive a wholesaler’s ad for a property, your first job is to determine whether to pursue it further or not.

Quickly weed out those that do not meet your investment criteria.  If you are not interested in the deal at this point, there is no need to validate any of the data. 

If you want rentals in Richmond and the ad is for land in Buckingham, you can quickly rule that out.

If the property does meet your criteria, then verify all the information, apply your own formulas, and create the offer that makes financial sense.

How much profit should a wholesaler make?

When buying from a wholesaler, find the pricing number that works for you. 

Don’t worry about the size of the assignment fee that the wholesalers is asking for.  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. 

Sometimes it may seem that 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 remember the marketing effort that goes into attracting the motivated sellers, and the time requirement to sift through all of the deals, visit all the houses, negotiate all the deals, to find the few that provide significant profit for both parties.

One investor writes:

"I’ve purchased numerous wholesale deals in my career. I’ve never cared what the wholesaler made because I negotiated a deal that worked for me. 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."

If you can purchase at a price that makes financial sense, the wholesaler’s profit should not matter. 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 them down a few more grand, you may very well convince that wholesaler not to do business with you again.

Creative closings

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 pass 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.