I recently used a wholesaler to put a contract on an investment property. I also recently failed to put a contract on a different property using a wholesaler as well. So it hasn’t been all smooth sailing!
As part of sharing my experiences in purchasing this new investment property I wanted to discuss the use of wholesalers and my personal experience with them. I think you will find it interesting.
Recently, I have done a lot of reading about Real Estate investing. I am actually surprised by how many books, articles, seminars, and websites exist dedicated to this topic. I suspect that for some of these people, writing about Real Estate investing is more profitable than actually doing it. One of the types of investors that is frequently mentioned, but rarely explained, is wholesalers. Actually, the way it is explained is usually not very positive – it seems complicated and shady. But it isn’t!
So what is wholesaling? Basically it is a way for Real Estate investors to help connect buyers and sellers and collect a fee. And we have all seen the signs “We Buy Houses For $$CASH$$ – Any Condition” posted at high traffic intersections. Those signs are posted by wholesalers and this post will discuss how they help people and make a profit doing it.
Example of a Wholesaler
So let’s dive right in. Here is a wholesaler in the mid-atlantic region with a website and blog. You can see that this particular investor is running a business.
Yes, this is not a charity. And running a business is actually a great thing.
You can see from this site that the investor behind it is serious. This is a professional site and there is a lot of automation and technology behind it. That wouldn’t be the case if this was some fly by night operation.
The other thing you can see is that the testimonials are pretty specific. I’ve seen some testimonials that are like, “This system made me millions and the teacher walks on water and turns woodchips into gold – J. D. in Arizona.” And of course you roll your eyes and move on.
It is always interesting to see testimonials with real names and locations. You could probably look these people up on Facebook or call them to find out about their experience.
Wholesalers Intend to Make a Profit – Obviously
I am surprised sometimes at negative reactions to wholesalers. People say, “well this investor is just trying to make … (gasp)… a PROFIT.” Like that is a bad thing.
Doesn’t everyone try to make a profit when they go to work? They figure the money they earn each year should be more than the cost of clothes, transportation, and food. That’s generally the idea I have! My family thinks this is pretty important since they need food, clothes, and toys at Christmas.
So there is nothing wrong with doing something for profit. In fact, profit has motivated some of the best discoveries and inventions in modern history!
A Helpful Service
The great thing about wholesalers is that they are motivated to make a profit. By doing so they provide a service that really helps people. Think about it – what could be worse than having a house payment that is too high but the house is in need of major repairs?
Many people find themselves in this situation and are not able to afford to repair their house and wait six months to sell it through a real estate agent. By the way, many real estate agents are not worth the fee they charge but that is a different story!
And that is just where wholesalers help. They deal with people who need a sale of their property quickly, with no red tape. They may not have the time or money to prep the property for sale. This creates an opportunity for the wholesaler to help someone unload their property.
But this also creates an opportunity for an investor to come in and do all of the things the seller was unable or unwilling to do. And the investor is willing to take on this burden because they will generally purchase the house at a relatively steep discount. This discounted sales price is the price the seller has to pay to unload their property quickly. And it is also the benefit the investor receives for taking a run-down house and making it nice and desirable again.
How wholesaling Works
And this brings me to the nuts and bolts of how wholesalers operate. It is actually incredibly interesting! And yes like all businesses there are some who do it well and others who are unethical con artists.
Here are some tips for you on avoiding the con artists:
“Ha ha! You fool! You fell victim to one of the classic blunders – the most famous of which is “never get involved in a land war in Asia” – but only slightly less well-known is this: “Never go in against a Sicilian when death is on the line!””
Hmm, now that I read it again, I think that quote is dealing with something else, I’ll check that and get back to you.
But let’s look at the way wholesaling works.
It all starts with the seller. They have an issue. Actually, a lot of the sellers have many issues! People get behind on their mortgage payments, let their house fall into disrepair, need to leave the state (or the country!) immediately, or may have health problems. Surprisingly and sadly, many people have a combination of those factors all bearing down on them at one time.
Because they need to sell their house immediately, they often don’t have the time or resources to prep their property for a typical sale by a real estate agent.
These people need help and if it were not for wholesalers their properties would generally go into foreclosure or simply fall into complete disrepair and be torn down.
Now we turn to another person. This person is interested in working hard and making a profit. Like we discussed, there is nothing wrong with that! They read that Real Estate investing is a good way to provide a valuable service to people while also making a reasonable return on their investment.
So the investor is out there looking for houses to purchase in order to rent to tenants and make a reasonable return.
Where should they be looking? Well they could look on the Multiple List Service (MLS) which is not a bad idea. But an investor will often find that using the MLS and working with Real Estate agents is challenging and doesn’t result in finding houses at a steep discount.
The bottom line is that real estate agents, unless they specialize in it, don’t generally like working with investors. Their whole business is oriented in serving a different clientele. There is nothing wrong with that! It is good business and party of a targeted marketing strategy. They are more efficient working with retail buyers.
So the best place for the investor to look for discounted properties is generally not on the MLS or through the easiest methods used by all retail buyers. There won’t be many good deals there anyway.
Investors end up looking at for sale by owner, rehabs, or wholesale properties in order to find properties at a discount so they can earn a return on their investment.
This is where the wholesaler comes in. He is basically going to connect the desperate seller with the diligent and hard-working investor. This connection will allow the seller to get out of their tough situation and have quick cash, while also allowing the investor to purchase a property at a big discount.
Like 30% to 70%. Yeah the discount could be that big because the investor may need to put $100,000 into renovating the property.
And like in other areas of commerce, the more sophisticated businesses buy and well their products at …. wait for it… wholesale. Yes, wholesalers in Real Estate fill a very similar role that wholesale, let’s say fish buyers, play on a dock. As I said, I’m obsessed with reality television shows and right now what comes to mind is Wicked Tuna!!!
So on that show the fishermen in New England catch these big beautiful Atlantic Bluefin Tuna and they need to sell them. These guys are not going to also open a restaurant and make some frou frou tuna meal and serve it to their wealthy patrons.
If you’ve watched the show you know that running a high-priced seafood restaurant wouldn’t be a good fit for these fishermen.
Help – I Have Need to Sell My Smelly Tuna
But they do want to get paid something for their fish. They have a problem – a big smelly tuna on their boat that they need to sell fast! That’s just like these poor sellers of Real Estate. They have a big smelly tuna of a house that no one wants to touch with a ten foot pole.
So the fishermen come to the dock and drop off their tuna and get paid right there. Bam! Quick money and they go on their merry way.
Do you think the fish wholesaler took advantage of the tuna fisherman? Not at all. That’s how business works. The wholesaler turns around and sells the tuna to a restaurant.
And guess what – the wholesaler is going to sell the tuna at a much higher price than he just purchased it for. And the restaurant will grill it and put some lemon on it and sell it for 3x what they purchased it for! To me, that seems like a smart way for the restaurant to get some cheap tuna, the wholesaler to make some quick money, and the fisherman to have a great living!
Notice how the wholesaler doesn’t really need to do much with the fish. His job is all about knowing the fisherman, being at the docks, and then cultivating relationships with restaurants and seafood stores in the area. He’s a marketer and a relationship builder. But he provides an essential service and becomes a tuna expert in the process.
Think about that the next time you eat tuna in a restaurant.
So finally this brings me to assignment. Basically the unique thing about Real Estate wholesalers is that they use an assignment contract.
This just means they agree with the seller on a price for the property and lock that price in through a contract which they can assign to someone else.
So they may offer the seller $50,o00 for a property and get a signed contract to purchase at that price but which allows them to assign it to another buyer.
They go find an investor who is willing to buy that property for a slightly higher price and the wholesaler keeps the difference. It’s a beautiful thing when it works.
Consider Using Wholesalers
I highly recommend wholesalers – but be careful. Just like anything you need to do your research and use a reputable business. I recommend using the wholesaler that was mentioned above. He found me the house that I put a purchase contract on and hopefully it will close this coming Friday.
I have been planning ahead to work through the list of things that need to be done before the property can be marketed for rent. The property manager came to view the house and the home inspection is done. Thankfully the home inspection didn’t reveal any major show stoppers. The house is in great condition and the property manager gave me good news on the potential monthly rent that I should expect.
Overall – I am very happy with my experience and can confirm that after closing! I’m guessing we have an 80% chance of closing Friday. In my experience there are often things that come up at the last minute to push closing out. I’m not too worried about a delay but am concerned that the deal go through because I think it is a good one.
Have you used a wholesaler before? What do you think?