There have been some discussions lately about the legitimacy of wholesaling. Darren Sager has made a good case that wholesaling is, for all intents and purposes, similar to a net listing (which is illegal in many states). Furthermore, Illinois has severely restricted the practice of wholesaling and other states are likely to follow suit.
Still, others argue that it can be done properly with full disclosure and reasonable margins between the wholesaler’s purchase price from the original seller and the sales price to the end-buyer.
While I have misgivings about wholesaling and we don’t wholesale ourselves, we do buy from wholesalers from time to time. And there are plenty of wholesalers around these days. So it’s worth knowing the best way to buy properties from them as there are, sometimes, good and ethical deals to be found.
How to Find Wholesalers:
Wholesalers are not at all hard to find. You’ll meet plenty at your local REIA (Real Estate Investment Association) and they will generally have advertisements up all over Zillow, Trulia, Craigslist, etc.
Whenever you inquire about their properties, they will want to add you to their list. If you are active at all in real estate, they will be calling and texting you to get your criteria (price point, size of rehab, where you want to buy, etc.) so they can put you on their buyer’s list.
Thus, if you start getting on their lists, you will start getting inundated with potential deals. Most will be junk, but not all. From what I’ve seen, it’s extraordinarily hard to get a BRRRR deal or a 70% rule-quality flip from a wholesaler, but there are a good number of decent deals available from them (about 10% to 20% equity). Of course, there is a lot of trash as well.
Many (though by no means all) have very bad rehab estimates. They seem to have gotten better in the last few years, but I’ve seen estimates that were off by several hundred percent. I’ve also seen “rehab budgets” on houses that were bulldozer bait. So yes, you need to put together your own rehab estimate and not trust that of the wholesaler.
And while it should go without saying, some of them are a wee bit oversold. “40% Cash on Cash!” “25 cap rate!” “$50,000 under market value!” “This deal will cure cancer!” etc., etc. Again, value the property yourself.
What Wholesalers Are Looking For:
The second most important thing when negotiating with a wholesaler is speed—both the quickness with which you can get to the property to make an offer and the quickness with which you can close. Most want you to close in two weeks or so, which makes bank loans all but impossible. Buying for cash or having a partner or private lender lined up is the way to go here.
I’ve seen three ways these properties are put up to view.
Lockbox combo (which is given out when requested)
Group showing (usually when the property is occupied or rented)
Regardless, getting there quickly and making your offer quickly with a quick close is the way to get an offer accepted.
There also seems to be a bit of a myth out there that it’s “take it or leave it” and you cannot negotiate with a wholesaler. You most certainly can. Offer what you are willing to pay. Don’t just walk if you think the price is too expensive. Sometimes it will go highest and best as it would with a real estate listing, in which case you should, again, offer what you are willing to pay.
The Best Way To Find Good Deals With Wholesalers:
When it’s all said and done, the best way to find really good deals with wholesalers is to get to the top of their list. Wholesalers generally make their money with volume. (Indeed, the good ones always do, as those who make their money with huge margins above the price given to the seller are really pushing if not outright breaking ethical boundaries.)
For this reason, wholesalers often take their leads to their go-to buyers before blasting them out to their email list. This is where you want to be, as there is less competition and therefore a higher likelihood of getting a good deal. To get on this list, you need to prove that you can close.
As Brett Snodgrass points out, “The biggest asset you can have in this business is your word. If you say you’re going to do something and our relationship proves that I can trust that you’ll actually follow through with what you say, that is what will distinguish you from the crowd and get you at the top of my buyer’s list.”
The main selling point wholesalers offer to the original sellers is the ability to close quickly. Therefore, an end buyer who doesn’t follow through is a big problem for them. And thus, buyers who they know will close are gold for wholesalers. Most wholesalers are willing to take a bit of a discount to sell to someone they know will close.
Of course, you can’t prove you can close until you buy one and that might be hard the first time around. (Sending them a proof of funds or reference letter to build your credibility is not a bad idea.) But once you do close one, ask if they have something else.
Try to move up to the top of that buyer’s list, as that’s where the best deals are to be found. Don’t settle for one and done; try to string off a few in a row when you buy a deal with a wholesaler.