Wholesaling is an absolutely fantastic way to earn money quickly as you begin to grow
your real estate business. However, what you don't always get is the "realistic" side of
wholesaling, especially when you are beginning. There are three components to a good wholesale deal.
These components are:
- Finding a truly great deal
- An executed contract (must have earnest money to bind the contract)
- A buyer
This article is not a report on how to wholesale properties, but what to do (or not do)
when you have a deal and how to handle some of the less than reputable people in the local industry
and protect yourself from being taken advantage of. A successful investor once told us with regard to
this business: "Pigs Get Fat, Hogs Get Slaughtered" and that is a good rule to live by
because if you try to take advantage of people, you WILL get burned.
We have had two problems recently surrounding local wholesalers.
- Scenario #1
We put a property under contract for $65,000. The comps put it around $100,000 fixed up and ready to
go. We contacted several people that we knew in the area and assigned the contract. We were up front
with our buyers and told them what we had the deal for and asked them to make us their best offer.
After some negotiation, we came to agree of a price of $4000 for the assignment. We were happy and
they had a good deal.
The problem was, like many of these companies down in South Florida, the people we assigned it to
were trying to assign it to another buyer. When we asked them about this, they told us that if their
buyer did not close, they were prepared to close on it themselves. The truth was, they never had any
intentions of doing so and did not tell us when their contract fell through with their buyer. The put
inflated numbers on their web site, trying to market the property way above real market numbers. In
fact, they were trying to wholesale it at $80,000. Yes, they were trying to make $11,000 as a middle
wholesaler. They didn't find the property, nor were they going to rehab the property, so they really
had no right to earn $11,000 on the deal, in my opinion anyway.
Our frustration had nothing to do with the fact that we were making $4000 on the deal because, in our
opinion, that was a fair fee for us. Our problem was with the fact that they were taking our deal and
misrepresenting numbers to other investors. In the end, they never closed the deal and we didn't make
any money, upset the seller and were involved in an overall "bad" business decision. We
learned and do not do business with that company anymore!
- Scenario #2
We have worked very hard in one particular neighborhood in South Florida. In the last few months,
we have flipped/rehabbed 6 properties in a 2 square mile radius. We know the neighborhood well and
can quickly and accurately assess prices, costs, etc.
We were called with a "great deal". We could pick up a home for $92,000, which according to
our estimates, would sell around $135,000-$145,000 quickly. The red light should have gone off when
they refused to show us the original contract. We agreed, however, under the condition that they would
produce it for our lender and attorney.
If anyone feels the need to hide how much they are making, you should be very concerned! At the end
of the day, there were over $22,000 in flip fees before we even had control of the deal. Now, on a
$70,000 deal, that is almost 30% in flip fees. This went through three people before we even had the
rights to the contract. Again, I really disagree with middle men making $10,000 on a deal that they
neither found nor closed on. These are the exact same companies that make wholesalers and wholesale
companies look bad.
At the end of the day, we didn't close on the deal. We never saw the original contract. In fact, we
found out about all these fees on the HUD statement the day of closing. It normally doesn't happen
that a buyer walks away from the closing table. We did and other investors may as well if they don't
like your ethics. Not to mention, we will certainly be telling anyone that we come in contact about
these people and their business practice.
As investors, we need to stand up to these people and make sure that they stop taking
advantage of new investors, investors that don't know how to find realistic numbers or produce
realistic estimates. If people continue to work with these companies, then new investors will continue
to get burned. This affects all of us because unfortunately, as investors, we are grouped with all of
the other investors, those that are ethical and those that are unethical.
Just remember to always try to do the right thing, not to take advantage of other people
and to truly understand and appreciate the value of long term, ethical business relationships. You
will not retire on one deal, but on the efforts of hard work and perseverance.
It is always better to disclose to your potential buyers so that you don't run into
these situations. It is better to have someone walk away from the deal in the beginning than at the
closing table. You will always protect yourself best by being honest and up front. Real and serious
investors will be okay with you making money on an assignment, as long as you are fair and leave
something on the table.
Just remember, "Pigs get fat, hogs get slaughtered". Keep that as a rule of
thumb and you can and will make money wholesaling. Find your deal (60-70% of After Repaired Value),
sign your contract, and find your buyer. More to come in our wholesaling section....
Stacy Holder and Heather Seitz began their real estate investing career with absolutely nothing! They
learned to leverage other people's time, money and resources to purchase over $2 Million in real
estate in their first 8 months.
They have just completed two products, The
"Complete Guide to Getting
Started" and "The
Complete Guide to Organized Rehab."
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