PLEASE don’t buy from wholesalers if…
By Vena Jones-Cox
Many of you know that I participate in a weekly Haves and Wants meeting where people ask for, and often get, funding for real estate deals (you can attend too, if you want; it’s a benefit of being a member of www.COREERocks.com).
But almost every week, I’m seeing a thing that REALLY concerns me, and it looks like this:
Someone comes to the call with a property under contract. Sometimes they’ve already put down “non-refundable earnest money.” Now they need the funding, and the numbers sound pretty good:
“It’ll be worth $400,000 after repairs. It needs $50,000 in work. I need to borrow $250,000 to buy it and fix it.”
Sounds…not bad, right? Very fundable, right? But on these calls, we have a lot of very experienced investors who are very able to do some quick due diligence, so…
We pull up comparable sales, and we can’t find anything in the area that’s sold for more than $335,000. We look at the pictures, and it appears that the house could need $50,000 worth of roofing, siding, windows, gutters, porch rebuilding, concrete work, and landscaping just on the OUTSIDE.
So then the questions begin:
“Where do you see sales that justify a $400k price? Are these current pictures? Have you actually seen the property? Have you gotten a contractor estimate?”
And the answer is almost always the same: “The wholesaler gave them to me.”
Another common request is for secondary financing in a sub to or owner finance deal. An exchange call is the right place to ask for something like that, since most of your traditional sources of financing aren’t willing to be in 2nd position.
However, the ask often goes something like this:
“I found a subject to, and now I need $90,000 to close it. The ARV is $300,000, it only needs about $9,000 to make it rent ready, and the loan I’m taking over is $160,000 at 3.5% interest.”
“So what’s the $90,000 for?”
“The repairs, catching up the back payments, and the wholesaler’s profit.”
“What will it rent for?”
“$2,000 a month.”
“What’s the payment?”
“$1,900 a month.”
So…that leaves $100 a month BEFORE vacancy, maintenance, repairs, management, and all the other things that cost money when you own a rental.
And you’re going to make the payment on that other $90,000 HOW?
I understand the appeal of buying from someone who’s already found the property and negotiated the deal. Finding deals is work, and negotiating with sellers can be scary, especially when you don’t have a lot of experience doing it.
Having someone else do that part can be REALLY valuable. I’ve bought my fair share of properties from wholesalers over the years.
But the thing is, wholesalers are NOT on your side, and they’re NOT always competent or ethical.
The goal of most wholesalers (note that I said most, not all; there are for sure a few good ones around) is to maximize the amount THEY make on the deal they’re selling you. It’s not to get you a deal that will make YOU money. It’s not, in many cases, even to make sure they’re presenting you with accurate numbers. It’s to make money for themselves.
In short, “The wholesaler already ran the numbers” is not a substitute for knowing how to run them yourself.
You have to know how to find the ARV. Estimate the repairs. Figure out the actual expenses. Understand the financing. Determine whether there’s enough profit to justify the money and risk.
And here’s the thing: the people who bring these deals to our call and get told “no” are the lucky ones.
It’s a LOT cheaper to lose a few thousand in “earnest money” than it is to buy a deal like the ones I described above.
The ones who worry me?
All those people out there who neither know how to evaluate deals themselves, nor ever get that second look. They close, start the work, and discover, with their own money, that the value was overstated, the repairs were understated, or the “cash-flowing rental” loses money every month.
You need the same ability to evaluate a property whether you buy it from a wholesaler, through the MLS, or directly from the owner.
A wholesaler can save you the work of finding a property. They can’t save you the need to understand what you’re buying.