From Heather:
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.
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There are three components to a good wholesale deal;
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- 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.
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Scenario #1
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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!
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Scenario #2
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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.
