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Best Practices for Wholesalers | By: Multiple Speaker(s)

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Best Practices for Wholesalers
By Vena Jones-Cox

This is one of a series of “Best Practices” papers I created a number of years ago for various real estate strategies. Let me know if you like it, and I’ll publish the rest in future eLetters.

Definition: Wholesaling is the practice of negotiating deals on various types of properties at prices low enough that an investor/buyer with the usual profit requirements for his strategy, property type, or area can pay the wholesaler a fee for the property and still meet his normal profit requirements.

In general, the fee that the wholesaler receives is in the form of an “assignment fee” for the contract–in other words, he is paid for his right to purchase the property at the agreed-upon price and terms, and the assignee then purchases the property directly from the seller. In some cases, the wholesaler will purchase the property and then quickly resell it. When the wholesaler purchases the property with his end buyer’s money, this is called a double closing.

Key characteristics of a wholesale deal include: the wholesaler himself does no repairs or improvements to the property; the buyer is an investor who intends to re-sell the property or hold it for investment after the repairs are made; the transaction takes place very quickly–usually in a matter of weeks.

Argument: Although wholesalers have not come under fire in the community at large, as have landlords, lease/option practitioners, and creative buyers, they have (erroneously) been lumped in with “illegal flippers” in some cases. The main arenas in which wholesalers have acquired a poor reputation is among real estate agents and the investment community itself.

While many investors rely on wholesalers to find the deals that they ultimately purchase, many more consider wholesalers as a group uneducated at best and rip-off artists at worst. In some cases, this is a fair estimation of the business practices of certain practitioners. As in any business, wholesalers can choose to provide a good service to an experienced clientele, or they can choose to prey on an inexperienced clientele. And as in any business, providing a bad product is a way to achieve short-term success at the expense of long-term customers and greatly increased liability.

Like all real estate transactions, wholesale transactions CAN be both successful and beneficial for all parties; and like all real estate transactions, they can be, through intentional malfeasance or accident, dangerous to all involved. Therefore, the best practices for wholesalers are aimed at the following outcomes:

A positive experience for the seller, who is promised and receives a relatively quick, hassle-free sale of an unwanted property

A positive experience for the investor/buyer, who gets a property that meets his requirements for profit and exit strategy

3. A profitable, low-liability experience for the wholesaler himself

Best Practices: Purchasing
The typical wholesale purchase is fairly straightforward: the wholesaler agrees to a price with his seller, then sells the contract to an investor/buyer, who purchases it from the seller for cash. A “failure” in this area occurs only when the wholesaler is unable to sell the contract to an investor/buyer, and is therefore unable to satisfy the seller’s need to sell the property. As with the purchase of any property, this is, at times, unavoidable–previously unknown defects in the property or the title can crop up after the contract is written, making the purchase unfavorable for the wholesaler and his buyer. However, as this is often a major emotional (and occasionally financial) burden to the seller, this failure should be avoided wherever possible. Therefore, before agreeing to a contract, a wholesaler following best practices will:

Become educated in the skills required to evaluate properties. These skills include the ability to correctly estimate the after repaired value of a property via the appropriate appraisal method (comparable or income method) for the property; the ability to inspect a property for major structural, mechanical, and other defects; and the ability to estimate repair needs and costs for most defects.

Become familiar with the general profit requirements of local investors. Although a great deal of the wholesaling education available in the marketplace today implies that there is a single 1-size-fits-all formula for calculating an appropriate offer price on a property, this is clearly not possible, much less true. Inserting a profit margin of 20% for an investor/buyer for a property with an after-repaired value of $500,000 results in a very acceptable profit for the buyer of $100,000 on that property; doing the same for a $70,000 property results in an unacceptable $14,000. It’s rare to find an area where the modest homes generally targeted in wholesaling fall within such a large range; therefore it’s common that investor/buyers in a particular area have a minimum profit margin that they will accept, and that this profit margin will vary from place to place. Knowing what this profit margin is allows the wholesaler to calculate offers at a price that buyers will be willing to pay, and therefore to sell his deals as expected. Networking with investor/buyers–most often through local investment associations–is a good way to get a handle on these requirements.

Do not formalize marginal deals. Unfortunately, it is the practice of some wholesalers to place deals that they know to be extremely marginal “under contract”, in the hopes that if they do this enough times, some of them will eventually sell.

Because wholesalers use contracts that allow them to get out of an unfavorable deal via an inspection contingency or liquidated damages clause, this practice is not “dangerous” to the wholesaler in the sense that he will be forced to purchase his bad deal. However, this practice is unfair to the seller, who has very little chance of having his expectations fulfilled, to any agents involved (in fact, this practice generates the #1 complaint that real estate agents have against wholesalers) and the buyers who have their time wasted when they spend time on deals that cannot meet their profit requirements.

When a wholesaler knows that a deal is marginal at best, best practices would require that he either: 1) buy an option to purchase the property, which clearly indicates to the seller that he may or may not purchase the property or 2) pass on the deal until such time as he can put it under contract at a more reasonable price.

If a property under contract will not close, notify the seller immediately. Again, since wholesalers use contracts with contingencies that give them easy “outs” when they can’t sell a contract, there is a temptation to avoid a difficult conversation with a seller in which the wholesaler notifies him that he will not be purchasing the property. For the sake of fairness and professionalism, a seller should be notified as soon as the wholesaler knows or suspects that the contract will not close, whether due to unexpected defects or the simple inability of the wholesaler to find a qualified buyer. A major complaint of professional wholesalers is that their jobs are made much more difficult by non-professionals who put properties under contract, only to let the contract expire without any word to the seller as to the outcome. Sellers treated in this way become extremely suspicious of all investors, and are left confused and angry by the process.

Best Practices: Selling

Since the “customer” in a wholesale deal is another investor, “success” to the customer is going to be defined by whether or not he purchased a deal that fit his goals as to location, condition, and, most importantly, profit. From the point of view of the wholesaler, success will be achieved when the wholesaler receives his assignment fee as promised, when the closing goes as expected, and when the deal is completed from the point of view of the buyer, seller, and wholesaler.

Ideally, the wholesaler following best practices will sell exclusively to experienced buyers who understand the process of renovation, and who will purchase the property using non-conventional financing (which presents enormous problems in terms of seasoning issues). More specifically, the wholesaler will ensure a smooth, profitable, and ethical transaction in the following ways:

Do NOT offer properties for sale that are not “Under Contract”. Some wholesalers prefer to rouse buyer interest in a property before committing to purchase it. This presents 2 major problems. First, it gives the buyer the opportunity to legally negotiate his own deal directly with the seller. If the seller has not committed, in writing, to sell the property to the wholesaler, he is free under the law to sell it to anyone he pleases. The wholesaler in this case has no legal or practical right to complain if the seller “goes behind his back”.

The second problem with marketing a property that is not “under contract” is that this can easily be construed as “acting as an agent without a license”, which is a crime. The wholesaler’s legal right to receive compensation in a wholesale deal is based upon his position as a principal in the purchase contract. Without a purchase contract, it can easily be argued that the wholesaler is “receiving compensation for the sale of a property on behalf of another”.

Do NOT wholesale properties to investors who can’t perform, or who can’t profit from the deal. Investors who do not have access to cash, private money, or hard money will be unlikely to be able to get a conventional mortgage to purchase the property–a situation which is unfavorable both for the buyer who’s put up a non-refundable assignment fee and for the seller, who will not meet his goal of selling the property. In addition, buyers who don’t have the skills, knowledge, or connections to complete the renovations that most wholesale properties need should not be considered as potential assignees of the contract.

It is especially important that wholesalers who are assigning contracts that are “subject to” some type of seller financing do not do so unless the buyer is ready, willing, and able to fulfill the terms of the agreement and make payments on the underlying financing no matter what the circumstances. In fact, I would argue that a wholesaler following best practices would not assign such a contract at all, but would remain responsible for making any agreed-upon payments and make the buyer responsible for payments to the wholesaler, not to the seller.

Do NOT set wholesale prices based on unreasonable appraisals or repair estimates. One of the biggest complaints experienced buyers have about wholesalers is that the wholesalers present properties at prices that literally cannot be defended based on an objective ARV appraisal or repair cost estimate. Unfortunately, some “wholesalers” go so far as to order professional “appraisals” to defend these high prices, thus convincing unsuspecting or inexperienced buyers to pay an indefensibly high price for a property that cannot, at that price, create a profit for the buyer.

Get payment for the contract up front, but follow the deal through to a successful closing. A buyer who has not committed cash up front for the assignment of the purchase contract has nothing to lose by not closing, which puts both the profits of the wholesaler and the hopes of the seller at risk. A buyer should pay the entire assignment fee to the wholesaler (or into escrow) prior to the assignment of the contract, and the assignment documentation should indicate that this fee is non-refundable unless the SELLER cannot or will not perform on the contract.

On the other hand, the wholesaler should make it part of his responsibilities to make sure that the closing occurs, even when he is no longer officially party to the contract. In this way, the wholesaler assures that both the buyer and the seller get what they expect and hope for from the deal.

5. Do not work with buyers with bad overall business practices. Some investor/buyers have a poor reputation in terms of the way in which they behave in their business dealings. Examples include buyers who attempt to intimidate their sellers into renegotiating at the closing table, and buyers who are involved in illegal flipping or predatory lending, or who are slumlords.
A wholesaler following best practices will make every effort to avoid these buyers, as they are a blight on the community and the investment business in general. “I can’t control what my buyer does” is NOT an adequate excuse for selling to unethical investors–while the wholesaler can’t control “what a buyer does”, he can and should control who is allowed to purchase his deals in the first place.

Reprinted with permission of Vena Jones-Cox. To get more free articles and tips, subscribe at

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