Real Estate Wholesaling And What Everyone Should Know About It
Real estate wholesaling is likely something you’re more familiar with than you even know. Suppose you have ever been at a stoplight or have a mailbox, which is pretty much everyone. In that case, I’m sure you are familiar with the term “WE BUY HOUSES” or WE’LL BUY YOUR HOURS FOR CASH IN 7 DAYS”, posted on countless billboards and printed on thousands of flyers sent to homes across the country.
The vast majority of these claims aren’t at all what the bold glossy print might indicate. Although claiming to be the purchaser, you are dealing with what is known as a real estate wholesaler and this is what real estate wholesaling is all about.
What Is Real Estate Wholesaling?
A real estate wholesaler is someone who contracts to purchase a home and then assigns the contract to someone else at a higher price. This is typically done through deceptive tactics and without full disclosure of the process to the seller.
Let me explain.
You have Sam, the seller, Walter, the wholesaler, and Bob, the buyer. Walter comes to Sam with an offer to buy his house for $150,000. Sam agrees to this price, and the contract is signed. Walter then takes the signed contract and assigns (sells) it to Bob at the cost of $200,000. When the closing happens, Sam sells his house to Bob, and Walter walks away with $50,000 for essentially introducing them to each other, without their knowledge.
Now, if this doesn’t infuriate you, or at least raise a few questions, then a) you are a wholesaler or b) I need to send you my address so you can mail me a check for $50,000 for doing absolutely nothing.
The example above is the best-case outcome for a seller who deals with a wholesaler, and I will tell you why. When a wholesaler makes an offer to “buy” someone’s house, they are making an offer in bad faith because they have no intention of purchasing the property.
How Real Estate Wholesaling Breaches Privacy And More!
Once the offer is accepted, the property is marketed through e-blasts at its new marked-up price to a list of potential buyers, including pertinent information, a property description, and photos of the home.
Many real estate wholesalers have thousands of buyers on their list. A common reason people may choose to sell their home quickly is to keep it private and avoid thousands of eyes. Not everyone wants to work with a realtor, have showings, or have pictures posted of their home. Sharing this information without the sellers’ knowledge or content is a major privacy breach.
What Could Be Worse Than Real Estate Wholesaling Causing A Privacy Breach?
Well, above all else, significant damage is done when the wholesaler doesn’t close on the property and can easily void the cleverly worded contract that allows for various reasons to do so.
I once sat down with a wholesaler who explained the verbiage on their contract to suit their needs. I asked what happens if they don’t find a buyer and what might be told to the seller as the reason they are voiding the contract.
His response to this was, “I just make some s*** up.” This is just a single instance of this, but unfortunately, it tends to be the rule and not the exception.
Fake Real Estate Gurus Teach Real Estate Wholesaling
Many fly-by-night “real estate gurus” pitch their course that teaches you how to get into real estate with no money or credit by learning how to wholesale properties. Can you picture them posing in front of luxury cars or private jets, wearing designer clothes and an expensive watch? I can!
As you can imagine, they may not have your best interest at heart. The focus becomes earning the most profit at the mercy of a home seller, who might end up with the short end of the stick.
Why Real Estate Wholesaling Looks Attractive On The Outside
With the rise of YouTube, Google, and Facebook, it has become easier than ever to access, absorb, and share information by anyone to anyone. Some do not have the best intentions, and it’s fair to say that real estate tends to be a hotbed for various get-rich-quick schemes for 3 reasons:
(1) Homeownership is a large part of building overall wealth. Countless books have been written on this topic, and there are many stories of people who have become millionaires and billionaires from real estate.
(2) You don’t need any kind of degree or formal education to invest in real estate. Loans can be used to pay for most or even all costs when purchasing a property.
(3) Lack of regulation invites a breeding ground for get-rich-quick schemes and is the third and most significant reason they occur.
There are many different ways to invest in real estate; you can invest in residential (houses), apartments, office buildings, etc. For this article, however, I am explicitly talking about residential investing.
The Lack Of Regulation
After the housing crisis in 2008, regulation was put in place to prevent predatory lending, which drove most of the immoral lenders out of the business because they now had a new rulebook that they had to play by.
As a former loan officer in the post-crash era of lending, I can safely say that today’s lending regulations are strict, leaving no loopholes to ensure consumer protection.
There is little or no regulation in place for an unlicensed buyer. You could even say that this is precisely the reason why real estate wholesaling exists. The large grey area provides a platform for tycoons to sell the dream of investing in real estate without experience, money, or credit. The exaggerated claims make it look easy and too good to be true because is it!
Teaching Real Estate Wholesaling
Not only is there an industry built on real estate wholesaling, but there is an industry built on TEACHING real estate wholesaling!
If you don’t believe me, do a Google or YouTube search on “real estate wholesaling” and check out all the “mentors” that want to teach you how to get started. This is insanity!
An unvirtuous cycle is created from this where these “mentors” teach people looking to get rich quickly how to begin wholesaling properties.
As you can imagine, there is very little taught on ethics here, which translates to people getting duped into “selling” their house to a wholesaler. Once someone goes under contract with a wholesaler, there is no good outcome. As I mentioned earlier, they use amicable agreements for themselves and make it easy to withdraw without repercussions.
Example Real Estate Wholesaler Lie #1
Deception and subtle lies are used by wholesalers throughout the entire process, from their marketing pitch until the sale of the home. We’ll go over the main lies here, but you can check out this article to see more horrific stories of what real estate wholesalers do.
Another common misconception is that they will tell you that they have their contractors look at the house and that you should leave during this time because it will be hectic. The reality is that they are setting up a time for potential buyers to look at the house, and they do not want you to catch wind of this.
Example Real Estate Wholesaler Lie #2
The biggest lie or cover-up of them all is how wholesalers will work with their settlement company to hide the spread that they are making on the transaction. On the settlement statement that is signed at closing, a ledger shows every debit and credit within the transaction and every instance of money changing hands.
It also shows who the buyer and the seller in the transaction are. The settlement statement shows the buyer and seller sides of the transaction on the same document in a normal situation. The buyer gets to see the seller’s costs and vice versa.
Since the wholesaler is not the actual buyer, the seller will know that person receiving an assignment fee paid by the buyer. Here is an example of a settlement statement I found online where an $18,000 assignment fee is paid at closing:
Because people tend to be less than excited about finding out they have been deceived and lied to in one of the most significant financial decisions of their lives, wholesalers make an effort to work with settlement companies who will help them hide this. Settlement companies that go along with this are guilty too, and I think it is a shame.
The 2 Outcomes From Real Estate Wholesaling
To summarize, two results occur when one engages a contract with a wholesaler.
First, they string you along and ultimately cannot find a buyer, voiding the contract, wasting your time and money.
Second, they share your private home information to their lists, find a buyer, and you sell your house for a lower price than if you sold directly to the end buyer, without the wholesaler.
Usually, when a seller finds this out, it is too late because it is at the closing table.
A Solution to Real Estate Wholesaling
We genuinely believe that we are the best solution to getting your property sold quickly, for the most money. But, even if you don’t use us, we still want you to be informed and know how to tell the difference between a wholesaler and a serious buyer. Here are a few ways to do this when you are speaking to someone interested in buying your house:
Follow These Tips To Avoid Real Estate Wholesaling
(1) Ask for some properties they’ve recently purchased. When a property is bought or sold, it is usually public record and can be accessed from the county property tax assessment. By looking at this, you can find out who the buyer of the property was. If their name or a business entity is the purchaser of the property, then that is a good sign that they actually purchase the properties they deal with. However, this is not always true. Sometimes a wholesaler will buy a few properties and wholesale the rest. So be careful using this technique alone.
(2) Look at the EMD (earnest money deposit) amount and when it needs to be delivered. On the contract, wholesalers commonly list a very small EMD ($100-200) or never specify how soon the EMD needs to be delivered to the settlement company. A serious buyer will typically do an EMD of 1% of the sale price or more and it will need to be delivered promptly (within a few days of the contract being executed). This tactic allows wholesalers low risk and is very convenient for them.
(3) Take time to review the contract to look for “escape clauses” and/or “assignment clauses.” Escape clauses are exactly what the name implies; they allow the buyer to get out of the contract. Wholesalers generally make these clauses very ambiguous so they can get out for any reason. “Assignment clauses” allow the contract to legally be assigned to someone else, the end buyer. Think of this as being a way for them to pop themselves out of the contract, and pop someone else in to take their place, at a higher price of course. This is a telltale sign that the person does not intend to actually purchase the property and therefore the offer should not be taken seriously.
Hopefully, this helps! We wish you the best of luck selling your home, and if you have any questions, reach out. If you are considering a cash home sale, click the button below to learn more!