Yesterday, Carol, Russell, Sue Ann, and I went to look at a prospective wholesale deal we’re calling either the Antelope House or the Home on the Range because of the toy deer in the front yard. This was a frustrating trip. The wholesaler didn’t have the three things you expect a good wholesaler to have when asking you to meet at the property: the keys, a firm idea about what he wants to sell the house for, and an understanding of the redevelopment business model.
But there are newbies in everything, and I’m going to put down his performance to a lack of experience rather than to a lack of respect for the business or us.
In real estate investing, wholesaling is a process whereby the wholesaler:
- Finds a (hopefully good) deal on a sad house
- Negotiates with the current owner to establish the purchase price of the house
- Signs a contract to purchase the sad house
- Markets the contract to other investors at a premium
- (Hopefully) finds another investor who is willing to pay the price the wholesaler needs for the property
- Assigns the contract to the new investor who actually closes on the deal
Some people will tell you this process is illegal if the wholesaler is not a licensed real estate agent, It is, in fact, illegal in some states unless the wholesaler actual takes title to the property. This strategy is called a double-close because the title changes hands twice: once when the wholesaler buys it from the original owner and once when the final investor buys it from the wholesaler. In Texas, sale and assignment of the contract is legal because the wholesaler is marketing an equitable interest in contract itself, not the real estate.
In this case, Sue Ann and I drove 40 miles each way (Russell and Carol drove farther!) only to waste our time with a wholesaler who was at best unprepared. He offered us the contract at nearly full retail prices without giving us the opportunity to look at the inside of the house. He said it would take about $15-thousand to repair the house, which would place the total cost of acquisition just north of what we could expect to sell it for—if his numbers were right. He said he would fix every flaw we found on the exterior of the house.
Now, there are ways to make an offer on a house sight-unseen. To do so, you must know your market extremely well. You can make the offer based on average cost per square foot of a sad house and your average cost to repair. Then you add in an allowance for worst case.
Also, never trust the wholesaler to make the repairs for you. There are two reasons for this:
- You are responsible for the quality of the repairs that the wholesaler makes without having any control over costs, materials,contractors, or corners cut. What’s the old adage? “If you want something done right, do it yourself.”
- The profit of a redevelopment company comes from the difference in value before and after redevelopment. Needless to say, allowing the wholesaler to reap these profits makes the deal too thin to think about.
The wholesaler wants us to meet back at the house on Thursday, at which time he promises to have the keys. If he still wants to sell us the house and act as a contractor, he will have read our contractor materials by then and understand the way we do business. If not, we will have other things to do on Thursday.
The bottom line is never be afraid to walk away from a “deal.” As my friend Larry says, “Some of the best deals I’ve done are the ones I walked away from.” It’s always better to walk away than to lose money.