If you’re a real estate investor, buying a fix and flip property from a wholesaler may seem like a great idea. There are clearly advantages to letting a wholesaler do their due diligence and hand deliver to you discounted deals. However, it may not be as black and white as some people make it out to be. So, before you get involved with a wholesaler, take a look at the good, bad, and ugly.
What Is Wholesaling?
Before we get into the good and bad, let’s look at what wholesaling means. What does it mean to wholesale a house? Essentially, wholesaling means that a real estate investor has taken the time to go find a motivated seller willing to sell at a great price. They snatch up the deal, get the contract, and then sell it as soon as possible to another investor. They usually don’t take any time or resources to do any repairs on the home and many times don’t even use their own resources to buy it. They simply lock up the purchase contract and sell it to another investor who plans to do the actual work.
Why Purchase A Fix & Flip From A Wholesaler?
Having someone else do all the necessary work in order to score a fix and flip deal and still get the home under market value sounds like a win-win, right? After all, there’s a lot of time and effort that goes into targeting and finding motivated sellers willing to sell their home at a deeply discounted price. For those real estate investors who either don’t have the time or don’t want to take the time to do that leg work, purchasing a home from a wholesaler could be a huge time saver.
Buying A Property From Wholesalers: The Good
Let’s take a few minutes and go over the benefits of buying fix and flip deals from wholesalers.
Saves Time – As we’ve mentioned, it saves the investor time. When a wholesaler can bring you a deal that’s below market value, you’ve saved yourself perhaps months and months of marketing, scouring neighborhoods, and negotiating with sellers.
Convenience – In a culture where convenience is king, this is a main reason why investors opt to buy homes from wholesalers. It’s also very convenient for those real estate investors who invest as a second or part-time career, or who have full time careers. They are spared from having to do due diligence, though they should still run the numbers themselves to evaluate potential fix and flip projects.
Build Relationships – When you buy property from wholesalers, you have the opportunity to build a working relationship with various service providers. You begin to network and negotiate, letting each wholesaler know what kind of numbers and deals you like. This way you start to learn how to work with various wholesalers, and they learn your preferences; saving you more time and making your deal sourcing process even more efficient.
A Chance To Get Your Feet Wet – Buying a property from a wholesaler is a great way to get your feet wet as a real estate investor. If tackling all the preliminary work in finding a great real estate deal is too much for you right now, or your marketing or negotiating skills aren’t as strong as you’d like yet, going with a wholesaler can certainly be beneficial.
Turnkey Services – There are some wholesalers that will offer ‘turnkey’ services, which means they’ll take care of everything for you and simply turn over the keys to the property. This includes acquiring the property, making repairs, offering financing, getting a tenant in there, managing the property, and more. This type of wholesaling is appealing to new investors who aren’t quite ready to take it on the project themselves.
Buying A Property From Wholesalers: The Bad
Here are some things to be cautious of when purchasing a fix and flip from a wholesaler.
Numbers Don’t Add Up – The reality is that you cannot believe every wholesaler out there when it comes to numbers. They may promise a good deal, but not all them are. If you’re buying a property from a wholesaler, you must run the numbers yourself, including the repair costs and the After Repair Value, to be sure the picture being painted is accurate. If you simply rely on the wholesaler’s information, you could be setting yourself up for a project and financial commitment you didn’t plan on.
No Escape Clause – When you purchase an investment from a seller, you usually have plenty of time to do your due diligence. However, when you purchase from a wholesaler, things move much faster, leaving you little time to do your due diligence. And, much of the time there is no escape, or inspection clause once you get under contract with the wholesaler. This can be disadvantageous if you don’t have the time to get the property inspected. Even if the wholesaler says they’ve done their due diligence, you should not just take their word for it.
Confusion Regarding The Contract – Some investors buying from a wholesaler won’t really understand the contract. There are different ways the property can be transferred from the wholesaler to investor, including contracts between the seller and wholesaler, one between the wholesaler and investor, or even the investor purchasing the LLC that owns the property. There can be some confusion regarding closing date, who pays what at closing, cash vs. financing, and more. Be sure that you understand the type of contract you’re signing and what it means.
How To Find A Great Wholesaler
You’ll want to spend a good bit of time doing your research when it comes to finding reputable wholesalers. Here are several ways to locate great wholesalers:
Meetups – Many cities have local real estate investor Meetups and these meetings can be a wonderful place to connect with fellow investors and wholesalers.
Word of Mouth – Simply let others know that you’re looking for a reputable wholesaler. Ask realtors, title clerks, attorneys, etc. Wholesalers are most likely doing their share of networking as well, oftentimes e-mailing realtors looking for eager investors.
Search Online – Do a simple online search, as some wholesalers will have websites with their contact information. You can also check online marketing platforms like Craigslist or Facebook, as there will most likely be wholesalers advertising with messages like, “We pay cash for homes with fast closing!”. If you find them, simply let them know that you’d like to be added to their buyer list.
The truth is that buying fix and flip projects from wholesalers works for many real estate investors, as they feel the benefits outweigh the disadvantages. Think of a wholesaler as a real estate consultant who is locating deeply discounted deals and offering them to eager investors for a fee. They’re the middle man that gets paid for their preliminary work in finding and negotiating deals and you, the investor, still get a good investment without having to do all the grunt work. When the numbers work in favor for both the wholesaler and investor, it’s a win-win for both.
Financing Fix And Flips Purchased Through Wholesalers
When you’re ready to finance your next fix and flip project, Asset Based Lending is here to get your deal closed. Give us a call at 201-942-9089 to discuss how our hard money lending programs work for wholesale projects and what we can do for your real estate investing business.