Beware Of Wholesale Home Buyers!

Dec 20, 2020

Beware Of Wholesale Home Buyers! I’ve said this often to property owners in dire need of selling their property fast. Since I received several questions regarding the wholesale process recently based on my earlier article regarding low-ball cash offers, let’s review wholesaling and examine the pro’s and con’s. The wholesale strategy is executed exclusively by buyers, but sellers need to understand the process, too, so they can protect their interests.

Wholesaling, like any real estate strategy, can be tailored to the type of property, the seller’s specific situation, and the wholesale buyer’s practices and resources. The strategy can be used with homes, land and even commercial properties. Here are the basic steps typical to a wholesale transaction.

  1. The wholesale buyer submits an offer
  2. The seller accepts the offer
  3. During the escrow period, the wholesaler finds another buyer willing to pay more for the property than they are paying and enters into a second sale transaction with that buyer.
  4. On the day escrow closes, the escrow officer appears to complete both transactions simultaneously, executing an assignment that substitutes the second buyer for the wholesaler (more on that below).
  5. The seller receives a check for the amount the wholesaler agreed to pay, minus any lien payments and closing costs; the wholesaler receives a check with an amount equal to the difference between what they paid for the property and the amount the second buyer pays, minus closing costs.

In short, the wholesaler profits by obtaining the right to purchase the property at a certain price and then selling it simultaneously for a higher price.

How Wholesale Home Buyers Find Sellers

Wholesalers deal primarily in distressed properties that must be sold quickly for financial reasons or are in very poor condition and may not qualify for most types of financing. They typically monitor legal filings in their area, looking for a Notice Of Default (mortgage payments seriously behind), Notice Of Foreclosure or other legal filing that indicates a property is in financial distress. Some also monitor building department notices that indicate a property is in such poor condition that it doesn’t meet building or fire safety codes, referred to as being “red tagged.” Wholesalers often drive neighborhoods looking for vacant properties, red tagged properties, and buildings in extreme disrepair. They also conduct direct mail campaigns that target neighborhoods where distressed property sales are commonplace.

When wholesalers find a property that meets their general criteria, whether it is currently listed for sale or not, they contact the listing agent or owner to get more information about the seller’s situation. If a wholesale deal looks attractive (they can purchase the property far below market value), they submit an offer.

How Wholesale Home Buyers Find Buyers

Wholesalers typically maintain a list of active investors who can make fast decisions on properties and buy with cash. Investors can be simple flippers, developers or even – though rarely – other wholesalers. A wholesaler may advertise the property online or in local publications, but most often they create a flyer or general property description and circulate the information to investors on their list.

How To Spot Offers From Wholesale Home Buyers

Offers from wholesale home buyers are usually easy to spot, here are a few telltale signs of a wholesale offer.

Escrow Period: Even though a wholesale deal is almost always an all-cash transaction, which normally closes escrow in about 15 days, the wholesaler will ask for a typical 30 day escrow period that allows them time to circulate the property among their investors and negotiate a sale.

Contingency Period: In most sales with a 30 day escrow period, the buyer has a specified period (commonly 15 to 17 days) during which to conduct inspections and review documents. If buyer cancels the sale after the 15 day contingency period, they lose all or part of their initial deposit. A wholesaler’s offer will allow them to keep their deposit even if they cancel on the 30th day.

Assignable. The buyer identified in a wholesale purchase offer will be the wholesaler or anyone designated by the wholesale during the escrow process, appearing as “John Smith and/or assigns.” This means the buyer can substitute a different buyer’s name (assign) during escrow. However, an assignable offer does not guarantee the buyer is a wholesaler. It’s a very common practice with investors to form a legal entity for liability or management purposes during escrow and want the property owned by that entity when escrow closes.

Investor Notice. Most wholesale offers contain a clause that reads something like “This offer is made by a real estate investor for the purpose of making a profit.”

Expiration: Most purchase offers are valid for three days and expire at a time specified on the third day. Wholesale offers frequently require quick acceptance from the seller and usually expire in twenty four hours.

Always Ask. If you receive an offer with features similar to those I described above, ask the buyer if they are a wholesaler. Try these questions:

“Are you a real estate wholesaler?”

“Do you intend to assign this sale to another buyer during escrow?”

Don’t want the sale assigned? Counter the wholesaler’s offer with a “you can’t assign this” clause (consult with an attorney or licensed agent for help).

Wholesale Home Buyers May Or May Not Be Licensed Agents

Anyone can sell real estate they own without having a real estate license. We see these properties all the time, typically labeled “For Sale By Owner.” When the wholesaler enters into a contract to buy a property, that contract gives them an interest in the property and therefore the right to re-sell it without a license – even though escrow has not yet closed. Ergo, many wholesalers don’t have a real estate license and are not required to.

The Pro’s Of Selling To Wholesale Home Buyers

Wholesalers provide a service – quick cash for properties that may not find a buyer though a traditional sale due to their condition.

The Con’s Of Selling To Wholesale Home Buyers

Wholesalers purchase real estate at a significant discount to profit from their sale/assignment to an investor. They deal primarily in distressed properties that owners need to sell fast for whatever they can get, even if the purchase price is well below market value.

The extended contingency period costs the seller marketing time if the sale is cancelled at the end of the planned escrow period.

Wholesale Offers Versus REALTOR® Services

When a property owner is in a distressed, must sell situation and is approached by a wholesaler, they should compare the potential outcomes of accepting a wholesale offer versus hiring a REALTOR® and soliciting standard offers. A wholesale offer price will almost always be significantly below market value and the wholesaler is under no obligation to disclose market value information or assist the seller with closing the sale. A REALTOR® will assess and disclose current market value, implement marketing strategies to attract offers at or above that value, plus assist the seller through each step of the escrow process. Many REALTORS® also keep lists of investors who can execute cash deals quickly – lists similar to those kept by wholesalers.

Wholesalers often require a market value discount of twenty to forty percent to achieve the profit margin they and their investors require. When compared to the much lower typical agent commissions, selling with a licensed agent may be the best option. Note: real estate commissions are not set by law and are always negotiable.

In Summary…

Wholesaling can serve sellers in specific situations, but sellers should understand how much value ($$$) they are giving up and whether other options exist that could provide a better sale.

Have questions about wholesale home buyers or real estate in general? Use the form below!

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