How A Wholesaler Can Break Your Rehabbing Business

I love wholesalers and purchase most of my properties from them.  For me, the idea of paying someone to bring a deal that I know I can buy is very attractive.  When you buy from a wholesaler, you know you are getting the deal.  This is very different from making offers on foreclosures, short sales or anything else you might find in the MLS and hoping to get it accepted. 

With all that said, you need to be very careful working with wholesalers.  Believing their numbers and buying a bad deal can break your business into a thousand pieces. 

We get calls frequently about getting deals closed that turn out to be bad deals.  Many times these deals are from wholesalers.  The sad thing is, the rehab investors believed the wholesaler’s rehab numbers and the after repaired value, and give handsome earnest money checks.  Many times the earnest money is not refundable, so you need to do your diligence before you part ways with your money.  In fact, we had a few bad deals come into our office last week with a total of $21,500 in earnest money that was lost. I am not saying that wholesalers are bad people, or are out there to scam you, but let’s be honest with ourselves.  It is the wholesaler’s business to sell their property for as much as they can get.  It is your business to buy quality deals that you can rehab and resale.  The wholesaler is not, and should not, be expected to work in your best interest.  You need to take responsibility for yourself and your business. 

So just how do you verify numbers?

There are really only two variables to worry about when dealing with wholesalers.  That is the value after the house is fixed and the repair costs.  The price is normally not a variable, as most wholesalers do not haggle, so their price is fixed.  I want the wholesaler to tell me a value and a price to repair because with that, I can run my numbers quickly and decide if it is worth my time.  If the deal looks good with their numbers, then I verify them.  The first one I verify is the value, because I can do that without seeing the house.  I simply pull comps on my own, or sometimes will run it by my Realtor friend to get another opinion.  Based on the desk review of comps, I can decide quickly if the wholesaler is on the same planet as me.  If it is close and the deal looks ok, I will then run out to the property and take a look.  Based on my experience, I can tell pretty quickly if the repair numbers are accurate.  If not, I might ask the wholesaler to justify their numbers in case I am missing something.  When I was first getting going and I did not know how to estimate repairs, I would call the wholesaler and tell him or her that I want the deal.  I would be upfront and tell them I was a little nervous about the repair budget and need my contractor to take a look.  Normally they would be ok giving me a day or two to get the contractor in there without the earnest money, as long as I was upfront with them. It does not take long to learn how to estimate repairs when you start looking at properties with your contractor. 

If all looks good, you should go ahead and close on the property and of course use Pine Financial for your financing.  If one of the wholesaler’s numbers is off, which is pretty common, go ahead and let them know that you cannot buy it at their price and share the reason why.  By giving them good feedback, you will keep the relationship strong and help them.  Just backing out of deals with no reason is a great way to be removed as a buyer and you could hurt yourself when they do come across a deal that works for you.