Featured Speaker for KREIA meeting Thursday evening
Wholesaling Myths that Just Won’t Die…
by Vena Jones-Cox
Every time I speak at a real estate association, I get barraged with the same set of questions from attendees regarding wholesaling and how it actually works. Some of these spring from a simple misunderstanding of how the process work; others are apparently myths that are being propagated by other wholesalers or educators. How many of these have you heard?
Myth 1: You need a lot of money or credit to wholesale properties. This one seems to be spawned by a misunderstanding about how wholesaling works: people who don’t fully “get” how it works believe that in order to sell a wholesale deal, you have to own it first.
In reality, wholesale deals are typically done in one of 2 ways: either through an assignment of contract, where you get paid by the buyer for your RIGHT to close at a certain price, or with transactional funding, where a lender provides the money for you to close the deal, which you immediately sell to the buyer.
The only money I’ve EVER spent on a wholesale deal is:
- Money for education. I invested $1200 to take a wholesale seminar back in 1992 so I didn’t have to reinvent the wheel. I do recommend that you get SOME education before you get started, just because you’ll make more money faster if you do
- Earnest money. When I deal with REO properties that are listed through real estate agents, I generally have to write a check for $1,000 UPON ACCEPTANCE (prior to acceptance, I simply send the other agent a COPY of an earnest money check). However, when I’m dealing with the owners directly, I never give them more than $10 earnest money.
- Marketing Money. Not necessary, but it helps—most wholesalers I know who are doing more than 1 deal a month are doing SOME kind of marketing to make the phone ring. If you have the money to make this investment up front, you’ll do more deals faster, if you don’t, you’ll have to rely on the free-or-nearly-free methods of using an agent or “driving for dollars” (that is, finding vacant ugly houses and calling the owners) until you do your first deal; once the deals start happening, I recommend that you set aside at least 10% of your profits to market
Any other “costs” of a wholesale deal—for instance, the title search, closing costs etc—are paid by the buyer or seller (neither of which is me) at the closing. Any of MY expenses, like the cost of the transactional loan or birddog fees—are paid from profits at closing, not up front.
Myth #2: In order to assign a contract, it has to include the words “And/or assigns”. This one’s been around since I was a brand-new investor, just knee-high to a grasshopper. And it’s absolutely, positively false.
ALL contracts are assumed to be “assignable” unless they specifically say otherwise. In other words, you can assign any contract that doesn’t have a “no assignment” clause in it, with or without the and/or assigns wording. And by the way, “and/or assigns” does NOT make a contract with a non-assignability clause assignable!
Myth #3: You should get paid by your buyer at closing. I’m pretty sure that this one is being perpetrated by buyers who don’t want to pay an assignment fee until the closing happens. In fact, the way I usually hear this from new wholesalers is, “around here, buyers won’t pay the assignment fee until closing”. And I can totally understand these buyers’ point of view; after all, who wants to risk giving thousands or tens of thousands of dollars to a stranger for a property that isn’t even bought yet?
But, on the flip side, why should YOU risk giving a buyer your right to buy a property when he has no skin in the game? What’s to stop him from deciding not to close after all when he’ll lose nothing by doing so?
It’s important to remember a couple of things in this regard: first, that you are not at the mercy of your buyer or buyers. You are not going to them as a begger (“please, please buy my property! You’re the only person in the whole wide world that can possibly make me money!”). Instead, you’re offering an opportunity that’s going to make your buyer a LOT of money if he buys it, and none if he doesn’t.
The second is that wholesaling is a business for you, and that as such, YOU set the policies about who you’ll work with and how. If you’re policy is, “no cash up front, no assignment”, then your buyers will have to either comply or go find their own deals.
But how do we work out the conflict between the buyer who doesn’t want to give you his money, lest you run off with it and the deal fall through, and you, who doesn’t want to assign a very valuable right to a buyer who won’t or can’t pay you up front? Here’s how I’ve worked it out over the years:
- I’ve let my “assignment fee up front” policy be known to all potential buyers. Those that CAN’T pay up front don’t bother to ask.
- I never ask for money from a buyer until the title search is completed and clear. This way, the buyer KNOWS that the seller can sell, and this should take away his main objection to paying before closing
- I AM willing to allow the buyer to deposit the assignment fee into an escrow account, if he prefers. Occasionally, I make a good enough deal that the assignment fee is over $10,000. In these cases, some buyer balk at the sheer amount they’re “risking”. If so, I have no problem with letting the buyer put the assignment fee in escrow with an attorney, as long as the escrow agreement says that the money is to be released to me on the date of the scheduled closing or actually closing, whichever comes first. That way, if he closes early, I get paid early; if he closes late, I don’t get paid late. The only way in this escrow agreement that he can get the money back is if the seller refuses to or cannot close.
Myth #4: Your buyer shouldn’t know what you’re making. This myth stems from the usually-newbie wholesaler’s paranoia that if the buyer knows what you’re making, he’ll refuse to pay it because it’s “too much” for what the wholesaler “did”. As a result, these wholesalers spend hundreds or thousands of extra, totally unneeded dollars on transactional loans or double closings rather than assigning their contracts.
Let’s put this into perspective: what the wholesaler “did” was spend the time to evaluate and make about 20 offers on properties; negotiate a great price; tie it all up, and present to the buyer as a “done for you” that he’s going to make a lot of money by buying.
And yes, there are investors out there who believe that a wholesaler should never make more than $1,000 on a deal, or that selling a deal you never bought is somehow morally wrong, or that the more profit you have built into a deal the more he should try to negotiate to get a better deal for himself.
I know I’m repeating myself here, but one the most crucial things that you have to absorb as a new wholesaler is the idea that you are not going out to your buyers as a “beggar”, hoping that they’ll have mercy on you and agree, out of the goodness of their hearts, to pay you a little money and take your deal off your hands.
Instead, your buyers buy from you because you provide them with great deals that make them lots of money with very little hassle. In other words, they buy from you because it’s in their best interest to do so. You provide a service that you’re well-paid for. A buyer who isn’t interested isn’t interested, but—so what? McDonalds sells billions of Big Macs a year and I buy almost none of them. I don’t think McDonald’s is crying into its coffee that I’m not interested in what they have to offer—instead, they focus on giving the people who love sugar and grease more sugar and grease. You should do the same: focus on providing the buyers who are serious, ready, willing, and able to buy from you with the great deals they want, and forget about the rest.
So the moral is, as with the folks who don’t want to pay your assignment fee up front: YOU SHOULDN’T WORK WITH THOSE BUYERS, ANYWAY! The customers you want to deal with are the ones who understand that it doesn’t matter how much money YOU make on a deal—it only matters how much THEY make.
This is one of the many reasons that a bigger buyer’s list is a better buyer’s list. There are enough good buyers out there with the horse sense to understand this basic fact of life that you can sell to them all day long…if you know who they are.
Having said that, I’ll reveal a trick of the trade to you—I don’t tell my buyers how much their assignment fee will be until AFTER they’ve agreed to the overall price. Once a buyer has said, “yeah, that looks like a great deal at $100,000”, it’s pretty tough for him to back down when he finds out I’m making $20,000 of that.
So in my world, the buyers get pitched on an overall price. If they ask how much I’m making before they’ve agreed to buy it, I say, “let’s worry about that after you’ve seen the property and decided if you want it.” End of story.
Myth #5: You can easily wholesale properties without ever seeing them. There are a number of mostly-online gurus out there preaching the philosophy that you can wholesale properties that are hundreds of miles away without ever evaluating them, talking to a seller, talking to a buyer, and so on and so on.
And you should know that, although “virtual wholesaling” is a great idea (or at least pipe dream) in principal, it is also the subject of a lot of ridicule among actual buyers. The very idea that you’re going to call or email or whatever a serious buyer with the message you’ve got a property for sale that neither you nor anyone you know has ever seen, but it’s a great deal at $xx,xxx, and they should go waste their time looking at it immediately, is ludicrous.
Anyway, all the serious buyers I know HATE the whole “virtual wholesaling” trend. They actually mock the “wholesalers” who call them with deals that neither the wholesaler nor anyone the wholesaler knows has ever seen. I do not know one single solitary buyer who’s ever bought a property from one of these people, nor who has ever seen a truly good deal come from one of them. Is it the case that it’s never happened in the history of the world? I wouldn’t go that far—but it’s never happened that I can prove.
So if you can’t take the time—or don’t have the skills—to properly evaluate the ARV and repair costs of a property, don’t bother to try to sell it to any buyer who knows what he’s doing. It’s a waste of his time and yours, and it just gives wholesaling a bad name.
, Make sure you see Vena at KREIA June meeting
Saturday Wholesaling Workshop with Vena is July 7th
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