Ethics in Wholesaling
Wholesaling is an absolutely fantastic way to earn money quickly as you begin to grow your real estate business. However, what you don't always get is the "realistic" side of wholesaling, especially when you are beginning. There are three components to a good wholesale deal. These components are:
Finding a truly great deal
An executed contract (must have earnest money to bind the contract)
This article is not a report on how to wholesale properties, but what to do (or not do) when you have a deal and how to handle some of the less than reputable people in the local industry and protect yourself from being taken advantage of. A successful investor once told us with regard to this business: "Pigs Get Fat, Hogs Get Slaughtered" and that is a good rule to live by because if you try to take advantage of people, you WILL get burned.
We have had two problems recently surrounding local wholesalers.
We put a property under contract for $65,000. The comps put it around $100,000 fixed up and ready to go. We contacted several people that we knew in the area and assigned the contract. We were up front with our buyers and told them what we had the deal for and asked them to make us their best offer. After some negotiation, we came to agree of a price of $4000 for the assignment. We were happy and they had a good deal.
The problem was, like many of these companies down in South Florida, the people we assigned it to were trying to assign it to another buyer. When we asked them about this, they told us that if their buyer did not close, they were prepared to close on it themselves. The truth was, they never had any intentions of doing so and did not tell us when their contract fell through with their buyer. The put inflated numbers on their web site, trying to market the property way above real market numbers. In fact, they were trying to wholesale it at $80,000. Yes, they were trying to make $11,000 as a middle wholesaler. They didn't find the property, nor were they going to rehab the property, so they really had no right to earn $11,000 on the deal, in my opinion anyway.
Our frustration had nothing to do with the fact that we were making $4000 on the deal because, in our opinion, that was a fair fee for us. Our problem was with the fact that they were taking our deal and misrepresenting numbers to other investors. In the end, they never closed the deal and we didn't make any money, upset the seller and were involved in an overall "bad" business decision. We learned and do not do business with that company anymore!
We have worked very hard in one particular neighborhood in South Florida. In the last few months, we have flipped/rehabbed 6 properties in a 2 square mile radius. We know the neighborhood well and can quickly and accurately assess prices, costs, etc.
We were called with a "great deal". We could pick up a home for $92,000, which according to our estimates, would sell around $135,000-$145,000 quickly. The red light should have gone off when they refused to show us the original contract. We agreed, however, under the condition that they would produce it for our lender and attorney.
If anyone feels the need to hide how much they are making, you should be very concerned! At the end of the day, there were over $22,000 in flip fees before we even had control of the deal. Now, on a $70,000 deal, that is almost 30% in flip fees. This went through three people before we even had the rights to the contract. Again, I really disagree with middle men making $10,000 on a deal that they neither found nor closed on. These are the exact same companies that make wholesalers and wholesale companies look bad.
At the end of the day, we didn't close on the deal. We never saw the original contract. In fact, we found out about all these fees on the HUD statement the day of closing. It normally doesn't happen that a buyer walks away from the closing table. We did and other investors may as well if they don't like your ethics. Not to mention, we will certainly be telling anyone that we come in contact about these people and their business practice.
As investors, we need to stand up to these people and make sure that they stop taking advantage of new investors, investors that don't know how to find realistic numbers or produce realistic estimates. If people continue to work with these companies, then new investors will continue to get burned. This affects all of us because unfortunately, as investors, we are grouped with all of the other investors, those that are ethical and those that are unethical.
Just remember to always try to do the right thing, not to take advantage of other people and to truly understand and appreciate the value of long term, ethical business relationships. You will not retire on one deal, but on the efforts of hard work and perseverance.
It is always better to disclose to your potential buyers so that you don't run into these situations. It is better to have someone walk away from the deal in the beginning than at the closing table. You will always protect yourself best by being honest and up front. Real and serious investors will be okay with you making money on an assignment, as long as you are fair and leave something on the table.
Just remember, "Pigs get fat, hogs get slaughtered". Keep that as a rule of thumb and you can and will make money wholesaling. Find your deal (60-70% of After Repaired Value), sign your contract, and find your buyer.
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"