What They Don’t Tell You About Wholesaling Houses

What_They_Dont_Tell_You_About_Wholesaling_HousesWholesaling houses is the real estate investing strategy of choice for many beginners. For those brand new to the business, it appears to be the best place to get started because it typically requires little or no money and it also appears to contain very little risk. However, all that glitters is not gold. There is a dirty little secret that most beginners are unaware of when it comes to wholesaling. Here is what they don’t tell you about wholesaling houses…

Definition of Terms Digression: The term “wholesaling” is relatively new in creative real estate investing circles. Originally, anytime you resold a property immediately, or even quickly, it was called flipping. However, a few unscrupulous investors gave “flipping” a bad name so creative real estate professionals coined the phrase “wholesaling” to distance themselves from the negative connotation of flipping. Then came along some popular television shows which brought the word flipping back to the mainstream. So now, flipping refers to buying, fixing it up and then re-selling a property, whereas wholesaling refers to re-selling a property immediately without buying it or fixing it up first. Now back to what they don’t tell you about wholesaling…

Where Great Wholesale Deals Come From

 

Of the millions of homeowners out there, a very small portion of them at anyone time want to sell their homes. Then, of these sellers, an even smaller percentage of them (our studies show less than 5%) are so incredibly driven to sell their property that they are willing to give it away for a very cheap price (or very favorable terms). Commonly referred to as “motivated sellers”, it is from these people that most wholesale deals are created. In many cases, motivated sellers are in a tight spot and they have very few options left in selling their house. When a person is backed into a corner, they usually become emotional and sometimes irrational. So the emotions and irrationality of these people is both and good and bad to a real estate investor. On the one hand, the fact that circumstances in their lives have created this situation provides wholesalers with the opportunity to get a good deal. (To join the debate on the ethics of this, check out Is Wholesaling Real Estate Ethical?) On the other hand, those emotions and irrationality creates a volatility that can be like gun powder and one spark can set them off.

What They Don’t Tell You About Wholesaling Houses from Motivated Sellers

 

Here’s where things can go terribly wrong in a wholesale deal that is rarely mentioned or talked about. If the motivated seller, who is usually at a financial collapse in their life, sees that you are about to make $5,000, or $10,000, they may get very upset. Why? Put yourself in the sellers shoes for a moment. Perhaps they have owned the home for 10 years. In that time, they may have replaced the roof, the A/C, some appliances, have done tons of handyman fix up jobs, paid for the property taxes, the insurance, etc. To the homeowner, they have been paying their dues on that house, spending a small fortune to keep the house in good working order. And then, you come along, with no skin in the game, and you’re going to make thousands of dollars on their house without, in their minds, doing anything. Do you see the rub, here? This point of view is not based on the facts of business and commerce, but it can be the reality of what is going through a motivated seller’s mind.

 

The Most Valuable Skill in Real Estate

 

In real estate, brokering a deal is an extremely valuable skill. It’s more valuable than the work of fixing up the house, originating the loan or closing the transaction. Putting a buyer and a seller together in a real estate transaction is the most lucrative part of the deal. If you don’t believe me, just look at any closing statement and see who gets the biggest check. Motivated sellers rarely understand this fact. Instead, what they see is some person having them sign a contract and then a few weeks later, collecting thousands of dollars without lifting a finger. They don’t realize that the person who can locate a buyer willing to pay more for the property than what it is under contract for is an extremely profitable real estate skill.

 

When Things Fall Apart

 

So rather than be happy with what they are getting, oftentimes motivated sellers become enraged when they see the profit a wholesaler is making on the deal. And this is when things can really fall apart. Boy, do I have some stories….on a deal I was doing many, many years ago, on the day before closing, once the seller saw on the closing statement that I was earning $7,000 on a house he was selling to me for $21,000, he left a voicemail on my phone that said, “You son-of-a-$%^#&. You’re making $7,000 and you haven’t done a damn thing! This deal is off. I don’t care what our contract says. I want out and if you don’t cancel this agreement, if I find out where you live, I will blow your head off with my shot gun.” True story.

So how do you avoid this unintended consequence? I’m glad you asked πŸ™‚

 

Steps to Avoid Wholesaling Disaster

 

1. Lay the Foundation:

 

You have to lay the foundation with the seller that you intend to make a profit. Make it very clear to the motivated seller by asking, “Sir, are you OK with me making a profit from this deal? Are you sure you are OK? So if you find out I am making a profit, you’re not going to flip out and go crazy on me, right?”

 

2. Plan Your Closing:

 

Even if you have laid a great foundation, you still have to be aware that people don’t always follow through with their verbal or written commitments. If the deal is nearing the closing and your gut tells you that the seller may flip-out if they find out you are making a profit, you will then, in most cases, have to do two closings. If you think the seller will be cool with your profits, you can roll the dice.

 

Two Closings:

The first closing would be you buying the property from the seller and the second closing would be you selling the property to the new buyer. Both closings could actually be scheduled for the same day, in sucession, but it would double your closing costs and in most cases, transactional funding would be required which would further cut into your net profits. It is likely that in some cases, going with two closings could whip out a wholesalers profits altogether.

 

Rolling the Dice:

Although doing two closings is the safest route to keeping your profit amount private, it may not be practical due to the extra costs. You may have to roll the dice and brace yourself for the whole thing to fall apart. I recommend prayer in such cases.

 

The Cool Seller:

If the seller is cool and you think they won’t care about your profit amount, just have your profit on the closing statement and hopefully the deal will close like a hot knife through butter.

 

The All Cash Buyer:

If the new buyer is paying all cash, sometimes you can convince them to pay you an assignment fee just before the closing, off the closing statement. This is the ideal way to get paid when wholesaling houses. But most all cash buyers won’t pay you until closing actually occurs.

 

The Loan Buyer:

If the new buyer is getting a loan, this creates all kinds of problems for a wholesaler. The two closing approach is very difficult unless the buyer is working with a mortgage broker schooled in the art of originating no-title-seasoning-requirement loans. Plus, many loan underwriters will reject a wholesaler’s assignment fee on the closing statement. That’s why most wholesalers sell their deals to all cash investors. Our team, along with some brilliant closing attorneys, crafted a wonderful way to get paid on wholesale deals when the buyer is getting a loan but that’s one of many proprietary techniques we hold back go just those who are members of my Apprentice Program.

 

Wholesaling Houses is More Complicated Than It Appears

 

As you can see, wholesaling houses is more complicated than it seems. Although many beginners feel that it is the best place to get started in creative real estate, for many, it is a tough way to break into investing without the help of a mentor or coach. Although it may not require much money to complete the transaction, wholesaling houses successfully often involves considerable knowledge. And if you aren’t careful, you could create quite a sticky situation with an angry seller. That’s what they don’t tell you about wholesaling houses.

Comments

  1. Excellent points made in this blog and video. I have found that many “wholesalers” make mistakes by opening their mouths at the wrong time to the wrong person. But the notion that someone can broker a deal stretches the concept of what a Broker is. The wholesaler is selling an option or contract, they are NOT selling the real property. If they do they can be busted for violating Real Estate law. Only a licensed RE Broker by law can broker the sale of real estate (real property).

    • Phil Pustejovsky says:

      Picture you are in front of a judge. He asks, “Did you buy this property?” Your answer, “Not yet judge”. He then asks, “Who located the Buyer”. You respond, “Me”. The judge then asks, “Do you plan on buying this property and then reselling to the new buyer?” You say, “Not exactly judge, I am going to assign my interest for a fee.” He then says, “Oh, so you are earning income from the activity of bringing a buyer and a seller together…in other words, you are brokering the deal.”
      If it looks, smells, sounds, and acts like a duck…
      I think it is wonderful that through the constitutional right to the free alienation of property in conjunction with the contract law that states a bi-lateral contract in real estate constitutes equitable interest, that in most cases, a non-licensed real estate agent can effectively broker a deal and legally get paid…but make no mistake…what a wholesaler is doing is brokering a deal.

      • so is Legal or not .. I also here in Florida in Miami ..so the law will apply also to me .

        Teach me please how to make / sound legal if is any legal situation

        thank You

        • Phil Pustejovsky says:

          Again, a legal question and you would need to connect with an attorney. If that upsets you, you can thank attorneys for creating laws that get them paid more.

  2. If you do 2 closings , who need’s to come up with the money to close the first , me?

  3. After reading the Mentor Article, i admire how you examined “wholesale” from the sellers perspective. As a “newbie”investor, wholesale real estate seemed the best to get started and best less complicated strategy. I’m more than glad to know and to see how that’s not true in some cases. I had not thought about the Seller becoming irritate ,let alone
    display out-right rage! But its possible, and if the transaction is not explained to the seller so that they fully comprehend what will transpire, this occurrence can become an embarrassment for both parties involved. Thank you for sharing this knowledge and gives me an investor, an incentive to not overlook the seller when doing wholesale deals. After all, its their property which we are seeking to buy,therefore we should be empathetic as well as practical with understanding.
    Great Article..will be looking for more educational tools such as this one!
    Valerie Robinson,
    VRCI PROPERTIES

  4. Great info. Your right I haven’t heard any program talk about the possible bad and ugly , just the good. Thanks for your video.

  5. It seems to me that the wholesaler should present themselves as a freelance real estate agent in effect. A good term might be “deal broker.” Since you are not a real estate agent as is typical in a closing, you can explain to the seller that you make money off of the deal just as an agent would, only it doesn’t come out of the sellers pocket at closing. It might be helpful to proactively state that if they challenge the right of the broker to make a profit on their home the transaction will be null and void–making it sound like they better take it or leave it–even though you really don’t want them to leave it. What’s wrong with calling your profit “commission”? Is that exclusive terminology that only a licensed RE agent can use?

  6. atelaite namatasere says:

    do u need licence to wholesale??

  7. I didnt no the seller could back out of contract on da last day. I thought once contract is sign , after a grace period, its a done deal..

  8. Morgan Neupauer says:

    Direct question for Phil. I have read your books and watch your videos. I am a beginner. I have never invested in real estate, but It has piqued my interest for a long time as a solid investment.

    I am interested in your opinion on a property I found in Missoula, MT.
    Since I have been listening to you I have been looking. So I came across a foreclosure, beautiful two story home on shy an acre for 199K. That’s a rare find in Missoula, MT (rocky mtn tax).

    The catch is that the previous owner, according to the agent is that owner added to the added to this house a few bed and bath, and the original septic was only meant for fewer bath and beds. Not sure what happened there. He failed to get permits and now the house has a huge red mark on the deed. Traditional government loans will not lend.
    Agent said it could cost up to 28k to fix the septic situation, and Missoula county is real progressive and strict. The house is in a river valley, but well away for flood zone, and the ground on this property is dry and hard. Would you touch something like this. The septic as is wi probably never pose a problem, except with the authorities. I am just investigating, and it’s fun. I am just curious what you have to say. I know you love this stuff. Someone who has the cash could probably still make a profit. There’s just some unknowns. I tried pasting a picture, but my iPhone wouldn’t let me on the reply.

    • Phil Pustejovsky says:

      I advise most people to avoid listed properties altogether. Once a property hits the MLS, especially REOs (also called Foreclosures), everyone knows about it and its hard to get a great deal. Plus, agents block any creative financing techniques. There are just as many motivated sellers per capita in Missoula as there are anywhere else. But you have to know how to target these people before the deal gets on the MLS.

  9. Thanks for the video. Great information. I am looking into wholesaling as a beginner and I was wondering what the downside was since you only hear about how easy it is. I’m a realist and I know it is never as easy as it seems. I appreciate your honesty and as I continue to look into wholesaling I will keep this in mind.

  10. Awesome video Phil! When I find a deal I look at the numbers and then decide how to proceed. Wholesaling is definitely an option although I have not done a wholesale deal yet. The deals that I have found have been so freeking good that I kept them for my self. Having said that I am open to wholesaling and i am confident that I will wholesale some deals in the near future. Thanks for the video I will definitely lay a solid foundation with the seller from the beginning.

  11. Mark Huffman says:

    Then is Wholesaling the best way for beginners in Real Estate Investing? I appreciate your comments concerning this.

  12. Phil Pustejovsky I am a beginner, were is a good place to start realestate for beginners??

  13. Hi Phil, Enjoy your videos. I find them most informative. Im sure you are familiar with Rich Dad investment seminars. I have attended several freebies and just finished one of their low priced 3 day intro programs on Real Estate investment. Im a Newby of about one year in this whole area of Real Estate but sure wish you folks had been around 20 years ago in public online like you are now. Money I dont have and Social Security dont cut it for income. lol
    Im currently in touch with a friend who is a Real Estate investor and I talk with him and compare info as I watch videos like your. He also attends Investment seminars. He buys property for resale after fix up FSBO. You have a great base for learning and you are gifted in using simple easy to understand language to explain Real Estate. Thanks for being there. Young people need to know about what you teach and I for one believe the word must go forth to this generation.

  14. Hi Phil, I’m Michelle from GA… I truely appreciate your videos and sharing of your knowledge. My question to you is can wholesaling be done in GA considering all the laws. Also Which states are best for wholesaling.

  15. Do you need an Real estate license to be an investor in any capacity?

  16. Just wanted to say thank you for your wonderful videos. I am a new to Real Estate Investments. I am learning, learning, learning. I hope to close my first deal soon. I had three opportunities, but they did not work out. I know it is a matter of time.

    Thank you.

    OELC Investment Properties, LLC

  17. HapsaiGeorge says:

    wowowoowowowoowo……..

    This is brilliant and fantastic indeed…..what the great stuff i learn out from this awesome video…..
    Thanks a lot…..really appreciated it

  18. I want to ask you if is possible to point to me a good Wholesale contract. The one that i use i am bit “scared” that after closing the seller will take also my share ( using your example the $7k) because he is the seller …

    I wan to learn how to protect my self in a situation also when a buyer will find a way to contact direct the seller , and exclude me from the deal.

    I had cases that the seller will not sign a non disclosure letter and when the buyer came to see the house they start to talk about prices and they realize that is a difference and they they get pissed on me …even if they knew that this is part of my job and well is my way to make money

    Thank You Phil!!!!

    • Phil Pustejovsky says:

      Although I know the answer, unfortunately, you are asking me for legal advice and since I am not attorney, I can’t share that with you. Reach out to an attorney to help you.

  19. Good job. This makes me think that one needs to prepare a very solid foundation with a seller that you are an investor, and you do have costs to recoup upon the sale. The investor is the broker in a supply/demand industry and is required to maximize profits for the investors.

  20. Eric weathers says:

    I’m reading chapter 5 of your book I find a local real estate attorney the deals I want to do looking for a mortgage broker that works with investor now
    I feel straightforward with the seller is the way go

  21. Good advice you are a good mentor to work with thanks for the information I’m in south Carolina educating myself and learning the wholesaling realastate business

  22. Hello Phil great point I really enjoy it Can You send me your new book .
    thank you

  23. Phil, great vid. In addition to protect ourselves when we wholesale or do land development we record a memorandum of a purchase agreement that cost $75 to record or you could have sellers presign all docs before the closing and have a HUD that only lists sellers side, so sellers will not not how much u r making on the deal

    • Phil Pustejovsky says:

      We’ve been doing that for over a decade too. Keep in mind that having that recorded Memo is what pissed off that seller who wanted to blow my head off with a shotgun.

  24. Scott Whitehouse says:

    Any advise on how to get a property bought that is tied up with a nursing hope lien. Family is dysfunctional. I would imagine you have been here before.

  25. Larry Ross says:

    Phil,

    Thanks so much for the info that you share. It is appreciated.

    I hope to meet you in person someday and participate in your inner circle.

    Happy New Year sir!

    Larry Ross – Dallas, Texas

  26. Hello Phil,

    I would like to thank you for the book and the imparted knowledge. That was an eye opener! I would have been like”What”, if someone had said that to me. I think that is very important to know. I sure hope one day I am able to afford your mentoring because I like your presentations and your candid approach. Thanks again.

  27. wow.
    this was very interesting.
    I was not told about the 2 closings..
    and that this would be complicated for a newbie.

    I like the laying foundation and
    I plan to get your book tomorrow…
    great stuff.
    thanks for sharing…

  28. Robert Knight says:

    What do I have to do to become a wholesaler?

  29. anneliese reyes says:

    What contract paperwork would be needed for wholesaling a property? And where would I be able to purchase it?

    • Phil Pustejovsky says:

      Those in my apprentice program get access to our custom developed forms. You could also reach out to an attorney to build them for you.

  30. Cedricklockett says:

    How do I get in the apprentice program

  31. Chris Denicola says:

    Just spent the last 4 hours watching your videos .. Needless to say, I am very interested in coaching/mentor services.. How does that work? I am a beginner eager to learn !

  32. D. Gordon says:

    Phil, your honesty knows no bound. I respect you for that.

  33. Larry Taylor Jr says:

    Phil that’s great knowledge u are sharing what I would like to know is how can I sale my house n b apart of your mentorship program

  34. Hello Don,

    You’re amazing, i heard a lot about wholesaling but, I nobody shared to me the king of details. How can I be your student?

  35. Phil,
    I love your energy, candor, information and the generosity of spirit you offer in your videos….
    I have heard this and it is on my radar. What I appreciate most about your presentation though is you broke it down into a bite sized nuggets.

    You Rock!!!!

  36. John de decker says:

    This is so true!!! Just almost lost a deal because the seller suddenly thought I had to much profit for “doing nothing ” and want to cut me out of the deal. Luckily I remindered another video of you: How to deal with negatve people : ) and now seeing this one: I can only confirm your opinion. I don t have to much profit, they want to take my profit without the effort of studying, look and found good deals, taking riskes (even calculated), bringing together the right people, solving their own problem, structuring the deal and last but not least accepting a lot of no’s before having this yes.
    I have bought 10 years ago a real estate where the flipper had 40 k euro benefice in 30 min. I remember my hesitation to go on with the deal myself at that time… I did my calculation and saw what i needed to see: the deal was also great for me. Now, looking back i have to admit this is my property that brings in the biggest cash flow of all my properties. I am so thankfull that i bought this house. That the flipper had a litle or a big benefice doesn t change that.
    Now I flip houses myself and i have to realise not everybody thinks like me. Your video’s help me doing this. Thx

  37. Van Hai Nguyen says:

    Hi Phil,

    Thank you very much for the video. As a beginner, I really enjoy it.

    Regards,

  38. Phil, I am wondering…could one use the $ proceeds from the second closing to fund the expenses of of the first, assuming they occur the same day?

    • Phil Pustejovsky says:

      RESPA guidelines put a stop to that in 2010; naming it the “Wet Funds Rule”. But it can still be done if the Buyer is paying all cash and all parties have signed the proper disclosures.

  39. Patricia R.k says:

    Great Advice, depending on the seller, is always recommended to do 2 closing with the same title company to avoid an extra charge in the title. Thanks for your advice.

  40. Shola Coker says:

    Thanks for sharing!

  41. K.F. (Jack) Griffin says:

    I would like to argue that the wholesaler is not bringing together the seller and buyer. They are dealing first with a seller, who signs a contract giving the wholesaler equitable interest; and this is the conclusion of their business together. Now the wholesaler finds a rehabber, and sells his interest in the deal for the assignment fee. Another transaction with a different party, having nothing to do with the first transaction. The first contract has the names of the seller and the wholesaler on it. The second contract has the name of the wholesaler and buyer on it; the two contracts are not related. Selling equitable interest is not the same as selling a property. When a wholesaler has sold their equitable interest in a deal, it is now incumbent upon the new buyer, and the seller to conduct business together, with the wholesaler out of the picture.

  42. Sheena Tweed says:

    What do you think of doing a seller side only hud? Then they only see what pertains to them.

    • Phil Pustejovsky says:

      Love them! But some title companies / closing attorneys won’t do them and if the new Buyer is getting a loan, the lender for the new Buyer won’t allow them.

  43. Louise Anderson says:

    Thank you so much. I can see that will be so helpful.

  44. Lazer Pepaj says:

    i watch your videos and i did read your book ” How to be a real estate investor “, but one thing i didn’t get!

    How do you find these Motivated sellers?? where do you find them?

  45. Christopher W Peterson says:

    Hey Phil, I was interested in this material back in 2014. I didn’t have the capital to get started. I wish to work with you as a peer instead of as a candidate. To build capital I’m building my investment portfolio in stocks and just saving. Question for you; what is the minimum amount to start again?

    • Freedom Mentor says:

      Consider making application to our Apprentice program and let’s see if this is a good fit for you.

  46. I would like to Thank you for your candid professionalism: There is a positive and negative side to everything in real Estate 🏑
    I’m glad that you’re able to keep it real and allow both sides of the deal to be exposed. I enjoy your videos and books and look forward to listening to more of your videos πŸ™

  47. One of the best ways to response are to say “I’m an investor buying homes cash looking to make a profit. Never had a problem!πŸ‘πŸΏπŸ’ͺπŸΏπŸ€·πŸΏβ€β™‚οΈ

  48. Im a cash Investor and I buy homes with my own cash looking to make a profit. Never had an issue.

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