Real estate wholesaling is a controversial topic, with some people seeing it as a viable investment strategy, while others, like me, tend to view it (mostly) as unethical and predatory. Although it can be done above board, both honestly and transparently, most wholesalers prefer to not go this route.
My views on this topic are based on what I’ve seen first hand. Both as a real estate investor and a real estate agent, so in this article, I’m going to delve into the world of wholesaling, exploring the risks and benefits of working with wholesalers from the perspective of a real estate agent as well as from the perspective of the homeowner, because they are the one most affected in this transaction.
What Is Real Estate Wholesaling?
Real estate wholesaling involves an individual, known as the wholesaler, contracting with a home seller to purchase a property with the intention of assigning the contract to a cash buyer (often a flipper) for a higher price. The wholesaler's profit comes from the difference between the contracted price and the assignment price.
Critics argue that wholesalers misrepresent themselves as cash buyers, when in reality, they are merely conduits to cash buyers. This dishonesty and lack of transparency can be off-putting to some home sellers. Especially when you consider that this detail is often not mentioned, and home owners typically don’t even know to ask.
The Negatives Of Working With Wholesalers
Misrepresentation Of The Truth
One of the primary issues with wholesalers is their misrepresentation as cash buyers. This can lead to mistrust and confusion from the home sellers who are looking for a reliable solution to sell their property.
If you don’t understand the nuance of a transaction involving a wholesaler—including the potential risks to the homeowner, then you risk damaging your own reputation when things go wrong, which can significantly hurt you when it comes to earning new business in the future.
As an agent, your reputation is everything, so you need to aggressively protect it by carefully vetting potential buyers—especially if they happen to be wholesalers.
Potential Failure To Close The Transaction
Wholesalers don't actually purchase the property themselves. Instead, they rely on their ability to find a cash buyer and assign the contract to them. If a wholesaler fails to find a buyer, the home seller could lose valuable time, and face potential consequences such as foreclosure, in the case of a distressed property. Things can spiral out of control pretty fast in these situations.
The problem is that while there are legitimate wholesalers, many are newbies just getting into real estate investing, and they have neither the experience nor money to effectively evaluate and close on a transaction.
Often, they will tie a property up with a deposit of as little as $100, as advised by some of the real estate investing “coaches” and then by the time they realize they’re unable to carry the transaction all the way to the closing table, they’ve already wasted several weeks or months of the seller’s time, and yours, and have potentially even driven away potential legitimate buyers.
Risks Due To ALack Of Regulation
Wholesalers operate in an unregulated industry, which means that there is no legislative body overseeing their actions. This lack of oversight can lead to unethical practices, as wholesalers can get away with these transgressions without fear of legal repercussions.
This means that as an agent, you need to learn how to evaluate a wholesaler yourself to determine if they are legitimate or just another inexperienced newbie who may hurt your client’s transaction.
For example, one of the things you can do is ask to see their most recent transactions.
If they don’t have at least a few deals under their belt in the last few months, it may be worthwhile to steer your client away from their offer. You should also Google their name and dig at least ten pages deep into the search results to look for any complaints about them online.
The Positives Of Working With Wholesalers
Faster And Easier Transactions
Working with a reputable wholesaler can actually accelerate the selling process. Without the need to involve various parties like lenders or other agents, the transaction has the potential to be completed much more quickly.
These types of wholesalers do exist, and in these cases, they often understand real estate far better than the typical buyer, so they will see the hidden value in a property that the typical home buyer would overlook. They also tend to have a large network of active buy and hold investors as well as flippers, so they may be able to help you move a property faster.
The key, as I mentioned earlier, is to carefully evaluate them to determine their level of experience.
Access To ANational Pool Of Buyers
Wholesalers often have a national network of cash buyers, allowing them to market your property to potential buyers from all over the country. This expanded reach can increase the chances of finding a suitable buyer, compared to the limitations of a local MLS listing.
This can increase the pool of potential buyers exponentially, which not only leads to a faster and easier transaction, but also a potential bidding war, which is a major win for both your client and you!
And a side benefit is that these other buyers can now become potential buyers for any other property you list as well, making you a more effective agent.
Flexible Options Due To Lack Of Regulation
Although the lack of regulation can be a negative aspect of wholesaling, it can also be advantageous for home sellers who are working with an ethical wholesaler. These wholesalers have more options and flexibility in how they conduct business, which could benefit the home seller in certain situations.
Realtors Beware…
Working with a real estate wholesaler can be a double-edged sword.
On one hand, there are potential benefits such as faster transactions, national exposure, and increased flexibility. On the other hand, the risk of misrepresentation, failure to close, and lack of regulation can lead to negative experiences that hurt both your client and you.
The key to successfully working with a wholesaler lies in carefully vetting them, just as you would with any other buyer, and like any homeowner should vet a Realtor. Do your homework to ensure they have a track record of successful transactions, sufficient financial backing, and a reputation for ethical practices.
By doing your due diligence, you can increase the chances of a positive experience when working with a real estate wholesaler, which means smoother transactions, happier clients, and more revenue for you.
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