You Need to Hear These Pros and Cons of Working with Real Estate Wholesalers when buying a property. The hardest part of finding any good investment property is the purchase! Many investors think (know) that the key to making money with investing is to buy it right. However, it can take weeks or even months to do all the research necessary to find undervalued properties. Working with Wholesalers can save time by letting them do the work to find those rare properties. Wholesalers get properties under contract to purchase but have no intention of actually purchasing the property themselves. They make money by assigning that contract to a buyer (you) for a fee. Most of the time, the purchase price, including the assignment fee, still makes sense for the end investor and is still less expensive than purchasing on-market properties or paying retail prices, but there are certainly things to consider.
Pros
Reduced Purchase Prices
A good wholesaler spends significant time and money finding undervalued properties. They reach out to off-market buyers through various marketing channels to help find those properties that must close fast. Buyers may not have the time, knowledge, or energy to go through a long, drawn-out process of listing the property through a realtor so wholesalers can find properties at an attractive price. Their fee plus the purchase price SHOULD still be under the amount that the seller could get if they sold the property retail and if so, the wholesaler just did a large amount of the hard work for you.
Time
A key benefit of working with a real estate wholesaler is they can speed up buying a property. Buying property can be a long, drawn-out process. Finding buyers and sellers can be exhausting, and using a realtor to find buyers or sellers can drive up costs. As real estate wholesalers have a long list of buyers and sellers, they can help speed up the process by identifying the best parties to execute the deals.
Cons
No Financing Contingencies
When you get a property under contract yourself, you will often have a financing contingency which will allow you to break the contract with no penalty in case there is an issue during the inspection. Since the wholesaler has the contract and it is most often a cash contract, a buyer will most often not have those clauses. These properties are truly “buyer beware”, and you must be 100% able to close on the deal once you sign on the dotted line with a wholesaler. In the Fix & Flip business, lenders such as Lendmarq facilitate loans so quickly that the loan process typically does not put the deal at risk. However, if the property does not appraise for what you think it will appraise for, you must be ready and willing to put more cash into the deal if necessary since there will be no ability to break the contract due to a low appraisal. The deal still can be done, but maybe with a larger down payment.
No Inspection Period
Just as in the above example, you must be ready to purchase the property, and you will not have the ability to ask the seller for additional concessions due to any findings there may be upon property inspection. For a Fix & Flip, this is usually not a problem since you plan to rehab the property anyway. However, if you were budgeting $20,000 for the rehab and it turns out it will need more like $50,000, you must be prepared for that.
Time to Close
When you control the contract, you can often ask for an extension if something unforeseen comes up. Extensions are usually not available with wholesale contracts, so you must be ready to close. Lendmarq will make sure financing does not get in the way, but you have to be prepared to move quickly. Additionally, wholesalers have several investors they typically work with, so they are working very hard to flip that purchase contract to the first available buyer. So when they say, “you have 24 hours to make the decision” they usually mean it.
Size of the Assignment Fee
Finally, good wholesalers know the business, and they know what can often cause problems. An assignment fee that is too large can mess up deals, so good wholesalers know to keep it at 10% of the original purchase price or less. However, often they will find those rare “steals” where they can market up the property by a larger percentage and still give the buyer a great deal. Lendamarq (like most lenders) will only allow for a 10% assignment fee to be considered as part of the purchase price. So you might have to make a larger down payment than you were planning for to account for that “steal”. Make sure you know what their fee is, and check with your lender (us) to make sure it won’t be an issue.
Summary
Lendmarq works with many deals that have wholesalers involved, and they can be great deals! Be prepared though, and be ready when working with them.
