The Underground Wholesaler Industry that is Killing Residential Real Estate.
What is a Real Estate Wholesaler?
A real estate wholesaler acts as a middleman between a property seller and a buyer. Their business model is simple: they find properties, often at a significant discount, and put them under contract.
Instead of purchasing the property outright, they assign that contract to another buyer, typically for a higher price, and pocket the difference. Wholesalers rarely hold ownership of the property, focusing instead on quick transactions that still pays them out a premium on their contract price and the closing price.
Why Have Real Estate Wholesalers Become So Popular?
Real estate wholesaling has surged in popularity due to the rise of “get rich quick” influencers. These individuals sell courses, coaching programs, and social media blueprints, promising aspiring entrepreneurs that wholesaling is an easy path to financial freedom. They teach people how to:
- Identify affordable properties through calls, mailers, and social media ads.
- Secure these properties under contract using favorable terms & tactice.
- Assign the contracts to end buyers at a higher price.
The perceived simplicity of this strategy attracts people nationwide, leading to an influx of wholesalers entering the market.
How This Trend Impacts Inventory Levels
Wholesaling is significantly affecting the real estate market in a negative way. Distressed properties that have historically been listed by agents, ensuring sellers get the best price, are now being siphoned off by wholesalers. These properties rarely make it to the open market, reducing inventory levels and limiting opportunities for both traditional buyers and sellers.
When wholesalers dominate the distressed property space, homeowners often miss out on maximizing their property’s value. By bypassing agents, sellers may unknowingly accept less money than they deserve for their home.
How Wholesalers Are Screwing Over Real Estate Agents
Wholesalers don’t just impact inventory—they also create headaches for real estate agents. Here’s how:
- Cash Offers with Strings Attached: Wholesalers present enticing cash offers with slightly extended closing timelines. Once the contract is accepted, they spend the next 30 to 45 days trying to find another buyer to flip the contract to.
- High Risk of Cancellation: If the wholesaler fails to find an investor willing to pay more, they cancel the contract. This leaves the agent and seller scrambling to relist the property and start the process over again.
- Targeting Vulnerable Properties: Wholesalers frequently go after distressed homes, dated properties, or listings that have been on the market for an extended period. These are often underpriced homes where sellers and agents are already navigating challenges.
How to Spot a Wholesaler’s Offer
Agents can protect their clients by recognizing the telltale signs of a wholesaler’s offer:
- Low or No Earnest Money: Legitimate buyers typically offer earnest money as a sign of their commitment. Wholesalers often avoid this or provide only a token amount.
- Out-of-Town Buyers: Many wholesalers operate remotely and make offers sight unseen.
- Fake or Generic Proof of Funds: Wholesalers might submit a proof of funds letter that is either fraudulent or doesn’t match the offer.
- LLC Purchases: If the buyer is an LLC that seems newly established, it could be a shell entity created to flip contracts.
- Suspiciously Smooth Transactions: Wholesalers often ask minimal questions and skip traditional inspections. They might only send someone to take photos.
- Unauthorized Access to the Property: If the home is vacant, be wary of reports of unapproved visitors. Wholesalers often send prospective buyers to tour their properties without obtaining the owners permission.
- Green Agents - Wholesalers typically work with newer (green) agents who are willing to spend an abundance of additional time servicing the needs of their out of town investors, not realizing that the pending deals they are handling have a high risk of cancellation.
Bonus Tip: If the buyer’s actions seem rushed or their approach feels too easy, investigate further. Wholesalers are counting on the process moving quickly before anyone catches on.
Protecting Your Clients
As a real estate agent, your job is to ensure your clients’ interests come first. By understanding the strategies used by wholesalers and spotting red flags early, you can help your clients avoid unnecessary stress and financial loss. Additionally, educating your sellers about the value of working with a professional agent can prevent them from falling victim to wholesalers’ tactics.
Remember: A great deal is only great if it’s legitimate. Stay vigilant, ask questions, and keep your clients informed.
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P.S. Good Wholesalers: The Exception to the Rule
Not all wholesalers operate in ways that harm sellers and agents though. There are situations where property owners need a quick sale or simply want someone to take a problematic home off their hands, especially if the home is not in the right condition to go on the market.
These good wholesalers, especially local ones investing in their own communities, genuinely care about the homeowners they work with. They strive to pay a fair price and help alleviate significant burdens for property owners. By offering a solution in challenging situations, they provide a valuable service that addresses the needs of sellers who may not have other viable options.
When working with wholesalers, it’s crucial to differentiate between those who prioritize quick profits and those who prioritize making a positive impact.