Wholesaling Ethics
Ok, well not only am I looking to wholesale within the next week with my marketing plan going in effect, but I have also dealt with a couple wholesalers in my area. Now when I think about wholesaling and what my profits will be.. i think 3k-5k, I know for a fact that some of these guys that I deal with are trying to bring in profits up to 13k at least per deal.
I'm not trying to hate on them, I mean hey if you can pull those numbers and everybody's happy...well then why not?
The problem is, I think the people that the people these guys are dealing with are newbie guys looking to get into re investing and they're not doing the math for themselves. So they are buying wholesales that aren't bringing in the profits that they may have expected. For example, I was wheeling and dealing at a property with an ARV of $80k he wanted $67k needed 5k in repairs. I didn't end up buying it, actually I just wanted to get out and meet an actual wholesaler and see how it works I also am working on rehab rentals so I thought maybe I'd find a good deal also. Well after he saw that I had a little experience and he didn't think he would have to hold my hand, the price dropped to 60k and then eventually to 59k. Now I can't guarnatee he was trying to get 13k, but I am guessing he didn't want to go below 5k in his pocket...fair enough.
My point is, once I get out there and I have some deals available, and when newbie rehabbers who have no idea what they're doing all they know is they just want to buy a house fix it and sell it...how ethical is it to charge almost double the fee you normally charge (not telling them of course) in exchange to "hold their hand" and show them how it works? I know when I am looking to rehab and hold, I don't want to pay any more than 65% LTV (including repairs), infact I want to get a better deal than that.
I'm just as greedy as anyone, but I really don't think I could do that, I'm far from being a seasoned investor, but I know with being new myself I wouldn't want something like to happen to me...where someone is willing to give up $8k before negotiation begins but if I didn't really understand how things work (well...in this case I wouldn't be negotiating until I learned, but pretending I was just jumping in something because I heard it's easy and a great thing to do) then the seller would let me do the deal without feeling like he could give me a break.
Ok, lol, anyways my point is...I feel like if someone is new and they are motivated, it would inspire ME to be able to help them do a great first deal, show them a thing or two, and have the potential probablility of a repeat buyer, rather than do one deal with this guy and he ends up not making what he thought he would, get discouraged and never tries again. If someone is new and hasn't put any effort in learning just something about what they're about to get themselves in...well I think (and these are the ways i want to work), I should just tell them "Look go buy this book, or go talk to this guy....and when you think you know a little more and will be comfortable with taking this step give me a call"
I'm no saint, lol, but I just thought making a point (my point) about this might help some people out.
I believe in the long run, if you use some ethics in your wholesaling, all those potential 10k deals that you let go for 3 or 4 because you wanted to help someone out...will be the one's coming back to you every couple weeks wanting more making you $$$$ on a consistant basis, rather than a one time deal.
Besides I love to talk about real estate, and it's one thing that when I learn something new, I like to let everyone around me know about it because I'm excited.
But point made...Good Ethics= Return Buyers = Consistant Paydays.
JB
JB,Great article. I agree too many wholsalers go for the one shot killing when it would be more prudent to take less profit and build repeat buyers.
JB,
I think what you said is so true. I would rather do many deals and have repeat customers than make my month in one deal. I have seen many people throw good deals away because there wasn't "enough" money. I believe you get stronger , more experienced, and more respected by volume.
Thanks,
Lori
I SO appreciate everything stated in this article. It reinforces my belief system..... Thanks for taking time out to clearly state it.
We are talking about a simple economic principal here....supply and demand. If the price was too high people wouldn't pay it. These guys are giving discounts to people who have experience because they know that you'll be back. These newbies that probably will not stay in the business pay more.
Thats my take on things. Take it or leave it. GOOD LUCK
JB I know where you are, and yes there are a lot of so called wholesalers in this city that I believe don't know what they are doing. There are only a handfull that are really making good money wholesaling. They understand that a rehabber is going to take the
ARV * .70or.65-repair cost=price of house.
As a wholesaler if you are not using this formula, you are wasting you time trying to sell to real rehabbers. I go with the 65% of ARV as this is the amount most hard money lenders will lend. Using this formula I would not have paid more than 47K for the property in your article.
Many of the wholesale deals I see on the net here have no profit for the rehabber built in.
I don't neccesarily think that it is people trying to take advantage of someone as much as ignorance. If you have never rehabbed a house how can you have any idea of the cost involved? I think that if you want to wholesale to rehabbers you need to rehab a couple of houses and learn the cost involved. As a matter of fact a couple of the most succesful wholesalers here started just that way, and still rehab houses. I don't care if you make 5k or 50k as long as my formula works with your deal.
I agree. I think the bottom line is that you have to make your customer happy.
If you walk away with $25K, but he profited $250 on a large home, you're both happy and will continue to do business. $5K for lower to median homes is about the going rate.
If he walks away from the table feeling like he paid way to much and was taken, he won't be back.
I'm not sure this is exactly a response to your post but I have a policy that I never count the money in the other guys pocket. I buy and sell at numbers that make me happy. If someone else makes a lot of money after I've sold I try to make it a rule not to be jealous or kick myself that I sold too cheap. If someone goes broke cause they paid too much I try not to feel like I pulled one over on them.
This policy sometimes has me holding property that I'd sorta like to sell and sometimes even walking away from deals that are pretty close to doable. Sometimes I even get out-bid on property I'd really like to own. That used to bother me the most, trying to figure out how somebody else could afford to pay more than me for the same building. Then I started going to the foreclosure auctions of the guys who had out-bid me and I didn't feel so bad.
That hits close to home commercialking, I also used to spend a good deal of time trying to rework numbers to find the error of my ways. How can these people be paying what they are, what am I doing wrong that I cannot afford to bid with them? Then one day I realized every house I have was someone elses failed attempt at RE. My numbers are ok.
the reality is most are in it for the money, ethics are very far down the list, honesty is a rare commodity
I couldn't agree with this article as well as your reply, CKING... I never understood how some of the people in this business could get mad or jealous thinking about what the other guy made in profits...
pk
JB (and the rest of you) are way, way too nice! The fact is the majority of wholesalers have been in the business for years and they know EXACTLY what they are doing and how much to charge. It is no accident that the purchase price they are asking for is so high. Over the last 5+ years, wholesalers have discovered that there are THOUSANDS of newbies investors, who can't spend their money fast enough.
Most wholesalers could care less about repeat business. Why? Because this industry has so many newbies entering every month, there is always a market.
I gotta go with Bruce on the comment he made. You people are WAY too nice. In this town, the wholesalers have jacked the prices up so high, ONLY newbies will buy from them. If you sit down at the table with them, you're playing cards with a stacked deck... I've known specific instances where the wholesaler pulled down over 30k on a WHOLESALE deal, and some newbie bought it.
Sounds to me, based off of what I am reading in the responses that a lot of people are going to wind up disappointed.
But as a newbie wholesaler, I can say that I know of newbie rehabbers and wholesalers that are making profits after doing deals like this (of course the prices are a lot higher in my area). They probably don't make as much or sell as quickly as some others and some newbies (maybe even a lot) are actually not investors anyway but homeowners trying to get a cheaper house and willing to do some work on it for it.
But having personally done some research and (definitely after reading these posts) I am glad to see that there are others who see things as I do. It also shows me that once the market changes a lot of people will be very disappointed because they don't realize how much their strategy is depending on the current market staying as it is when they are ready to sell after rehabbing, This gives me all the more encouragement to feel more secure in all the deals that I turned down because the numbers didn't seem to mesh right for me.
Great article JB...There must be something in the name "JB"...see below.
I truly wish more investors, newbies/seasoned, people in general shared the same vision...ie, being "ethical"
I would have to agree with it is better to treat people right, share your knowledge and the $$$ will come.
JB
I agree with you 100% JB. In the market I am in, there are a few people that are fixing up and selling that are charging ridiculous prices. I know casue I got suckered. Iam still making a positive cashflow so I am not that mad but still... My business plan has been to work with two or three investors that want rentals. I buy rehab get renters into them and then they refinance and cash me out. The amount of profit I take out is 6K per deal. I think it works out well for everyone invleved cause I get five or six houses sold to a single investor, he gets them at good prices with good equity built in and I get a good reputation for being fair. I defintaely think the ethical investor will come out ahead in the long run.
Our entire economy is based (as myfrogger said earlier) on supply and demand. You and I as consumers vote everyday with the dollars that we spend, or choose not to spend. If the wholesalers are charging too much, then they will either lose the contract, or lower the price, or lose any potential profit to holding costs One of the best things about a free market economy is that if there is a vacuum created, (in this case no ethical wholesalers) Someone will come along to fill the void. This situation will police itself.
The only time anyone should have a problem with how much a wholesaler makes on a deal is if there's not enough left in it for you. Then it's your turn to make a decision. P*****, or take the deal, It's pretty simple.
Is this really about how much the wholesaler makes, or is it about them getting getting a deal signed with the home seller before you did?
No I think it is more of making sure that wholesalers don't get a bad name and reputation as so many out there already do. In many parts of the country, wholesalers and rehabbers are the housing industries equivalent to sleazy car salesmen. And as someone else said there always newbies that are coming into the industry looking to get a start. If that is the case, the situation will NOT police itself. I would think that the laws in place and the tighter reign that mortgage companies are placing on mortgages as a result of illegal flipping is proof of that.
Also as far as whether it is getting the contract signed before someone else does, I have no worries of that. In the short time that I have been doing this, word has spread around that I offer better deals than the more established wholesalers so I am starting to get the deals that they would have gotten. I couldn't care less what they make as long as they aren't bamboozling thier customers and creating ill will towards wholesalers and rehabbers. Just my 2 cents
Joe
Joe,
While I don't disagree with you that we need to protect our reputation as investors, your reply, "In the short time that I have been doing this, word has spread around that I offer better deals than the more established wholesalers so I am starting to get the deals that they would have gotten.", without realizing it, strengthens my point. This situation does police itself. Maybe not as fast as you would like to see, but it does work.
I'd like to add that nowhere in the article , at least to my recollection, was there any reference to "illegal flipping", and I do not consider that to be a legitimate part of this discussion. No one here is advocating that anyone commit fraud, and I'd prefer not to further confuse someone that might not be clear about just what illegal flipping" is.
With regards to protecting newbies, Please! Who have you ever heard recommend to anyone that they go out and buy a property form a wholesaler and not conduct their own due dilligence? If a newbie goes out and acquires a 100k property for 125K because the person they bought the property from told them it was worth 125K, then they have no business investing anyway. Sure, we all have made mistakes, but when I make one, It's MY fault. It's never the fault of the person that sold me the property. And nothing is going to change that.
Bottom line, "Capitalism Works!"
Jeff
Jeff, I appreciate your comments. I did not mean to offend anyone or imply that illegal flipping was advocated. As far as "protecting"newbies, I am not saying that we hold thier hands through out the process, I am saying that some ( not all or possibly even very many) wholesalers take advantage of a newbies enthusiasm to get them into overpriced rehabs becasue they don't know any better. That is the sort of thing I am saying hurts the reputations of everyone else. I just don't think it is legit for a wholesaler to sell a 100k house for 125k just becasue he can take advantage of someones inexperience.