Real estate wholesalers also tend to be newer real estate investors that want to get involved in the real estate investing business. There are exceptions where you can find experienced wholesalers and you will also find that some flippers and buy and hold investors will occasionally wholesale a deal that is not a good fit for their portfolio. However, most of the time, real estate wholesalers tend to be new, inexperienced real estate investors that do not intend to be the end buyer on a deal.
Instead of buying themselves, they often will negotiate the deal with the seller and go under contract with the intention of having another investor actually perform on the contract and ultimately buy the property.
In practical terms, the real estate wholesaler will go under contract to buy a property they find and then either assign their rights in the contract to the flipper or buy and hold investor or, in some less common cases, they will sell ownership of the LLC or corporation that has the contract to buy the property to the flipper or buy and hold investor. There are also variations where the wholesaler will actually close on the property, but only if they have another investor who can immediately buy it from them, usually on the same day. You might have heard the term double closing where a transaction happens in the morning and the same property is sold again in the afternoon. This is an example of that situation.
How do real estate wholesalers find the deals to wholesale? Usually, through networking, marketing to find sellers who are not listed in the MLS, properties listed in the MLS, and bird dogs.
At first blush, you might think that working with wholesalers as a real estate agent is a great idea. I would disagree. Lukewarm idea, maybe. Great idea… not so much. Here are a few reasons.
First, the actual real estate investors who are buying the properties from the wholesalers are usually wanting deeply discounted or amazing cash flowing deals. As you find these deals, you should bring them straight to your own flipper or buy and hold clients. Bringing them to the wholesaler just increases the complexity.
One of three things must happen with the deal when you bring in the wholesaler.
- They need to be able to assign the contract (harder to do in my market but maybe yours is different)
- Buy in an LLC or company that has essentially no assets other than the contract to buy a property so they can sell it to the flipper or buy and hold investor who will actually close or
- The wholesaler will need to close and then immediately sell it to the flipper or buy and hold investor
If that's the case, why not sell to the flipper or buy and hold investor yourself, directly? That's what I'd suggest.
A wholesaler might argue that by going through them it is more likely to close since they have multiple flippers and buy and hold clients that could buy it. Maybe, but more often than not, I've found the opposite to be true. An experienced wholesaler with some well-heeled, experience flippers and buy and hold investors on their buyer's list might be able to convince me otherwise, but that would be uncommon.
Now that I've explained to you why working with wholesalers might not be optimal, like bird dogs, there are some benefits to working with a few wholesalers. Actually, they're the same reasons for working with bird dogs: possible deal flow for yourself and possible seller listings leads. Just like with bird dogs, wholesalers often want some help with comparable sales data and only a small percentage of the sellers they talk to will have a deal that is good enough to be able to wholesale to their flippers or buy and hold investors. So, approximately 9 out of 10 sellers they talk to that are interested in selling want retail price. You can help those sellers by listing their properties for sale. So, working out an agreement with your wholesalers to have them pass on any seller leads that they can't make a deal with, might lead to some listings for you.
I rarely focus on this strategy anymore since I focus on my actual investors, but when I did, I always told the real estate wholesaler that we could always exclude them from the listing contract in case the seller changed their mind and wanted to accept their original offer. That way the wholesaler knew that they would not need to pay a commission if the seller they referred to us eventually decided the offer from the wholesale was their best option after all.
I suspect other real estate agents would be willing to even pay the wholesaler a fee for the seller leads. Make sure you check with your managing broker and attorney to structure this appropriately. I personally would NOT be willing to pay a referral fee based on a transaction closing. If I really wanted to pay a fee like this I'd check with my attorney to see if I might be able to pay the real estate wholesaler a fee to remove my real estate brokerage yard sign from the front yard and return it to our office when the house has sold. It might be the most expensive “yard sign removal service” out there but it might still be worth it. To be clear, I've never structured it like that personally… I've just offered to help them with comparable sales on all their deals, and there was an unwritten expectation for them to turn over their unconverted seller leads in exchange for that, without any exchange of money. If any money were involved, I'd undoubtedly talk to my managing broker and an attorney.
A couple other interesting side notes about wholesalers (and all other investors for that matter, but especially bird dogs and wholesalers). First, they tend to be regular attendees to meetings. They want to meet lots of investors to add to their buyer's list. So, they want to network and attend meetings where investors hang out; that's your real estate investor group meeting. So, they can help get your attendance up at your meetings which helps with social proof. Early on when you're trying to grow your attendance, I'd recommend and encourage you get as many people there as possible. For my club, we've reached capacity with our meeting room and I'm too lazy and cheap to find a different venue, so we try to focus on Nomad and buy and hold investors primarily through class topic selection.
Also, wholesalers will often attend more than just your real estate investor meetings and meet a lot of investors that have not yet found you and your group. They can be great advocates for you and introduce many other investors to your investor group. The best way I've found to encourage real estate wholesalers to refer investors they are meeting at other clubs and while networking is to be remarkable and worthy of referring with your classes. Having excellent class content and topics is the best way I've found of being remarkable. You can check out the recordings of the classes we teach for ideas, and if you are interested in being able to use our class content, contact me.
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