Some of the biggest differences between buying a wholesale property and buying conventionally, such as from the Multiple Listing Service (MLS) are outlined below:

• When buying a wholesale property there is not a 7-10 day period for inspections, unlike when buying off the MLS. You are either in or out, so do your due diligence quickly and before you make any financial commitment.
  
  
• Most wholesale properties are in need of repair which can make it difficult to arrange conventional financing.  Again, before making any financial commitments, understand your financial options for that property.  Typical sources are hard money, private money, smaller banks that understand your business, lines of credit and, of course, cash.
  
  
• Most Wholesalers do not own the property in which they are selling; however they control the rights to the property. This is legal, but can make purchasing or closing on these properties tricky when trying to use conventional lending institutions.  Some hurdles we see with conventional lenders are:

• Chain of title requirements.
  
  
• Seasoning issues- some lenders have restrictions on lending on any property that has not been held by the seller for a period of 3-6 months.
  
  
• The property is tied up in the name of an entity (LLC, Trust, etc.) and the seller will not allow the buyer to be changed or assigned. 

As with any successful business you must anticipate potential problems and understand there are most likely creative (and legal) solutions to almost anything you may come across. If you do find yourself faced with any of the above hurdles, consider three potential solutions:

• The Wholesaler must purchase the property first and then resell the property to the Investor (provided that the conventional lender has no seasoning requirements). This is a bit risky for the Wholesaler and may be met with some resistance.
  
  
• Double close the property.  Although we still do double closes, we are finding that requirements from the lenders and title companies are making them increasingly difficult.  Please make sure there is full disclosure to all parties. 
  
  
• The investor buys with cash, hard money or private money and stays away from conventional lenders. Once they have the property fixed up, they can resell the property for quick profits (paying off the underlying loan) or refinance the property with a conventional lender if the exit strategy is to hold rental properties for long term wealth building.

So, who do Wholesalers like to sell their properties to? Easy answer here: cash buyers. Why? Another easy answer here and that is because cash buyers can actually close the deal without all the headaches and drama involved when you have uninformed buyers working with uninformed realtors who are attempting to get loans from conventional lenders. 

Remember, a good Wholesaler who understands investors is in the volume business and will get paid a small fee on each deal but move a lot of deals.  This way they keep the prices at a point where investor buyers make money on the deals and become repeat customers.  On the flip side, because Wholesalers do not make large margins, do not expect them to hold your hand through the transaction like a realtor would. 

Although Wholesalers are constantly looking for buyers, they are just as concerned that the buyer can perform on the contract as they are finding the buyer.  If the buyer defaults, everyone loses!  In the case of a default, the buyer will most likely lose a deposit or even the entire wholesale fee and the Wholesaler will lose their opportunity to sell that property to someone else.  In our experience, most of the wholesale deals that have fallen apart are due to financing.  If the buyer is financing the deal it is very important that the buyer is using a lender that understands wholesale deals.  Below are several examples of how to finance wholesale deals:   

• Conventional Lenders (Bank Loans) - Disadvantages to using conventional lenders are that they can be very difficult to use when they are involved in buying properties from Wholesalers due to ownership and title seasoning issues, they require large down payments, higher credit scores (FICO) are usually required, loans are almost always based on purchase price only and do not include repair money, prepayment penalties and possible refinance difficulties later on. Wholesalers generally do not like to hear that you will be buying their wholesale property using a conventional lender.
  
  

• Hard Money/Private Lenders - Hard money lenders are a great resource for real estate investors, particularly a beginner with limited resources (e.g. cash and credit). Having a hard money lender on your team enables you to confidently make offers on properties. It enables you to purchase properties when your offers get accepted, and it provides you with the funds necessary to do the repairs if needed.
  
  

• Cash – Cash works in every scenario and when we talk about cash, remember that it does not necessarily need to be yours.
  
  
• IRA & 401K Accounts – As long as you have your retirement money in a self-directed account you can purchase wholesale properties the same as cash.

As stated in the beginning of this discussion, you make money on the buy; however, a good deal is determined by what the property will be worth after it is fixed up.  Although there are deals that need very little fix-up, the value increase in the majority of wholesale deals will be gained by rehabbing the property. 

A word of warning, many investors make the mistake of looking for the “easy deal” that just needs “carpet & paint”.  Make sure you understand why the property is selling under value.  If it is “too good to be true” then it probably is!  If a property doesn’t need any work to increase the value, ask yourself, why has it not sold previously?  It is true that there are many reasons other than financial that properties are sold, and we have purchased deals that have not needed much work, but they are the exception not the rule.  Wholesalers usually do not have a problem finding buyers for below market properties that don’t require any work! 

With that in mind, let’s look at how to determine the After Repaired Value (ARV). This is how much the property will be worth after you’ve done the necessary rehab work.

Next, determine how much you can afford to pay for the property, a number also known as the Maximum Allowable Offer (MAO). Figure out all of your costs, including the expenses involved in the actual purchase (title work, title insurance, appraisal, loan fees, survey, etc.); the expenses involved in selling the property (Realtor commissions, marketing costs, any other costs you may pay as part of the deal); your costs while you own the property (taxes, insurance, debt service, utilities, etc.); the costs to rehab the property; and the amount of profit you want to make on the deal. Subtract all theses costs from the ARV, and you have your MAO.

When calculating your desired profits on a wholesale property keep in mind that every investor would love to make huge profits on every deal, but the reality is that some deals are great while others are good. When calculating the profit that fits your investment strategy, make sure that you are taking the number that is the minimum amount that you require to do the deal, and then use your various investor skills to create a greater profit. Sell or fill the property quickly, save on holding costs, get good upfront financing, save costs during rehab etc.
Wholesalers attempt to determine a fair, middle of the road figure to advertise, but truly, it’s meant only to be a guide and not an absolute. You, as the investor need to determine your own repair estimates after viewing the property as each investor have their own cost estimate; you may use granite slab, we may use granite tiles and the next investor may use Formica. The cost of renovation can vary by 25% depending on the investor and experience level. A good rule of thumb for newer investors might be to use about 15% of the ARV, although it could be higher or lower for you based on the cost of money, and how you plan to sell your house. But as a rough gauge, the 15% rule seems to work.

Each Wholesaler has a profit requirement that he or she can work with, some have a bit of room to negotiate while others might deal in volume and take very little profit and are less likely to entertain an offer other than the advertised selling price.

A Wholesaler’s point of view is this; if there is a lot of interest in the property then there will be very little interest to entertain an offer less than advertised, but on the other hand if the property hasn’t had too much interest, they could be a more negotiable.