Impact of Real Estate Wholesalers

In a recent article published in the Christian Science Monitor, there were some concerns expressed about the effect of  ”Real Estate Wholesalers”.

What is a real estate wholesaler?

The article from the Christian Science Monitor describes them as:

“…[someone] who quickly flips homes to a new buyer, usually an investor, for a profit ranging from a couple of thousand dollars to $10,000.”

That definition is basically correct. However, it underestimates the skills that this wholesaler brings to the market place. There are very few people that are good at everything. There are some folks that are fantastic at spotting the great deals and there are others that are great at taking a property like that and making it something worth more. Many investors who are good at turning a rundown property into something more desirable are not as adept at tracking down appropriate properties. In some cases, they simply do not have the time to go through the process of tracking them down. This is where the wholesaler often comes in.

Wholesalers and investors establish relationships and each begins to learn who the players are in both worlds.

The wholesalers gets paid for their skill at finding the right property and the investor takes a property that is unlikely to sell due to its condition and makes it one that is more appealing to buyers and therefore can sell for more than what the investor paid for it in aquisition and improvement costs.

Wholesaler Risks

After reading their article on Wholesaling, you may just want to give it a try yourself!

After all, it sounds like these guys are making a nice chunk of change and not doing any real work. Not quite. First, there is a HUGE cottage industry in “Get Rich Quick” schemes relating to wholesaling. Just do a google search on the term to see what I mean.

The truth is that a wholesaler is often the best example of putting their money where their mouth is. In order to really get those properties, they have to pay all cash. Todays loan climate simply makes that part of the deal. What if the wholesaler is wrong? What if the property is not as desirable to investors as they think? While the linked article seems to want to make it sound like profiteering, these folks are definitely taking a risk.

Finally, investors are cagey about wholesalers. Investors like to put together a team they work with regularly, so an investor and wholesaler need to build a relationship where each trusts the others abilities.

The only investors I have come across that use wholesalers are the ones that are working on multiple properties at any given time and simply do not have the time to find that next investment. They use wholesalers they have had a long relationship with. To imply that a good wholesaler is not offering a service for which they should be compensated is to reveal that you really don’t know that much about real estate investing.

So what’s the problem?

The Christian Science Monitor tries to walk the line. It gets the argument about half right. It points out that these folks get distressed properties into the hands of people that can restore them quickly. It then goes on to try and imply that this is bad for lower-income and affordable housing groups.

I would disagree to the point that getting rundown homes into the hands of low income folks tends to result in sustained rundown housing. Most low income families simply do not have the funds to make the improvements that investors do. Investors are also in the position to make the improvements the most cheaply. The end result is a home that is in better shape and more move in ready so that lower income families will have less of a burden in maintaining the home in the long term.

The case trying to be made here is that somehow things would be better for lower income families if wholesalers were not buying these homes. I don’t share that opinion. For each home that an investor gets via a wholesaler in a neighborhood, the value of the other homes in that neighborhood will increase, bolster a sense of pride of ownership and allow residents of the entire neighborhood to benefit from the improvements.

Given all the aspects in play here, there is a greater long term benefit to everyone involved, including low income families, to wholesalers and investors playing their part in these neighborhoods.

Much Ado About Nothing?

Depending on where you are located, the percentage of homes that are purchased by investors can range from 15 – 25%. According to the Sacramento Business Journal, more than 25% of homebuyers now are investors. This same article goes on to state that,

“…most [buyers] are not looking to sell quickly but instead will rent homes until real estate begins to appreciate…”

Using Sacramento as an example, an area where foreclosures are high and investors are drawn, gives us what this article would likely consider the place where this would occur most. However, the reality does not indicate this.

In addition, we would have to look at what percentage of these investor buyers are using a wholesaler. Most investors, in my experience, do not use wholesalers. In my 20 years of real estate experience, I would have to say that less than 5% of the investors I have worked with make use of a wholesaler. However, even if we assume my first hand experience does not represent the norm and assume that half of all investors use wholesalers, this would mean that in an investor dominated marketplace like Sacramento, only 12% of all sales have a wholesaler involved.

For most parts of the country, that number will probably be closer to 7 or 8% – if we continue to assume half of all investors use wholesalers. That low number hardly seems like something likely to shift markets or freeze out anyone looking to buy – regardless of income level.

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