Why I Never Buy Properties From Wholesalers

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If you want to buy off-market properties the easy way, the solution is to buy properties from wholesalers, right? WRONG. It may be the easy way, but it’s not the best way—not even close. In fact, host and Thoughtful Real Estate Entrepreneur founder Jeff never buys properties from wholesalers…and never will. In this episode, you’ll learn how buying properties through wholesalers shortchanges your investments and leaves massive value on the table, and doesn’t serve the Seller nearly as well.

Episode Transcript

When people first find out that I’m an advocate for buying properties off market, often they say, “Okay, so you buy properties from wholesalers, right?” And I say not only no, but heck no! I would never buy a property from a wholesaler because it completely limits so much the potential of the deal and in today’s episode, we’re going to discuss exactly why that is the case exactly everything you might possibly miss by buying a property through a wholesaler and why you should be the one in charge. Let’s keep the theme song we’ll dive right into this topic.

Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans. nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows for sale. I’m Jeff from a thoughtful real estate entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media. This show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Hey, thank you for joining me for another episode of Racking Up Rentals. Show notes for today’s episode are at www.thoughtfulre.com/e58. Please do us a big favor by hitting the subscribe button and your podcast app real quick. That of course will make sure that you know exactly when the next episode comes out. But it also sends a message back to the platform that encourages them to share this show with other thoughtful real estate entrepreneurs. Onward with today’s episode.

So my wife and I just got done, binge watching, Breaking Bad. So I know we’re a little bit behind the times. And that’s okay, that’s a whole other episode in and of itself. But in one of the recent episodes that we just saw, there was this scene that I think this has actually happened a couple times in this show. But in this particular case, Walt was effectively kidnapped, he was thrown into a car, he was put in the backseat, he was blindfolded. And he was driven out to the desert. And when they got to where they were going out in the middle of nowhere, he got out of the car. The blindfold was taken off of him. And he could see where it was. And he could see that he was in the desert. But he had no idea where specifically he was in the desert. And he didn’t even really know why he was there. He wasn’t sure until that moment exactly who would put them in the car. And it was only once he got there that he started to piece the puzzle together a little bit. And you know, this experience. This experience is kind of what it’s like buying a property from a wholesaler.

So I want to dissect this topic today. And I want to tell you why I never do and never plan to buy properties from wholesalers. But first, let’s just start by asking why do people tend to buy properties from wholesalers? Well, I think one reason is just simply that it’s kind of common, right? If you get started in real estate investing, you might just think, oh, that’s just kind of what we do. You know, you can either be the wholesaler, or you can buy from wholesalers. Maybe you do both. But that’s just kind of what people do. But most of the time, it’s because investors don’t want to do their own deal sourcing, right. But they also, they also believe that they are in the business of buying low and selling high. And then if you’re in the business of buying low and selling high, that you believe that just getting inventory that is below market that is low, that you can later sell high is all the matters. So they believe they’re in the business of buying low and selling high. And that just you have to have inventory of properties you can buy low. Well, you might be thinking that right now you might be thinking Well, yeah, duh, Jeff, of course. That’s what it’s all about. But I’m going to encourage you to see that situation differently. And I’m going to tell you that that is not what you are in the business of you might buy low and you might sell high and I hope you do. But that is not what you are in the business of. So can wholesalers provide a source of deals for you? Yeah, absolutely. They can. That’s not really in question. But can wholesalers provide a source of optimized or maximized deals for you? And the answer is, almost universally. No, they can’t. In order to talk about this, we have to go back to a topic that we call opportunity vision now, opportunity vision is something we’ve explored in great depth in previous episodes. In fact, Episode 23 was really all about Opportunity Vision.

In our recent series about the YESSES framework, we certainly got into the topic of opportunity vision as well. But you might go back to Episode 23. And take a listen to that one. But let me give you the definition of opportunity vision term that I made up myself. But an idea that I didn’t make up. Opportunity vision is the visionary skill that it takes to see all of the aspects of what’s possible with a property or with a deal. And then to evaluate each of those possibilities to determine where the greatest opportunity lies. So stated otherwise, it is your ability to see the whole picture, see all the possibilities of where this property, this deal this, this relationship with a seller could go, sort through them and then figure out which is the best of those opportunities, which is the best of those paths. And the first point I want to make for you today, and in my notes, this is in all caps, because it’s that important. Never outsource your opportunity vision. Other people will not see the same things that you will, opportunity vision. And the suite of possibilities with a deal is not a thing. It is your take on a thing. It is your perspective. And I’ve You and I both look at a deal. And somebody else we all look at the same deal. We’re gonna have three different ideas of what all the possibilities are. And if you abdicate your responsibility for creating opportunity, vision to a wholesaler, you are really, really selling yourself short and doing yourself a disservice. Never outsource your opportunity, vision, your exploration, exploration of possibility with the property, your exploration of possibility with the seller themselves are literally the most important and valuable things you do. As a thoughtful real estate entrepreneur, you might say, well, actually buying something and owning it is the most valuable thing that I do.

That’s very valuable. But it only comes after you explore the possibility and explore the possibility with the sellers and determine what the best path is that is the most value adding an important component of the whole thing. So you never outsource your opportunity vision and you never outsource your negotiation. Never outsource your negotiation. So let’s go back to our breaking bad example, for a second. Breaking Bad teaches us that wholesaling the experience of buying a property from a wholesaler is like voluntarily allowing yourself to be kidnapped. It’s like somebody is taking you to a destination. Now this destination in this metaphor is it’s a purchasable deal. It’s maybe an assignable deal that you can take from this wholesaler. But you are blindfolded. You’re in the backseat of this car.

And the blindfold is only taken off really after you arrive at the destination. Right so you arrive at the destination and that is your ability to take over this deal from the wholesaler. If you want the blindfold is only taken off once you have arrived at that destination, meaning you don’t know anything about it until the opportunity to take the deal from the wholesaler shows up on your doorstep or more likely, in your inbox. Or even more likely these days in your text messages.

You had no say in this destination that the wholesaler is taking too, you had no say in deciding if that was the right destination, you had no say in how you got there. Either you were just sitting in the back of the car with a blindfold on. You weren’t able to see what vehicle you were riding in. You weren’t able to see the scenery along the way that got you to this destination to have some context for where you’re going. You could barely even see who was driving the car. And you can barely even tell if you know or trust this person who is driving the car. You’re just a blindfolded passenger in the backseat, helpless waiting for the arrival at the destination.

I’ll tell you what, that’s not the kind of existence that I want to live. That’s not the kind of business I want to run. I want to give you a simple example. That is a tale of two negotiations. This is just an example that I made up today of two different ways that two different people a wholesaler and you might negotiate with the exact same seller for the exact same property. And we’re going to take a look and see just how different these two outcomes very likely might be. In these two cases that are the same property the same seller but two different approaches from you and wholesaler. So your seller here, let’s say she is a 50 year old woman, she is a tired landlord. She’s been renting this property out for the whole 15 years that she’s owned it. Right now it’s vacant, which is why she’s thinking about selling it because it seems like the right opportunity. And there is some deferred maintenance. And that deferred maintenance includes it needs a new roof really to even be financeable. After repaired value, the ARV of this property is $300,000. And it needs about $15,000 of work, including that roof. So here’s the situation that the wholesaler presents to you the situation that they create when they do their negotiation, the wholesaler meets the seller and very quickly gets down to business trying to figure out the bottom dollar of the seller within an hour at the most, the wholesaler has made an offer and a few minutes after that the property is in contract. So the wholesaler has put the property in contract very, very quickly, the wholesaler negotiates to buy this property for $200,000. And they are allowing you to buy it from them for 10 or 10,000 more dollars. So a total all in cost of $210,000 to you. But effectively you’re paying them $10,000 to have the right to buy it for $200,000.

The deal that the wholesaler has negotiated closes in 20 days, and there are no contingencies that you can take on by taking this deal from the wholesaler. There’s no contingency for inspection or any kind of due diligence. Of course, you can do inspections, if you can finagle your way into the property, but there’s no contingency that will allow you to back out. And of course, you’re even making a non-refundable deposit to this wholesaler in order to have the deal from them. There is no contingency for financing. And you know that it probably wouldn’t be financial in the traditional sense anyway, through a bank. So you’re gonna have to show up with cash, or some kind of a private money, hard money type of a loan, where there is not a contingency for your financing. So you’re going to go out and you’re going to either use your own money, or you’re going to borrow somebody else’s expensive money and there’s no contingency for inspection or financing. You were actually just one of many people who heard about this opportunity, quote, opportunity from the wholesaler. And you have to decide pretty quickly whether you’re going to take them up on the opportunity as a result. And that means that you just get to decide if you’re going to buy it, that’s really it, you get to decide, am I gonna buy it? Am I gonna do the work? And then what am I going to do after that, and because of the financial circumstances here, you either need to resell it. So this will be a flip for you. Or you can scramble to refinance the property to hold on to it after a while but because you bought it with hard money, you are going to be feeling a sense of urgency to refinance it as quickly as possible, after you’ve renovated it and re rented it. But if you do the work, you could resell it, and you might make 55 or $60,000 on a flip. And that sounds okay to you. But here is a completely different scenario, the same property, the same seller, but your negotiation skills in the game, your opportunity vision at work. So here’s how this one plays out.

You meet the seller, and you start getting to know her, and you don’t try to make a proposal or an offer to her right away. You’re simply trying to get to know her and to understand her you’re building rapport with her. Over the course of two or three weeks, you learn several really important things about her, you find out that she doesn’t really want to sell, she just kind of feels like she needs to because it has been difficult for her and she wants to move out of state to be closer to her kids and her grandkids.

You find out that when she was renting this place, she was renting it below what you know to be market rents, she felt like she was renting a little bit below market rents because she, you know, didn’t want a lot of friction with tenants or a lot of maintenance requests and things like that. But you know, she was actually renting it further below market then she really realized she’s really kind of worried about her capital gains, and this comes back to the idea that she doesn’t really want to sell. She’s worried about paying capital gains tax because her CPA has told her that the capital gains tax bill after owning it for 15 years in a rising market. It’s going to be significant for her but she also doesn’t want to just exchange this property with a 1031 exchange into another rental property because that’s not really going to help with her lifestyle change desires and having less responsibility. She’s also concerned about the income that she’s losing from this being a rental. If she sells it, there goes her source of income. And so that’s not ideal to her too. So she’s wanting to sell kind of, but really hesitant, because it just doesn’t feel like the perfect solution. She doesn’t feel like she has a lot of other choices. She knows that she has let the maintenance slip. And she’s kind of regretful about that. And she knows that actually, that actually hurts her because she knows that in order for her to list this property on the market, and just have kind of a regular sewing experience, she’s going to need to have some that work done, but she just does not really want to do that. It’s not so much that she’s in a hurry to sell. It’s just that she wants to be done with this chapter in her life and move on to the next thing which is being closer in a different state to her kids and grandkids. So you focused on solving the person first right part of our YESSES framework, then you move on to solving the deal and putting together a proposal you discover in your own due diligence, because you’re spending time with her and looking at the property and, and taking the time to get to know her that this property is really perfectly set up for a detached accessory dwelling unit. Because in this particular town, the zoning allows to build another unit on the property detached from the current structure that’s on the property that could create effectively a duplex that goes from being a house to a two-unit property. And so this creates a great ability for you to expand what is already there. And you to just like the wholesaler negotiate to buy this property for $200,000. It’s the same price, the same price exactly. And you have been listening to this seller and you know that she is concerned about capital gains, and she has concerned about income. So you make a proposal to her that aids significantly in both of those topics. And you say seller, I would like to propose that I give you a $10,000 down payment. And we put the rest of the balance of this property this purchase price of 200,000, which means $190,000 on a promissory note, and we do an installment sale and this installment sale will help you defer your capital gains. And it will also help you continue to receive a stream of income every month from the sale of this property but without you needing to be the landlord and the owner.

So you propose that your $190,000 promissory note is going to bear interest at 4%. And that your payments each month will be interest only or more, you have the right to pay more, but what she will expect is a 4% interest only monthly payment on her $190,000 balance with you. That would give her an income stream of $633 a month. Now this is just about the same as she was netting before as the landlord and owner because she was keeping the rents low on purpose and inadvertently much lower than the markets really would have allowed her had she wanted to. So you know you’re going to come in, you’re going to put a market rate tenant in here after you fix it up. And you can easily pay her this 633 a month which is 4% interest only payments, which you have the option to pay more on $190,000 promissory note. But you also know that you’re not going to be able to rent this property for a couple months because you’ve got a little bit of work to do. And that little bit of work involves reroofing the house and some cosmetic changes that you’re going to be doing as well some cosmetic improvements. So you say seller, if it’s okay with you, what I’d like to suggest is that interest will begin accruing 60 days after close because frankly, we both know I can’t put a new tenant in there right away. And if I don’t have a new tenant, I don’t have the income to make the payment. And so I’d like to propose that interest begins accruing 60 days after closing so I can have time to do the repairs, I need to get it re rented. And then your first payment of course will be 30 days after that because our payments of interest are made in a rear so on the 19th day, we’ll be paying you your first payment from the interest that began accruing on the 16th day.

This note you propose will be due and payable to her in a balloon payment. manner. Honor before 20 years from when you close so that continues to give her a nice long income stream for all 20 years. And you will owe her the balance that is outstanding at the end of those 20 years. And also, last but certainly not least, you negotiate with her because she does not want her capital gains tax to be due and payable before she really wants to and she’s planning on having that capital gains tax be primarily due and payable in 20 years. On the on the 20th year. you negotiate that should you need to Neither want to sell the property, refinance the property, or anything like that you both agree that she doesn’t want to get cashed out early. And so you have negotiated the ability for yourself to substitute the collateral that secures this note. So if you want to take her loan that is secured by this property and secure by a different piece of property that you own, that you have the right to do that, because you are at the driver’s wheel of making sure that her capital gains tax strategy that she is just carefully concocted is not going to be pulled out from under her. So now let’s just step back, you’ve negotiated the same person, the same property.

But you have negotiated a way, way, way better deal, you’ve even negotiated to purchase it for the same price that the wholesaler had negotiated to buy it for. But the terms you’ve negotiated are infinitely better for you. You have massive expandability with this accessory dwelling unit, this ad you that you now know that you can build in the backyard because you had time to do the due diligence to discover the zoning and you understand that that now I’m going to turn this house into a duplex which is a game changer. You now have the ability to cash flow this property the second you put a tenant in it without needing to go and refinance out of a hard money loan. Because there is no hard money loan, there is no giant cash infusion that you put into it, that you need to get back out or a bad loan you need to get out of through a bank refinance. You have cash flow from the second you put the tenant in there without needing to refinance. Because you don’t need to refinance. There’s no loan qualification for a refinance. And frankly, there was barely any loan qualification for this $190,000 seller loan in the first place. Because the seller was feeling good about you. She used her subjective intuition about your character, she asked you a few basic questions and ask you for a couple of verifications of things, maybe a simple credit report. And with no more qualification than that you got this $190,000 loan, you have massive, massive flexibility in your monthly payments, because the only payment you’re committed to making is for 4% interest only payments, but you have the ability to make larger payments should you want to, you have effectively delayed your payments for three months, because interest will begin accruing after two months, your first payment will be due three months then from closing. So you have preserved your cash flow to preserve your ability to repair the property before you need to start making payments. You’ve also preserved your ability to sell this property in the future and not have to pay off the note. You have to provide new collateral for the note and that collateral has to be quality collateral. And you’ve negotiated for exactly what the definition of that is. But you have the incredible flexibility of being able to sell or refinance this property without paying off this amazing loan that you have negotiated with the seller. And you also have a real person who is a lender. And should anything challenging come up in your world should you want to request any kind of revision to your plan. If you want to have any type of conversation, you’re now having a conversation with a regular human being rather than a bank, which always makes your likelihood of having success and the ability to have any degree of flexibility, much greater than when you’re dealing with an institution and the cherry on top, my friends, all of this, all of this not only is it way better for you.

All of this actually meets her needs so much better than the wholesaler’s proposal. Now, if you had bought this deal from a wholesaler, you might have made a few bucks on a flip. And that’s great. But you would have left so much of the potential possibility, the potential value of everything that you could have negotiated, all have that opportunity undiscovered, untapped, and sitting on the table for nobody to even notice.

So here’s my encouragement to you don’t sit blindfolded in the backseat, during the most important part of your business. insistently being in the driver’s seat, being alert in the driver’s seat with your hands on the wheel, feeling the road seeing the curves ahead, sensing the landscape around you, sensing the conversation with the seller and directing that conversation accordingly.

Is it more work to do your own marketing than to just sit around and wait to receive emails and text blasts from wholesalers who go out and negotiate lowball deals? Yeah, it’s a little more work than just sitting around on your butt waiting for those emails to come in. But it is so worth the effort that you put in, because you can negotiate something unbelievably better. And this leaves me with my final point for you today. To bring it back to the beginning, I said, you might think you are in the business of buying low and selling high.

You are not in the business of buying low and selling high, you might buy low and sell high. And that’s fine. But that is not the purpose. That is not the underlying big picture of what you are doing. You are not in the business of buying low and selling high you are in the business of connecting with people evaluating the opportunity associated with those people, and then extracting the maximum opportunity that you can see in a way that meets both of your needs as well as you possibly can. And for this reason, my friends, I don’t buy properties from wholesalers. And I hope that you will consider not doing that yourself and instead, sourcing your own deal driving your own car and feeling the road with your own hands on that steering wheel.

That is it for today’s episode of racking up rentals. Again, show notes for today’s episode are at www.thoughtfulre.com/e58. Please do us a big favor by hitting that subscribe button and your podcast app. And if you could take just a second to rate and review the show. It doesn’t have to be brilliant along poetry. Just a few words saying what you might like about the show and a review and a rating. That’d be so appreciated. Hey, did you know also that we have a Facebook group for thoughtful real estate entrepreneurs. It is called Rental Portfolio Wealth Builders and you can just search for that in Facebook or you can just type group.thoughtfulre.com into your browser and you will be taken right there. If you liked this episode, it would be awesome if you would take a screenshot of that episode and post it to Instagram and just tag us on Instagram @thoughtfulrealesate. I will see you in the next episode. You will hear me in the next episode.

And until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off. Thanks for listening to Racking Up Rentals where we build long term wealth by being a win-win deal makers. Remember solve the person to unlock the deal and solve the financing to unlock the profits.

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