Unethical individuals and organizations bother me more than anything else in my line of work.
There is one Houston branch of a national “wholesaling” company in particular that makes a ton of money by ‘wholesaling’ properties to investors. They tie-up properties as cheaply as possible, give their estimate on what it’s gonna take to rehab the property, add $15K to what they have it under contract for, and sell their position to another investor… usually a novice.
Now I have no problem with wholesaling per se, but when it’s done unethically, it really gets under my skin.
Here’s are my main beefs:
- They take advantage of newbie investors who are too green to know how to research what they’re being fed
- Their rehab estimate consists of what they think it will cost to throw unlicensed Mexican contractors at house for a couple of weeks, use the cheapest possible Home Depot materials, and slap it back on the market.
- For their estimated After-Repaired-Value (ARV), they take the highest comp in the neighborhood, and tell everyone that that’s where it’ll sell. They don’t take location (the most important thing in real estate), square footage extremes (more to come on this in a later post), or aesthetic concerns in account.
The result? Newbie investors buy the house, spend twice as much money as they were told, and sell the house for far less than they were told.
Here’s a real-life case study in one of my favorite neighborhoods to work in: Willow Meadows.
There was a house that I’d been keeping my eye on as a possible deal for one of my investors. The location wasn’t the best (it was a corner lot close to a big utility easement), and it did not have a garage, but it was a nice big house that I suspected could have been bought for a good price. It was in a hot market area at a hot time. It was listed at $260,000, and I thought it had the potential to sell at about $340,000 with a sizable location/no garage discount.
The very day I was going to write an offer, I hear through the Realtor grapevine that my favorite wholesaling company got it under contract for an “all cash deal” at $230,000. That night while browsing the real estate section of Craigslist, I saw an advertisement that went kinda like this:
BELLAIRE INVESTMENT
ARV (after rehab value): $ 369,900
purchase cost: $242,500
estimated rehab cost $ 45,000
——————
investor buy price: $287,500
Profit $82,400 (% 22)
I had already run the numbers. And…..I *know* this neighborhood. Their rehab costs were low by about twenty grand, they don’t take any ’soft’ costs into account (loan costs, commissions, closing costs, etc which come to around twenty grand), and they overestimated the ARV by about another twenty grand.
SO……… $60K later you’re down to $22,400 in profit. IF IF IF IF everything goes as planned (which it never does in this business). Now don’t get me wrong, a lot of new investors would still be happy with $22K. But for the risk involved in a deal of this size (with marginal location no less) I would have a tough time talking my legit clients into this deal.
I guess I shouldn’t care so much about whether or not these folks get lied to and lose their shirts, but it gives everyone in the business a bad name. We already have enough PR obsticles to overcome as it is.
Oh… the outcome of that deal? I’ll let you know. The home is currently on the market. He did a great job on the rehab, but went waaaaay over the wholesaler’s budget. He is a really nice guy, and I hope to direct him to some good deals in the future.
