Tuesday, October 13, 2020

The Wholesaling Scam

A Note on Real Estate Wholesaling

Here is the wholesaling business model as I understand it:  
The wholesaler identifies a property that might be purchased for less than market value.

The wholesaler approaches the owner to discern interest level in a sale.

The wholesaler's goal is to find a property that he can purchase under market value from a less than savvy seller.

The wholesaler and the seller reach a deal for the property at a less than market value price and place the property under contract.

The wholesaler then approaches buyers (often investor types) who may purchase the property at or near fair market value.  Or at least closer to market value.

The wholesaler and the buyer go under contract at or near fair market value often using a buyer corporate entity (LLC, corporation, etc).

There may be a double closing, but it is certainly not necessary.

At closing, the buyer is introduced as a partner or associate of the wholesaler.  The buyer's entity acquires the property at market value, the seller gets the originally agreed less than market value price, and the wholesaler keeps the difference.

What actually takes place is the buyer acquires the property at the originally agreed less than market value price, and pays the difference to the wholesaler as an assignment fee.
Of course, there are variations of this.  But in any case, it's all pretty nifty, but for one little problem:  Transparency.  Three questions:  Does the seller go into this transaction fully understanding what the wholesaler wants to do?  Does the seller understand what is happening along the way?  And finally, at closing, does the seller understand how the deal is structured?

Another question:  If the answer to these three questions is yes, why would any seller agree to it?

Also:  Does the seller understand that the wholesaler has no intention of purchasing the property himself?  And can terminate the contract if he fails to find a buyer?  And here's a question that I really do not know the answer to:  If the wholesaler truly has no intention of purchasing the property and this is not made clear to the seller, is the wholesaler not in breach of his contractual duty to act in good faith?  Yes, there is such a thing:  There is a covenant of good faith and fair dealing implied in every contract.  Imagine that.

Look, I am not terribly interested in foolish sellers.  My heart does not really bleed for sellers who fall for this nonsense.  Although maybe it should.  No, rather, I am concerned with the wholesalers and their business model.  It is a business model designed to take advantage of the ignorant and perhaps the unfortunate.  It is a model of bad faith.

It's really theft.  The wholesalers are stealing equity from unknowledgeable and unsuspecting sellers.  This is who wholesalers are and this is what they are doing.  I am not calling for more laws or regulation, but I do think we should shine a light on the practice.

Real Estate Wholesalers:  Modern day, small time con men.


  1. Agreed.

    Supposedly, however, the younger generation likes the idea of "no-showings, no hassle." Either they think it is worth the cost, or they don't truly understand the cost (perhaps because it is not being explained to them properly).
    Your thoughts?

    This from a twitter article:

    "Future looks promising

    But every company Yahoo Finance interviewed for this article was bullish on the future of iBuying as digital buyers and sellers emerge from 2020 and 2021.

    The coronavirus pandemic only accelerated demand for and adoption of contactless, digital technology in real estate. And iBuy options can shelter families from exposure to the novel coronavirus by giving instant offers, instead of allowing strangers to traipse through their living space during open houses.

    “iBuying is attractive during COVID. People don’t want to have open houses,” said Sridharan.

    iBuyers like Opendoor made their processes even easier during the pandemic by replacing in-person indoor home inspections with video walkthroughs. Opendoor is now testing options for customers to replace synchronous assessments altogether by taking pictures of their home and uploading them to Opendoor for assessment.

    “The pandemic was the catalyst to accelerate many of the things we think are good long-term vision. More millennials are becoming homeowners and are looking for all-digital solutions,” said Willerer at Opendoor. “Real estate has been long overdue for this kind of innovation and COVID helped accelerate work under way to digitize the process.”

    Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter

    1. Well I would point out one distinction between iBuyers and the wholesale scamsters. And that is, as far as I know, the iBuyers are actually buying the properties. And therefore assuming some amount of risk of ownership and resale.

      I have read that some wholesalers will purchase in order to have a double closing (primarily to hide the transaction structure from the seller). And of course, only after lining up a buyer. If they fail to find a buyer, is there any chance that they will move forward with the purchase? I know, I know, this is the deal that the sellers agree to. Like I said above, my heart does not really bleed for these foolish sellers. Many of whom think they are doing better for themselves by avoiding those sharky real estate agents.