[Edited from my post on the SJREIA listserv on June 7, 2010]
I got a call from a new “wholesaler” this morning and I feel compelled to share this conversation of incompetence on the listserv. An aspiring wholesaler would benefit from reading this by learning what to avoid that could destroy his/her reputation in minutes. I will not give any information that will allow anyone to identify the individual and in fact, I don't know his name myself (he told me his name at the beginning of the conversation but I didn't catch what he said). This well-meaning new investor tried to sell me a deal with no clue what he was doing and he got an education.
If you are a newbie and a wannabee wholesaler, read this before you ever contact me to buy your deal. If it's a good deal, I definitely do want you to call me since I am a qualified and serious buyer with the ability and will to buy. If you read this, you will learn a few of the mistakes to avoid when you call me.
Classic Mistake: Grossly Overestimating ARV or Not Knowing ARV
First, the "wholesaler" (I use the term very loosely) had no clue what the ARV was. When I asked him about after repair value (I had to spell it out), he responded "$170,000 is the highest comp." (I am not disclosing the number). I wasn’t sure that I heard him right since I couldn’t believe that anyone would give such a response.
I told him that if he was going to attempt to sell the house to me, he needed to know the ARV and justify the number. He said he got a realtor to give him a few comps (couldn't tell me if they were the same house characteristics, location radius or even house style!) and simply said that $170,000 was the highest. So, I followed up and asked if he knew the range of price at which it really may sell. He had no clue.
I told him that if he doesn't know how much it would sell for after repair, how could he possibly make an offer himself?
Classic Mistake: Not Using the Right Contract
At that point, I asked him if he had the property under a contract for purchase or if he used an option agreement. I explained the difference to make sure he could answer my question. I further explained that if he had a full contract for purchase (without a proper escape clause) instead of an option, he couldn't walk away and therefore he would have to know his numbers were very good, since he would have to live with the numbers and buy the house himself. He responded that he had a “contract for purchase.” So, again I asked him for the ARV he used to calculate his maximum allowable offer and he didn't answer other than reverting back to the $170,000 as the highest comp.
I obviously wasn't making any progress to get an ARV using this line of questioning and I probably should have hung up and stopped wasting my time. However, one never knows if there is a deal there, even from an incompetent "investor" so I continued the follow up. I then asked him if he was prepared to buy the house if he didn't find a seller. He then said that if he couldn't find a buyer then the house would revert back to the seller. I asked him again if his contract was an option and he was confused. As far as I could tell, this was indeed an option.
Classic Mistake: Not Knowing Enough about the Property
I still needed to know if the house has a shot of meeting my buying criteria. It turns out that he had no clue about the age of the house or the house style when I asked. I then asked if it was more than 50 years old since I buy houses up to about 45-50 years old. He said it might be under 50. He then said that the property was listed on MLS, so I looked it up on MLS while we were on the phone and it was 81 years old. Imagine that, he was telling me about a property listed on MLS that he had under option (or possibly a purchase contract with an escape clause) and then he called me to wholesale the house without the listing in front of him and not knowing the house parameters!
Classic Mistake: Grossly Underestimating Repairs or Not Having a Repair Estimate
He said the repairs were about $9K-$15K. This is a very low number for an 81-year old house, unless it was recently rehabbed, but if it was, it probably wouldn't be a wholesale deal to an investor-buyer. So, I asked if the $9K-15K included a kitchen for example. He said the kitchen was OK but may use some updating