Real estate wholesaling is a polarizing sales method that is gaining popularity rapidly in our well-established, affordable neighbourhoods. Wholesalers act as intermediaries between a homeowner and an investor. A wholesaler is a businessperson who is often able to sell your home in a short period of time, but at a discount. Wholesalers have an important function in our real estate market, but homeowners need to understand when to use them. You’ll often see wholesalers market themselves as “private real estate investors”, and “professional real estate buyers”. It’s important to remember wholesalers are not real estate agents and are not held up to the same rules, regulations, and standards as licensed salespeople. 

This blog is going to delve into the intricacies of real estate wholesaling, what it entails, and why someone might consider selling to a wholesaler. We will also take a look at why someone might buy from a wholesaler, and some of the risks involved from buying from real estate wholesalers.

 

What Is Real Estate Wholesaling?

Real estate wholesaling is a business transaction where an individual, known as a wholesaler, acts as the middleman between a homeowner and an investor. Typically, wholesalers target distressed sales where below-market offers are possible due to the homeowner’s urgency to sell. These distressed sellers usually own homes that need repairs and renovations. Or, they might choose a wholesaler because they don’t have the time to list their home for sale and wait for offers to come in.

The wholesaler will then resell the home to someone who has the time, knowledge, and funds to renovate it. Unlike traditional sales, a wholesaler does not close on the home. The wholesaler will assign the contract to another buyer to close under the same terms and conditions negotiated with the homeowners.

When a wholesaler resells their contract, they charge the buyer an “assignment fee”. AKA: The wholesalers profit. Profit can vary significantly… most wholesalers will start with a large profit baked into their asking price (like $50,000), and slowly reduce their profit until the price looks good enough for investors to bite.

 

What Is The Timeline Of A Home Sold Through A Wholesaler?

• Day 1: You and the wholesaler negotiate an offer. The terms could be: $500,000 purchase price, closing date 60 days from today, and the home is for sale in as-is condition. 

• Day 2-13: The wholesaler markets the home to their network for $550,000. 

• Day 14: The wholesaler receives an offer for $545,000, which they accept.

• Day 17: The wholesaler is paid $45,000 and the new buyer takes over as the buyer in the original contract.

• Day 60: The new buyer closes on the home and pays your lawyer the $500,000 you negotiated with the wholesaler. 

The benefit of selling through a wholesaler is that you get to choose your closing date. You also know exactly how much you’re getting out of the sale. Wholesaling like this also allows you to negotiate some unusual requests as well. Like asking for the right to move the closing date back a month or two if you cannot find a home. Or asking for the right to rent the home for 2-3 months after the final closing.

 

What Are The Ethical Considerations When Buying And Selling Wholesale Real Estate?

Wholesalers are not bound by the same legal framework as Realtors. Wholesalers are working in their best interests, and in some cases, have been known to underprice homes significantly for personal gain. We believe there is a place for wholesalers, and there are many ethical wholesalers. But, it’s important to remember that they are in a position of power.

Wholesalers often deal with homeowners who do not know the true value of their homes. If you are questioning the value of an offer from a real estate wholesaler, contact a local realtor or appraiser. Many realtors offer free, or low-priced, market evaluations. Alternatively, you can hire an appraiser, who is a professional trained in giving unbiased home valuations. 

 

Who Do Wholesalers Sell Their Homes To?

Wholesalers have a network of buyers, who are real estate investors, end-users, and realtors. (That’s right, many buyers are represented by realtors when buying wholesale homes).

The one thing that unites all wholesaler’s buyers is their desire to buy underpriced real estate.

For a buyer, the home needs to be cheap enough to cover all the following expenses and still leave some margin for profit:

• Closing fees (land transfer taxes, lawyer’s fees, utility hookups, etc).

• Carrying Fees (mortgage, taxes, maintenance, utilities)

• Demo / Clean up

• Renovations/permits/drawings

• Resale costs (staging, realtor fees, lawyer fees)

• And, at the end of the day, the profit is subject to income tax and HST.

 

Is Selling Your Home To A Wholesaler A Good Idea?

Think of selling to a wholesaler as the quickest and easiest option. It’s not a guaranteed sale though. If a wholesaler cannot find a buyer for your home in 2-3 weeks, they might exercise their right to walk away from the deal. However, they will usually come back to you and renegotiate a lower purchase price and a longer conditional period if they cannot find a buyer.

Wholesalers often use the fact they aren’t realtors as a way to make a “human connection” with the sellers. It’s important to remember realtors are legally bound to work in their client’s best interest, while a wholesaler is not. Another important point to remember is the extensive marketing reach of the MLS system. There’s no better way to get market value for your home than to market it to thousands of people through Realtor.ca.

 

What Are The Benefits To Selling To A Real Estate Wholesaler?

• The wholesaler will purchase the home in as-is condition 

• The closing date is set so you know exactly when the home will close 

• The property likely only needs to be viewed a handful of times. 

• Negotiate the price and closing date with the wholesaler, and know that the home will likely sell and you will receive exactly what you agreed to. 

What Are The Drawbacks To Selling To A Real Estate Wholesaler?

• The main drawback is the reduced sale price. In many cases, you would earn more if you sold through realtors. Often, realtor commissions are less than the assignment profit asked by wholesalers.

• If the wholesaler cannot resell your contract within the agreed-upon timeline, they might come back to you to renegotiate a lower purchase price and a longer timeline. This can be quite frustrating. 

• Once your offer is signed with the wholesaler, you have no control over who they sell the home to. You are unable to vet the buyer to make sure they are qualified to close on the home.

• Limited market exposure, and fewer eyes looking at your home.

• Risk of unethical practices. Wholesalers are not licensed, and there are no repercussions for the wholesaler who severely undervalues your home for their gain. 

 

Are There Risks To Buying A Home From A Real Estate Wholesaler?

Wholesale assignments are an attractive source of discount real estate for real estate investors. However, they come with risks.

• Lack of due diligence: In Ontario, it’s up to the buyer to complete their due diligence on the property prior to placing an offer. In most cases, it’s not possible to complete a home inspection. And the wholesaler might not be able to answer questions about the home that a realtor or homeowner might know.

•  Quality of the home: What attracts buyers to wholesale properties is the low purchase price, but that low purchase price means the home comes in as-is condition. A homeowner might be wholesaling their home because they know the purchace price and cost of repairs exceed the final value of the home.

•  Unfamiliar closing process and closing fees: A real estate assignment is a whole different transaction from the final closing. There is the first closing date, which is the date you pay the wholesaler their profit and take over the contract. And then there is the second closing date, where you close with the homeowner.

• Lack of negotiation power: The deal has already been negotiated with the seller, so there is no flexibility to renegotiate the terms agreed to already. However, there might be price flexibility.

• Financing hiccups: If there is enough time to organize a mortgage, the bank will likely finance the original purchase price, excluding the wholesaler’s profit. Secondly, the bank might not finance a home in need of significant repair, or in as-in condition. 

• Inheriting the property with all it’s structural, mechanical, legal and tenant issues. It’s not only the physical condition of the home you need to worry about. Sometimes properties have illegal extensions, illegal basement apartments, illegal garages etc, which are very costly to remedy.

• Underestimating the costs and timelines to renovating.  Flipping a home is an art. It requires balancing spending on the necessities, but splurging in places that buyers find important. What you might like, might not appeal to the next buyer. Neutral, classic finishes are usually the best choice.

 

Conclusion

There’s a time and place to sell your home to a wholesaler. But, it’s important to educate yourself on the true value of your home. Don’t hesitate to discuss the practice with a lawyer, or real estate agent so you fully understand the process.  It’s also very important to understand the potential money you’re leaving on the table when selling to a wholesaler. To get maximum market value for your home, you need to market it extensively on a very popular site (like realtor.ca) for around 2 weeks. At that point, you know your home has reached an extensive audience that includes buyers, investors, realtors and flippers who would be interested in buying an as-is home. 

Many investors search on MLS for their next renovation project. A quick glance on realtor.ca (under the advanced filter) will show hundreds of homes when you search for the keywords: Handyman, Investor, Contractor, DIY, Personal-Touch etc. 

If you’re in the GTA, and curious about the value of your home, feel free to reach out to Janette and myself.