Is this Person Really Buying My House? The Difference Between Wholesalers and Cash Buyers
By JSL
When we meet with sellers, we often find that they have been contacted by and/or received offers from wholesalers. Wholesalers sometimes present themselves as buyers or investors (or state that they “work with/for investors”), but in reality they have no intention of purchasing your home.
Instead, wholesalers will get your property under contract and then call, email and text people like us (we receive dozens of emails and calls each week from wholesalers) to try to sell us your home.
As there are so many wholesalers out there who can tie up a property for a long time and prevent a seller from moving on, it is very important for sellers to know when they are speaking with someone who is actually going to purchase their home quickly (cash buyers like us) and when they are speaking with a wholesaler.
How Can I Identify a Wholesaler?
While they may present themselves as buyers, wholesalers will not be purchasing your home. Instead, they will try to get a signed purchase agreement and will then go out into the marketplace to “flip” that contract for a fee (like a commission) to a cash buyer.
There are experienced and honest wholesalers out there, but it is important to understand that wholesaling as a business is often how people who want to be real estate investors get started.
It is viewed as a great way to get started because you don’t need any money to do it. You simply need to convince a seller to get into contract with you and then act as the middleman by finding someone who can actually buy the home.
For this reason, wholesalers can skew towards being inexperienced beginners who may not know as much as they should about real estate, purchase contracts, escrows, closings, and all the nuts and bolts of completing a transaction with you.
So how can you tell if you are dealing with a wholesaler or an actual buyer?
1. Start with the simplest approach. Look them directly in the eyes and ask, “Are you (or your company) going to be the person who actually buys my home, or are you trying to flip the contract?” Also ask, “Will you be doing a double-closing?” A double closing is another way wholesalers operate, which means that they will first take title to your home very briefly, and then immediately transfer it to the ultimate end-buyer. Hopefully they will be upfront and honest. If you can’t get a straight answer, walk away.
2. Get a written response to the question above. You of course should not be signing anything at your very first meeting with someone, so in your follow up discussions write an email which specifically asks them the question in item #1 above.
3. If you receive a proposed purchase agreement, look out for some specific language in the contract which gives them the right to “assign/transfer” the contract to anyone they want.
Wholesalers need this type of language in the contract so that when they find a cash buyer, they have the contractual and legal right to simply pass their purchase rights on to the cash buyer. If the agreement does not give them any right to assign or transfer the contract, they may not be a wholesaler.
4. Look out for long due diligence/escrow/other time periods in the contract, and very broad rights to cancel the contract.
Typically, cash buyers like us will offer to purchase your home with “no contingencies” (other than title insurance-related work) and a quick timeline. In simple terms, “no contingencies” means that once we are in contract with you we don’t have any real excuses to walk away (again, with the exception of a title insurance company telling us there is a serious problem with your ownership rights). If we were to walk away for almost any reason, you would get to keep our “earnest money” (discussed below).
Wholesalers, on the other hand, often include a much broader right to walk away in the contract so that if they can’t find someone who will purchase the contract from them, they can terminate the agreement without owing you anything. To insure that they have time to find a buyer, they will also include language in the purchase agreement giving themselves a good amount of time before they have to commit to purchasing your home.
Wholesalers are in the Middle.
Working with a cash buyer and cutting out the middleman is of course an ideal situation. With no middleman you will be interacting directly with the person who is paying you for your home. You also won’t have to worry about the possibility that the wholesaler will be unsuccessful in finding an end-buyer for your home, ultimately walking away from the deal and wasting your time.
Additionally, when there is a middleman (wholesaler) who takes a fee for selling your purchase agreement to a cash buyer like us, they need to build their own profit into the deal. This means they either have to (i) reduce what they offer you to make room for their own profit when they flip the deal to a cash buyer or (ii) mark up the price that they will present to cash buyers.
As cash buyers are often experienced investors, most of us will know when a wholesaler is marking up a property too much and we will not be interested. The vast majority of the deals that wholesalers email to us are overpriced and deals we would never touch.
Three (3) Important Tips When Working with a Wholesaler
If you do ultimately decide to work with a wholesaler, here are three important tips:
1. Ask for a reasonable “earnest money deposit” and make sure the money is deposited with a reputable escrow company (i.e. check the escrow company’s reviews).
An earnest money deposit is simply the upfront money that should be deposited into an escrow company’s account by any wholesaler or cash buyer with whom you are working. It is a form of security for you as the seller, and it should be at least 1-3% of the purchase price offered.
So, if you get an offer of $100,000.00 for your home, the buyer or wholesaler should be placing at least $1,000.00 - $3,000.00 into escrow within a few days of the purchase agreement being signed. You can ask the escrow company to confirm for you when they receive the money.
Make sure you review the terms of your contract to see what it says about the earnest money deposit. Generally it should state that if the property has not been sold and the contract has not been terminated by the wholesaler or buyer after a specified period of time, the earnest money belongs to you even if the wholesaler/buyer walks away.
Note: An escrow company should be involved in every real estate sale and acts as a responsible third party to collect and hold onto the buyer’s money and ownership transfer documents until a contractually specified date. On that date, the escrow company will transfer the purchase money to the seller and new ownership documents to the buyer and county where the property is located. Run away quickly if you are dealing with someone who says that an escrow company is not necessary.
2. Reduce the time the wholesaler has to find a buyer.
As mentioned above, when we enter into contract with sellers, we almost always have no contingencies in the contract (i.e. we don’t give ourselves the right to walk away from the deal and keep our earnest money deposit). Except in atypical situations, if we walk away for any reason at any time the earnest money is yours to keep. The major exception here is if a title/escrow company tells us there is something wrong with your ownership rights (your title) with respect to the property.
However, since wholesalers (i) need time to find a buyer like us, (ii) are not certain they will be able to find a buyer, and (iii) do not want to give you their earnest money deposit if they can’t find a buyer, they will often include language in their contract which gives them a good chunk of time to walk away and keep their earnest money.
This is where you should absolutely exercise some leverage. For example, if the contract states that the wholesaler has thirty (30) days in which they can terminate the agreement and keep their earnest money, you should be pushing back and changing that timeframe to somewhere between ten (10) and fifteen (15) days. After that 10-15 day period ends, the wholesaler can walk away but you get to keep their earnest money.
3. Make Sure You Have a Right to Terminate.
You, as the seller, should have a right to terminate the purchase contract. The last thing you want is to find yourself stuck in an agreement and unable to sell your home. Make sure that the agreement states unequivocally that you can terminate if the sale is not completed within a specified number of days.
As escrow companies have their own internal processes that can take some time (these are things like title research and title insurance underwriting), a typical single family home purchase contract will state that the the sale will close within 25-35 days. You want the purchase agreement to state that if the deal has not closed within that type of timeframe, you have the right to terminate.
Josh has been a real estate investor since 2011, and owns/operates single-family, multifamily, and commercial real estate in multiple markets in Northeast Ohio with his wife and partner, Elina. When they are not onsite managing construction projects, getting their hands dirty fixing things, and touring neighborhoods and properties, Josh and Elina can be found walking in the Metroparks, enjoying ice cream at Mitchell’s, pretending to work out at LifeTime Fitness and traveling.
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