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Understanding the Financial Pitfalls of Home Wholesaling
Dated: March 17 2022
Views: 2758
Understanding the Financial Pitfalls of Home Wholesaling
One of our guiding principles at Flotilla is to educate our clients on trends in the housing market in order to protect their biggest financial investment—their home. This month, we’ll be tackling the practice of home “wholesaling”. We believe that wholesaling can be a predatory practice that misleads sellers, and can leave them with lost equity, and profit left on the table unknown to them before it’s too late.
Wholesaling has become a more prevalent practice in Oklahoma City, especially in this hot seller’s market where homes are selling for record-breaking prices and at incredible speeds. The opportunity for profit is ripe, but we believe that homeowners should reap that profit, not wholesalers.
Wholesaling is the practice of entering into a purchase contract to your home at a lower, discounted, “wholesale price” with a wholesaler who, in turn, sells that contract to your home to a 3rd party at an increased market price.
By definition, the market price of your home is the price you could have sold your home for on the market via a traditional sale. However, the purchase contract entered into with the wholesaler means the seller only nets the lower wholesale price, while the wholesaler nets the difference between the wholesale price and the market price as profit. The technical term for the profit the wholesaler makes by selling your home’s purchase contract is called an “assignment fee”, and equates to the seller potentially missing out on thousands of dollars from selling at the market price.
Wholesaling is a particularly enticing business practice since the wholesaler isn’t putting up the capital to actually purchase your home. They are simply entering into a contract which is sold at a profit to the actual buyer of your home.
Wholesalers can often be identified by their slogans of “We buy homes for cash! As-is! Quick close!” An ethical wholesaler will clearly communicate to you that they are a wholesaler; the purchase contract you’re entering into is a discounted price for your home vs. the full, market value of your home; and that the wholesaler is not purchasing your home, rather the purchase contract for your home will be offered and sold to a third party.
For some sellers, this is a selling arrangement they’re happy to make. The condition of their home or financial situation may necessitate a quick sale with a lower return on investment. However, for some sellers, they may not have understood the practice of wholesaling and the financial pitfalls involved.
In fact, the Oklahoma Real Estate Commission (OREC) proves the latter to be true as they have seen an increase in complaints about the misleading tactics and predatory contracts that can cloud a property’s title in the wholesaling practice. Often, sellers are surprised to learn that the wholesaler was not who bought their home, but that it was sold through the wholesaler to another party at a higher price.
The practice has been such a problem, that Oklahoma passed the Predatory Real Estate Wholesaler Prohibition Act , which went into effect in November 2021. This legislation requires wholesalers to obtain an Oklahoma real estate license in order that they comply with the Oklahoma Real Estate License Code & Rules. This was a move in the right direction in order to protect the equity Oklahomans have earned from their homes. Even Arizona and other states are beginning to take action on home wholesaling.
Again, our mission at Flotilla is to protect our clients’ real estate investments. When you list with a competent, experienced REALTOR®, you have a local expert on your side whose goal is to protect your home's equity by selling it at a fair, market price rather than a discounted one, and negotiate on your behalf so that you walk away with the equity earned from your home.
When you’re ready to buy or sell your home, we encourage you to request a Comparative Market Analysis of you home from your Flotilla partner to get a true understanding of your home’s value.
© 2022 Flotilla Holdings, Inc.
Jennifer Cody
Jennifer Cody (Arsenault) is a lifelong Oklahoman and seasoned real estate professional who has been serving her community since 1998. As the founder and Broker Associate at Flotilla Real Estate Partn....
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