What’s a home-buyer? Someone who wants to move up or to stop paying rent or to relocate from another city. Someone with stuff to be housed and who desires, periodically, to bathe and sleep in private. They want a specific, carefully-chosen home, and they don’t want to lose out on it.
But then there are buy-and-hold and fix-and-flip investors. They want the home to invest in, but not quite as urgently: They keep their stuff in their own homes, and, at a certain point, other opportunities can seem more promising.
And then there are wholesalers. They want the home, but only at an insanely low price, and they don’t particularly care which home they happen to be lily-padding on, provided the price is insanely low.
So first, as a warning to Sun City homeowners: Zillow your address. I am Zillow.com’s first and harshest critic, but your home’s Zestimate is a much better reflection of its Fair Market Value than the number some fast-talker is quoting you over the phone. Unless you are beset by an insuperable emergency that brooks no possible delay, you have no interest in talking to pawn-brokers.
But true pawn-brokers at least bear the risk of owning the merchandise. The self-idealized perfect wholesaler owns nothing except the temporary right to palm a property-under-contract off on a greater fool, who in his turn hopes to flip it to an even-greater fool, each taking a fee for the assignment of the contract.
Eventually the contract lands with a lesser wholesaler, whose job it is to effect the second scam: Renegotiating the already-discounted purchase price even lower – much, much lower. The theory is that you will be so desperate for whatever money you can get that you will cave. Does this work? I can show you MLS listings that suggest that it does, at least sometimes.
But it’s scummy, scummy, scummy, every bit of it. The assignment game is pure rent-seeking – demanding compensation for no added-value. And cancellation blackmail is white-shoe extortion.
How can this be? Don’t free markets protect us from this kind of predation? They should, but markets work by equilibrium – balancing costs and benefits on both sides. Where one side has an unfair advantage, fair outcomes are unlikely.
The problem is Section 6j of the Arizona Association of Realtors Residential Purchase Contract:
The specific villain is line 266 – the right to cancel. Owner-occupants only cancel on inspections if they have deeply misjudged the house – foundation issues, rampant infestations, sewer/septic-tank failure. Normal investors will cancel if turns out there is less juice or more squeeze than was expected. But wholesalers cancel deals with abandon, because there is zero cost – to them – to turning every crank on every candy machine until they find the one that’s broken – the homeowner who didn’t Zillow his address.
The assignment problem is actually trivial, it’s the blackmail-by-threat-of-cancellation that makes wholesalers toxic: The game is to get a property under contract, ideally at a deep discount but at full price if necessary, then torque the seller with demands for a much deeper discount on pain of cancellation. The buyer has nothing at risk; the earnest money comes back, if it was ever even deposited. But the seller will have gone through escrow’s nine circles of hell, will have made plans and, at a minimum, will have suffered market-bruising from the experience.
How to slay this dragon? It’s actually pretty easy for an MLS-listed home: “By mutual agreement of the parties, Section 6 of this contract is stricken in its entirety.” That does what I want done, but judges might not love language that comprehensive. Instead, my plan for wholesalers is simply to insist on a signed BINSR – the buyer’s inspection form – along with the contract, accepting the house as-is.
That would be the literal intent of entertaining an as-is offer: The seller agrees to accept a discounted price, and the buyer agrees to underwrite his own risks in operating from an information deficit. Second, if you imagine that you can evaluate the property financially without seeing it, then presumably you can also physically inspect it in the dark. But first, if you actually do want to perform the due diligence appropriate to a true investor, and not a scam-running rent-seeker, do it now, before you write the contract.
Do you see the benefit? I don’t want to deprive genuine investors of the opportunity to inspect the property and to demonstrate its value to their own standards. But I do want to chase away all of the fleas who will never do what I am asking – which takes care of the assignment problem, too. And I want to make sure that I am negotiating price only once.
The purchase contract is broken in the same way the marriage contract is broken, rewarding defection and penalizing cooperation. The fix is to take away the reward for defection: If you insist you must buy from the discount rack, the terms are cash-and-carry – a contract with no contingencies.
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