If you’ve read this blog for any length of time, you’ll know that real estate investing is an incredibly popular field with immense opportunity for profit.
Many people who are interested in real estate investing but don’t have immediate cash, or just want to get in fast – start their careers with real estate wholesaling.
Many people believe that wholesaling is the best way to get your career kick-started before entering the flip and fix game, or before becoming a landlord. It is a great way to get started.
The Huge Value of Wholesalers to House Flippers
For full-time house flip guys like me, I love wholesalers. They’ve been one of the best sources for deals for me and my team for years now.
In fact, some of my best deals of all time came form wholesalers.
In fact, last year, I brought my partner Bill Roberts on full-time as a wholesaler – although he now does a whole lot more than just that.
Bill started as a wholesaler, got a few deals under his belt (one of which he passed off to me), built up enough of a cushion to quit his day job, then shortly thereafter partnered up with me.
However, Bill is the first to tell you of all the many mistakes he made when he first started out – many of which are listed here.
So if you learn the mistakes that others have made, you can take the correct action to avoid them.
9 Things That You Should NEVER Do When Wholesaling
Below are 9 common mistakes that beginners in the wholesaling business make – avoid them at all costs…if you can.
1. Jumping In With No Emergency Cash
One of the main reasons that wholesaling is great for up-and-comers is you don’t necessarily need any money. As a wholesaler, you’ll sell the contract for the property to an investor who will close in your place.
But just because you don’t need money, doesn’t mean you shouldn’t have some available just in case.
If for some reason you cannot find a buyer, you will be responsible for paying for the property. Moreover, you’ll have to pay for things like bandit signs and any marketing you use.
Related: Why You Need to Have Cash Reserves
2. Not Assembling A Buyer’s List In Advance
One of the main ways wholesalers find investors to sell to is by assembling a buyer’s list. These ongoing buyers are people you might meet by networking at an REIA meeting, and they are always interested in new opportunities to purchase properties.
A mistake that some wholesalers make is that they wait until after they’ve put a property under contract to assemble this buyer’s list. If you wait too long, you might have to be willing to (yet again) negotiate down and settle for a lower offer. Or, in a worse case scenario, you’d have to close instead if the buyer, and pay out of your own pocket.
3. Ignoring The Buyer’s Needs
The goal of any flip is profit, and wholesaling is no different. However, sometimes you might be so focused on your own profit that you might forget that of the buyer.
The two are actually related. If the buyer feels that he won’t profit from a house because it needs an extraordinary amount of rehab, he’ll want to negotiate lower. If he negotiates too low, you won’t make any money from the deal.
To avoid this, put yourself in the buyer’s shoes. Just because you won’t be making any of the renovations, doesn’t mean that you should ignore them.
4. Failing To Get An Inspection
Sometimes, wholesalers become so proud to close sales that they don’t realize that they are getting played themselves. Sellers will sometimes convince you that there aren’t many significant problems with the house, when in reality there are. Other times, the seller doesn’t even realize that there are these hidden problems.
Make sure to always get the house inspected, just incase there is trouble lurking in the shadows like a gas leak or a mold problem. If you don’t get the house inspected, just know that the investors will. Don’t put a house under contract that no one will want to buy.
5. Paying Too Much
This might seem obvious, yet it’s something that many wholesalers don’t pay enough attention to. If you pay too much, you will not profit. It’s that simple. It doesn’t matter how good the property is.
Some wholesalers feel that they can work their magic when they resell the house and somehow make up the difference. The truth is, you can’t beat the numbers.
Which brings us to the next mistake you need to avoid…
6. Not Crunching The Numbers
Before making any deal, you need to determine whether or not the house is worth buying. You must always remember to get a reliable ARV, or “after repair value” from a real estate broker first and foremost.
Then, you will need to calculate 70% of the ARV and subtract your wholesaler’s fee (usually a few thousand dollars). The number that you end up with will be your MAO, or “maximum allowable offer”. You should never exceed this number on your purchase or else you run the risk of not profiting.
7. Buying A Bad Foreclosure
Since the economic recession in the United States, foreclosures have been one of the most prominent investments for wholesalers. Although good ones are harder to find now, foreclosures can be purchased well below market value they always run the risk of having considerable damages.
Additionally, you cannot look inside the property or get it inspected before purchasing. If there are considerable structural damages, or expensive problems, you could end up loosing money.
To avoid this problem, you might consider buying and REO property instead. REOs have low prices like foreclosures but you are able to get them inspected.
If you do decide to buy a traditional foreclosure from a foreclosure auction, make sure you have enough income to take a loss. Don’t depend on buying a single foreclosure to make or break your business.
8. Poor Marketing
If you fail to market yourself, you will most likely struggle in this business. Even if you are able to find a good deal on a property, chances are, you won’t be able to keep getting lucky.
Also, when you go to sell, you won’t have as many options to choose from. Instead of getting the pick of the litter, you’ll be bending to the will of the few or sole offer you get.
9. Bad Market Pricing
Sometimes, you’ve done all of the proper steps in terms of marketing and assembling a buyer’s list, but you still aren’t getting any offers. The problem may be that you have an asking price that is too high.
To get more bites, lure potential buyers in with a notice that you are lowering your starting price. Send out emails or letters to the same people that you had originally contacted so that they know you are willing to negotiate down.
What other pitfalls are there as a wholesaler? If you’ve made it this far, leave a comment below!