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9 Blunders Every Wholesaler Must Avoid (Or Else!)

by Michael LaCava on July 27, 2014 · 31 comments

  
9 Wholesaler Blunders

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.

He did it right and most importantly he networked his tail off to meet people like me and other people who would lend him money.

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…

Related: Why I Often Pay More For Property Than It’s Worth

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!

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{ 31 comments… read them below or add one }

Jason July 27, 2014 at 8:50 am

Michael

Great article. I’m sorta struggling with number six. I’m not a real estate agent, but I do know do don’t have a problem doing comps for me. I don’t want to be a burden by leaning on the same two people. Should I just bite the bullet and just get a real estate license or work with a few more agents so I’m not just asking the same two people for comps?

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Michael July 27, 2014 at 9:00 am

Hi Jason – How you establish your relationship with them and they have an understanding of your business will determine if your being a burden or not. I don’t look at it as being a burden. I look at as collaborating with my team to get deals done. I promise the ones that work with me I give them the listing so it is worth there while for sure. I DON’T have my real estate license. That being said I don’t feel there is anything wrong with getting it for your use but I just chose not.
Are you a new investor?

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Jason July 27, 2014 at 10:08 am

Right now I’m focusing on wholesaling as a means to build reserves for any property I acquire to buy and hold.

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Michael July 30, 2014 at 2:24 pm

Ok great. Good luck with the wholesaling. What area’s are you scouting?

Ben July 27, 2014 at 9:29 am

Great post Michael. A lot of actionable advice in here. I particular agree with blunder #1. In some instances, I have considered purchasing properties with my own cash and “wholetailing” it instead. I think it’s important for wholesalers to consider the sellers needs above their own. In many instances these sellers are in a tough situation, and if the wholesaler doesn’t close, then you are making the sellers problems even worse.

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Michael July 30, 2014 at 2:26 pm

Yes sir. We have to think about all involved and do the right thing. Just be real and tell them exactly how you are going to handle the transaction that way there are no surprises.

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Gary July 27, 2014 at 11:32 am

To me the most expensive aspect of wholesaling is marketing costs. It may cost me $2000 in marketing to make a $5000 wholesale fee on average. Of course, it depends on your competition and how good a salesperson you are. Here in Phx its very competitive. That said, I’ve made $12K on a craigslist ad which cost me nothing.. ha ha. But on average over time, it costs a lot more than most people think in marketing to land a deal. At lease where I live and wholesale. Also, if I can’t lock up a buyer in 5-7 days.. I’m up front with the owner and either back out of the deal then or get an extension. I’ve never been *forced* to close a deal.. I have lost earnest however..long story.. I’ll never do that again! ;-)

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Michael July 30, 2014 at 2:30 pm

Thanks for sharing Gary. You are correct and every market is different. Yes marketing can be expensive and you must know your ROI. Good to see you are doing right.
Phoenix is hot and investors are over paying so it must be tough finding good deals.

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Eddie July 27, 2014 at 11:55 am

Sorry but i disagree with #2. Believe me you do not need to worry about finding cash buyers they will find you once you have the deals.

I spoke with four wholesalers this week in my area and none of them have anything to sell. Why do I have to put in extra work asking for them to bring me deals? It should be the other way around.

Focus on finding the deals! The buyers will find you.

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Michael July 30, 2014 at 2:28 pm

That is true Eddie but it is nice to have some buyers on your list that can perform and you build relationships with. It makes business go smoother. I do agree if you have a true hot deal you should have no problem selling it but you still have to promote to someone and it is better to be prepared with buyers. Thanks for you comments

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Leonard July 27, 2014 at 12:29 pm

Jumping in with no emergency cash is a bad thing to do in any circumstance. Perhaps it would be worse in the wholesale market, but that’s advice everybody should heed.

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Michael July 30, 2014 at 2:32 pm

yes that is true like in any business. you must have some funds to get started to run your business

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Sharon Vornholt July 27, 2014 at 2:30 pm

Great post Michael.

Anyone of those 9 things can get you in a heap of trouble. I think paying too much and not nailing the repair costs for whatever reason are two of the biggest problems of all. Next would be not having enough back-up cash to bail yourself out if you really make a mistake in one of those areas.

Anyone considering wholesaling should tack this list up on their wall.

Sharon

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Michael July 30, 2014 at 2:34 pm

Thanks Sharon those are the 2 big ones and it happens a lot in this business even with experience sometimes you can’t get it perfect.

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Shaun July 27, 2014 at 4:26 pm

Good article but really if you hit #8 and do good marketing to keep the leads coming in and you don’t fall victim to the disease of #5 and pay too much all those other things are just symptoms of paying too much. (You didn’t crunch the numbers so you paid too much, you paid too much so your asking to sell for too much, you didn’t understand the repairs needed so you paid too much…)
Even needing a big buyers list is really just a function of getting thin deals. If you need to blast it out to a hundred guys hoping it meets someones criteria, or that they might be willing to overpay a little since they “need” a deal then you are… paying too much! :)

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Michael July 30, 2014 at 2:35 pm

Great points Shaun and I agree. Get the #’s right and most will fall into place.

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Patrick July 27, 2014 at 7:12 pm

What do I need to get a property under contract? It sounds easy at a guru seminar or reading threads on BP, but when you’re out in the real world and realtors give you a blank stare… it’s frustrating.

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Michael July 30, 2014 at 2:37 pm

Patrick don’t let other’s discourage you. You need to continue to educate yourself and get more confident. If a Realtor doesn’t understand or does understand your business but doesn’t want to work with you then just move on to one that does and don’t’ stop till you find one. NO EXCUSES is a sign we have in our office and we live by in on many fronts.

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Lorene July 27, 2014 at 11:58 pm

Yes, I would also be interested in how a contract is written to wholesale a deal. I am a real estate agent in NJ and I have been told that as a real estate license holder I cannot assign a contract. Is that true? Is there another way to wholesale a property without assigning the contract to someone else? Is there any special wording that needs to be stated in the contract?

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Michael July 30, 2014 at 2:40 pm

Maybe some of the real estate agents can chime in here. How about you Shaun you have your license correct. I don’t think it is illegal if you represent your self or your LLC and not as the agent and you disclose your an agent but you will not be acting as an agent in this case. This is not a legal advice just my opinion.

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Philip Elmes July 28, 2014 at 1:57 pm

Very useful post, Michael,

I think Shaun summarized several thoughts I had: Two related closely to the need for a Marketing Plan not only directed to potential “retail” buyers but to rehabbers, and investors as well. And we don’t just send out a blast or direct mail piece when we have a deal in hand*; to be effective we stay in touch continually–our prospects, even our customers, can have short memories.

Internet email marketing makes this easy and inexpensive. Tell ‘em when you’re looking for deals, when you find a deal and, importantly, when you close a deal, using pictures when you can. Takes time, but this is what we call building trust and relationships. Remember, we are in the Marketing Business. In this instance wholesaling is simply the real estate-related service we perform for compensation.

Secondly, failure to take into account your buyer’s costs to improve the property will almost always result in paying too much for the property. Your “75% of ARV” rule must take into account the Cost To Fix (as well as your contract assignment fee, of course) in order for the deal to work for your buyer, professional investor or owner/occupant ‘retail’ customer. (Personally I work with a 65% figure. Gives me a bit of a ‘Margin for Error’ or Contingency allowance.) In order to work with a savvy investor, don’t even think of presenting a property that does not meet that 65-75% test. For those who find they have “paid too much” it would be best if they have the where-with-all to keep the property as a rental until the market “catches up” with the pricing.

Wholesaling can be a great low-capital, low-risk, entre into the real estate business. But, to be successful, the aspiring wholesaler must know just about as much about buying, fixing and selling as his or her savviest prospective customer. Success is more about preparation than available cash or working capital. #

* Ref. the chap who is spending “$2000″ marketing a property.

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Michael July 30, 2014 at 2:45 pm

Thanks for adding this great information Philip and your right on and I agree especially that wholesalers need to as much as investors. I think too many get into wholesaling because they think it is a quicker way to get into this business and is a short cut to investing. NO Way. There are no short cuts. Yes our 70% is applied then our repair costs are deducted to arrive at our MAO and if you are wholesaling you have deduct for what you want to make for a fee on top of that.

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Tim Gordon July 28, 2014 at 9:31 pm

This post is is very inaccurate and misleading when it comes to wholesaling. Sorry to sound so harsh but almost every pointer here is incorrect, misleading and discouraging for new wholesalers.

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Shaun July 28, 2014 at 10:40 pm

Tim that is a pretty sweeping statement.
Can you elaborate on why these things would be inaccurate and misleading?

I’ll give you discouraging since I’d say they are pretty accurate and would be reality check for those hyped up on the “No Money, No Credit? No Problem – 30 days to Real Estate Riches!” types.

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Michael July 30, 2014 at 4:32 pm

Tim I just read your comments and I agree with some of them especially the one about saying the wholesaler would be responsible for paying for the house. With a well written contract like Shaun states there are many ways so you don’t fall into that trap if you can’t perform and close. It was a short post and I rushed before I went on vacation with my family so my apologies for not clarifying or going into more detail and what could be taken as some in accuracy’s by you.
I don’t mind healthy debate and I will be happy to do so but I don’t think you needed to rip me a new one with out knowing too much about me and then re posting it like you did. Hope your doing well wholesaling and if you ever get anything in the South eastern part of Mass look me up as we are always looking for more deals to buy. Thanks for your opinions.

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Tim Gordon July 30, 2014 at 5:15 pm

Michael,

Sorry for being a little harsh on you… You are probably victim of my frustrations of non wholesalers in general guiding wholesalers in very incorrect and misleading ways.

On other subjects I am sure you are well versed and an expert in those fields but in wholesaling based on this post I do not think you are and I felt it needed someone to step and and clear up some of the facts there were very incorrect.

Thank you for being nice to me in your response, I was harsh and I should have been more tactful in my responses. Bigger pockets in its nature seems to have a large amount of non wholesalers telling wholesalers who to wholesale and it is frustrating. So, instead of whining and rebuffing others posts I should be writing my own from the very start.

Sorry for the harsh treatment, cheers.

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Tim Gordon July 28, 2014 at 10:42 pm
Shaun July 29, 2014 at 12:13 am

Thanks Tim.
You make a lot of good points.
I agree with you on many but still agree with Mike in a lot of them as well.

One great point you made is look at your market as somethings will work in some places and not others.

On that note Mike and I happen to be in the same market. He is more south and I am more north but there is a lot of overlap in the middle. So we see a lot of the same conditions and probably a lot of the same (crappy) deals, and I think most of his points are right on the mark HERE.

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Tim Gordon July 29, 2014 at 12:22 am

Telling wholesalers if they screw up they have to buy the deal themselves is one of the worst statements on wholesaling I have ever read.

You read my post, I very much so respect you taking the time to do so and we’ll have to just agree to disagree but in my opinion this author hasn’t the slightest clue about wholesaling.

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Shaun July 29, 2014 at 12:45 am

Okay yes there is no real defending of that point.
Nobody ever HAS to buy a piece of real estate no matter how far they get and what the contract says.
Besides having the contingencies in there to be able to back out all together worst case is you lose your deposit as “liquidated damages” like most contracts say.
That’s why you always see the advise to tie up a place with as little of an EMD as possible right? Might suck to lose $100 but hopefully won’t kill your business, losing $10K could though.

BTW I also agree with you that I don’t think buying at the foreclosure auction is a major acquisition strategy for a wholesaler, REOs sure but not the auction.

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Tim Gordon July 29, 2014 at 12:52 am

Truth be told I think this person paid someone to write this article for them, one of those blogger services. There is just no way any experienced investor would say these things, someone without real estate experience was paid to read about 10 blogs. Throw them into one with a “super catchy title” to draw clicks and posted it.

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