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The Uneducated Wholesaler’s Deal Gone Wrong: A Cautionary Tale

Nasar Elarabi
3 min read
The Uneducated Wholesaler’s Deal Gone Wrong: A Cautionary Tale

An eager wholesaler was introduced to me through someone I respect deeply, and he was anxious to get his first deal. My primary source of finding properties is direct mail; however, I went over some other options with him. He said he wanted to do direct mail. I advised him that he needed to be able to mail for at least three months. Just sending out one mailing campaign would probably not get a deal. He said ok, and we went on and did a mailing campaign. He funded the campaign, fielded phone calls and would give me addresses to properties that called in. I would then comp them and tell him what to offer. I don’t recall exactly how many postcards he sent.

I do recall getting one disappointing lead; we almost had it, but the owner decided to do a reverse mortgage. As a full time wholesaler, I advised him that deals fall apart more often than we want them to. In some cases, if selling to me is not the owner’s best option, I would advise them to do a refinance, reverse mortgage or in some cases, keep the house.

Related: Newbies: Master These 4 Major Areas of Real Estate Wholesaling FIRST

Wholesaling Isn’t Easy

As could be expected, the newbie was feeling down, so I reminded him that wholesaling isn’t easy. Of course, my reminder did not replace the few hundred bucks he spent on marketing. However, through that marketing campaign we got in touch with this extra motivated guy who was willing to give you a full body massage if you were willing to buy his house. I explained to the aspiring wholesaler that the property was due for foreclosure and was upside down. He said “ok” — as if he was listening to me.

Every week he would call me and say, “The owner just called me,” wanting it to buy it. He wanted me to meet his realtor. And, of course, the realtor told him to put in a offer so she can try to get the short sale approved. At this point I told the aspiring new wholesaler that the property was worth $100k tops, and that the owner owed $95k. It’s not a deal; leave it alone.

The uneducated wholesaler went down to the foreclosure auction that the realtor and owner walked him through how to do. And got into a bidding war with a hedge fund. The uneducated wholesaler outbid the hedge fund. Normally at my local foreclosure auction, when the hedge fund bids, no one bids after him because they know the fund has very deep pockets. The uneducated wholesaler, being eager, did not know he was bidding against a hedge fund. The uneducated wholesaler won the bid at $105k.

Trouble Selling the Property

Oh yeah, the uneducated wholesaler was broke and did not have money for the deposit you must leave with the clerk. So he borrowed money from a friend and promised the friend to split the profit. The auction gives 30 days to close after the winning bid. After they were having trouble selling, they came to me with the deal. I had seen a comp for $160k. And the rest of the comps were topping out at $100k. I advised him that I could maybe make this work based on those comps. He said the property was occupied and did not need any work.

I shot the deal out to my list. I got hammered by my list, with about 10 people emailing me back stating that the $160k sale was a foreclosure. And the top sale was at $100k. I said, “Sheesh. If only these people were that eager when I send them a actual deal.” Anyway, I looked up the sale myself, and the $160k sale was the bank taking back the house. I advised the uneducated wholesaler that this was not good. I had to talk to the friend and explained to his friend that I couldn’t save the day. And more than likely, the county would keep $500 out of the deposit for legal fees and to run the ad again in the local newspaper.

Related: The Ultimate Beginner’s Guide to Real Estate Wholesaling

I hope you learn from my mistake and also the uneducated wholesaler’s mistake. And for all the aspiring wholesalers who have a habit of taking deals too high (or if you can never seem to find a buyer for your “smoking hot deal”) — it might be time for you to start using the BiggerPockets Wholesaling Calculator. And always remember: Don’t be an uneducated wholesaler.

In conclusion, properly educated yourself on different strategies. Some strategies may seem easy, but turn out to need specialized knowledge to utilize them. This is a business, but like any business, risk is involved. Don’t make a habit of taking on bad risk.

What’s the biggest mistake you made starting out? What advice would you give to newbie wholesalers?

Leave your comment below, and let’s talk!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.