How to Protect Your Wholesale Deal from Investor Sharks

How to Protect Your Wholesale Deal from Investor Sharks

In the world of real estate investing, there isn’t anyone more enthusiastic than a new wholesaler with a deal. As the naive wholesaler chums the waters for prospective buyers it attracts investor sharks, prepared with advanced tactics to take chunks out of the wholesaler’s fee. These are the common tactics they use and how to prevent it from happening to you.

From the start, wholesalers are subjected to a general disdain from investors. The starting place for many in real estate investing. There appears to be a line drawn between the “haves” and the “have not's” and investors don’t hide their frustration they have for wholesalers. They often view wholesalers as a barrier to getting the deal. An unnecessary element looking for their piece of a shrinking pie.

Pay attention to who is offering advice, seek guidance from successful wholesalers

Reading comments on the Bigger Pockets wholesaling forum a trend begins to emerge. People who have never wholesaled a deal are telling new wholesalers how to do their job. On no other forum would the experience of someone who isn’t actively in that field be taken seriously. You are getting advice from the wrong people. It is critical to seek guidance from the successful wholesalers and verify their track record.

Since 2012 I’ve wholesaled over $15,000,000 in off market real estate in Southern California. I have been interviewed on the Bigger Pockets Podcast Episode 67, House Flipping HQ Podcast Episode 31 & The Best Real Estate Investing Podcast Ever Episode 256 on the subject of wholesaling. I am sharing this to give context for the advice that will follow, all of these tricks have been used on me.

Watch for misinformation attacks

Investor buyers will do their very best to convince you the sky isn’t blue if it means they get a better price on a deal. If you do not have confidence in the wholesale process, there will be blood in the water.

There are many ways you could be approached with a misinformation attack, it could be that your repair numbers are wrong, the ARV is incorrect or that a newly discovered issue with the property changes its value. These could all be valid issues, but they can also be tactics used to work the price. Here's how you can work that out.

Never show the deal to only one buyer. This is the equivalent of getting one contractor bid on a project. You don’t have enough information to make an educated decision. Furthermore if the investor buyer shows any attempt to rush you on a decision, it’s likely they want you uninformed to verify the points they are using to negotiate the discount. 

These are signs that you are dealing with someone who has negotiated many more deals than you. While being outmatched isn’t fun, it doesn’t mean you have to lose the battle.

Here are a few ways to prevent losing money. Always show the deal to multiple buyers and let them know there is competition. Repair issues and after repair value will be discussed with each potential buyer and a trend will begin to emerge. The simple fact the investor buyer knows there is competition will help keep them in check. You need to be informed, calm and not feel rushed.

Be aware you might get tag teamed, the investor buyer’s agent, contractor or acquisitions manager could have a pre-planned strategy for negotiating with you. It can be uncomfortable to handle multiple experienced real estate professionals at once. If you need to slow down the process do it. Allow yourself to be prepared with time to react with proper information. A naive and uninformed wholesaler stands no chance to experienced investors.

Remember, investor buyers are used to match ups with listing agents. This is a dance they’ve done many times before. Be prepared for pressure and aggressive negotiating tactics and have a plan for how you will handle them. If possible, find an experienced wholesaler on call as your phone a friend. This could be someone in different market so there’s no concern of creating new competition. I'll cover how to do this in another blog post soon.

Discounts for the sake of a relationship

Fairly often I’ll see investor buyers encouraging new wholesalers to focus on relationships over profits. This guidance has always confused me. It is a negotiating tactic that uses an implied event in the future (buying all your deals) as a reason to give up something today (discounted price).

A wholesaler is only as good as the deal they have right now. No amount of relationship building will convince an investor buyer to take on a deal with bad numbers for the sake of a relationship. But that isn’t the point, the investor buyers goal is to have you thinking into the future while they take something from you today. This is negotiating disguised as a bond being created.

Let me repeat that. You will not succeed in selling a bad deal to a buyer because you gave them a screaming deal a few months ago. It is important to establish relationships with buyer but that is not reliant on doing future deals with them. Focus on the now, do the very best you can with your deal and plan to give the same attention to any deals you get in the future.

Let’s not get greedy

I fell for this line on an early wholesale deal, I took $6,000 and the investor pocketed six figures. I felt pressure on the spot and caved to a lower wholesale fee but valuable lessons were learned to trust my gut.

This is an attack on the emotional level, ignoring logic and numbers the investor intends to persuade you “hey, you’re making good money let’s not get greedy now”. If you hear this, I encourage you to examine simple human behavior.

When the investor buyer has completed fixing the property and has it listed for sale. How do you think they would respond to a buyer’s agent using this argument when presenting an offer? They’d get laughed out of the office. The investor’s goal is to earn the maximum amount from their investment as the market will allow. There is no reason the wholesaler shouldn’t follow the same directive.

Seeking a fair market price for your wholesale deal is not greedy. I agree there are many inexperienced wholesalers who will tack on $10k to a deals ARV and asking price hoping to cash in, I don’t consider this real wholesaling and that topic deserves its own blog post.

I am talking about a wholesaler with a real deal, who is close to working out an agreement with an investor buyer and how to handle pressure in the moment. If you have agreed on a price, that is the price. Unless there are additional repairs, costs or burdens that the buyer is taking on, there is no reason to adjust your fee. Period.

Don’t let anyone make you feel bad for being a wholesaler

While I don’t necessarily think wholesaling is the best place to start in real estate investing, and it’s most certainly not the fastest route to building capital (I’ll share what is in my next blog post). There are still markets for wholesalers to operate in.

The attitude you see towards other wholesalers is not representative of you as an individual. You are your own person, with your own goal and path into real estate investing. A huge part of wholesaling is throwing a bunch of #$%@ against the wall and seeing what sticks. This means sometimes it ain't pretty, and you'll have to be ok with that. 

Here are a few guidelines I’d encourage you to follow, some reassurances to lean back on in those moments when things get tough.

Be professional, use proper English and check your emails and text for typos. Mistakes happen but the devil is in the details. We are dealing with big numbers and serious transactions, it shouldn’t be too much to request a level of professionalism on par with that.

Be kind, to both the sellers you encounter who are dealing with a huge life decision and the investor buyers. Regardless of what they think of you. That doesn’t mean being a doormat, but it’s not fun to look back at an email that’s been sent too hastily only to leave us knowing we could be better.

Be informed. You must know your market and your buyers, this is a business that thrives on data. Use it to your advantage. If you truly understand your market and its intricacies you will have more confidence when these tactics are used against you. 

Happy Wholesaling :)