This topic comes up quite a bit when I am around other real estate investors, and I have to say that everyone has a little different opinion and a different story to tell.
A lot of seasoned real estate investors will tell you that wholesaling is the strategy they started out with. Typically they either didn’t have a lot of money or their credit wasn’t good enough (or both) to dive right into buy and hold strategies or rehabbing. So wholesaling seemed to be a perfect fit for this group of folks. They just went out with a truckload of bandit signs and when the phone started ringing, they started making offers. It’s just about this time they will also chuckle and tell you they had no idea what they were doing. Sound familiar?
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My Way or “the Other Way”
I have often told folks that I went about this process in an entirely different manner. Wholesaling was the last strategy I tried.
My very first investment property was a fix and flip. Now I am the first person to admit that this isn’t probably the best strategy for most folks to start out with. There are so many things that can go wrong, and there are so many things you don’t know. In fact when you are just getting started, you “don’t even know what you don’t know”.
To be successful as a wholesaler you have to:
- Buy the property at the right price
- Be competent at inspecting the property and coming up with a good list of repairs needed. You will need this whether you intend to keep the property or wholesale it.
- Know how to figure the costs associated with rehabbing the property (remember the part about buying the property at the right price?)
- Understand holding costs and other costs you (or your end buyer) will likely incur such as Realtor commissions when you sell the house, utilities, insurance etc.
And, this is really just a “short list” of things you need to know. I think it’s fair to say you need to know a lot about the basics of real estate investing to be successful with this strategy.
After my first rehab project which I did make money on (just not enough), I bought my second property which was a rental. I continued down this path with these two strategies for years.
This brings us back to the question, should you start out as a wholesaler first or after you have some experience?
Wholesaling Pros and Cons
I believe that there are pros and cons for each argument.
If you start out like I did with a fix and flip strategy or by buying rentals and becoming an “instant landlord”, one of the biggest dangers you face is that you will pay too much for your first properties. This is what I did. I paid substantially less than retail but it was only after the fact as I gained experience that I realized that I didn’t pay “wholesale”. Inexperience was not my friend when I sold those first few properties.
“When you are just starting out, you really don’t know how to buy properties cheap enough”
Looking at this equation from the other side of the fence, if I had started out wholesaling I would have learned pretty fast that I was paying too much; I wouldn’t have been able to sell the properties to another investor.
And if you and pay too much for those initial properties you can find yourself in a bad position with the seller. You could go back to him and try to renegotiate a better price which he may be willing to do, or it might just cost you the deal.
You could invoke one of you contingencies and get out of the deal. This is sure to leave a bad impression with the seller, and it has the potential to really leave them in a bad position if they were counting on that sale to meet a deadline of their own.
“Backing out of the deal should always be a last resort”
Let’s Get Some Opinions
I would love to hear from everyone and get their input on this question:
“Is Wholesaling a Strategy for the Beginner or the Experienced Investor”?
Photo: Marco Bellucci