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

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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

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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!

About Author

Nasar Elarabi

Nasar is a corporate failure who was saved by Real Estate. Nasar is now a Wholesaler, Rehabber and Landlord in the Charlotte area. Nasar may have just barely graduated college but can flip a house like an acrobat. Nasar's work can also be found at RealEstateDoru.com.

24 Comments

  1. Tom Cyr

    There are a lot of beginner investors who do’t understand the real estate cycle and run, the herd, and still expect to have a spread between their basis and their net after a sale. Simple economics escapes them. Is it the tease of real estate teachers, coaches, gurus who are selling yesterday’s business model? I think that has a lot to do with it.

    Before you spend a lot on training materials, find out best you can if a particular strategy is current or a has-been. The market changes and if you don’t change with it, you will be the sucker for someone more experienced exiting their position.

    Best to have many investment vehicles in your portfolio. The capital you lose in real estate if you are a one trick pony could scare you out of real investing for a long time.

  2. I would have had someone proofread the post, “I do recall getting one deceit lead;” However, some good points, thanks for sharing mistakes from two people! Really, the biggest mistake could have been blasting out a crap deal to your list!

  3. Brian Gibbons

    Wholesaling only is a terrible model

    You should be a transaction engineer – one cash offer one or 2 terms offers for each seller

    you should also be licensed – so tired of people saying you should not have a license, if you have a license you can network with other agents, you can split commissions, you can list houses

    Pretty house 90% loan-to-value – subject to, lease option assignment, wraparound mortgage acquisition

    Pretty house 80% loan-to-value – listed with an agent, subject and a note, wraparound mortgage

    Pretty house free and clear: all-cash at 80% if good rental or lease purchase, installment sale, payments only, no interest or little interest under market rent

    Ugly house 50% loan-to-ARV – depending on your cash buyers list, wholesaling deal.
    ***If cash buyers are not buying your area, it doesn’t matter how cheap it is nobody wants to buy it.

    Think of your areas: if you’re getting a wholesale lead in A or B area, a non-landlording area, a residential ownership area, then you cash buyers list is probably not going to be interested in that, they usually want C-D areas

    Your business model should be:
    find home sellers at want to sell

    A. If it’s a pretty house offer terms, like sub 2, lease option assignment, or wraparound mortgage acquisition,
    then do a lease to own exit.

    B. if it’s an ugly house with equity, make sure you have private lenders and joint venture partners to quickly by the property, then you could on sell it to a builder or fix it, and retail it.

    You can save a lot of hassle if you love wholesaling by buying the course by J Scott on biggerpockets https://www.biggerpockets.com/store

    There is nothing better, ANYWHERE.

    Lastly if you want to do a terrible job in wholesaling, just send a [email protected] deal to cash buyers list.

    You’ll kill your reputation as a “switched on” wholesaler, and they will think of you as an idiot.

    • Nasar Elarabi

      Brian, thanks for the input. I must say I disagree with wholesaling is a terrible business model. I and some other have made 6 figures exclusively from wholesaling. Not sure whats so terrible about it. NC has a lot of regulation for lease options and I choose to stay away from them. As far as the license. At this point I would love to focus on my investment business..

      • Devin Beverage

        This is a little late, but I believe what Brian was saying was that having wholesaling as your only OPTION is a terrible business model. For example, if you go into a deal thinking that if you can’t assign the contract to one of your cash buyers, you are going to have to break the contract, I think you’d agree you’re limited.

        I like what Brian is proposing, and I just recently got my license, and am ramping up efforts to wholesale again.

        The reason I actually ended up on your post is because I’m trying to learn some of the other Exit Strategies so that I’m prepared when I have an actual deal sitting in my lap. If you listen to the podcasts (BP and many others), read the blog posts, and the books as much as I have, you’ll notice all of the smart top producers say to have MORE THAN ONE exit strategy.

        But you probably already know that, since I think your comment was a misunderstanding. I’d be interested in hearing how your business is going and how it has changed since March! You mentioned 6 figures exclusively from wholesaling. If you’re still doing what you’re doing, an update would be nice.

  4. Neil Schoepp

    Nasar, Thanks for the post.

    Biggest mistake…….. Believing that cashflow was rent minus mortgage. Now I know there are things like vacancy, cap ex, property management……….

    Advice……… Everything starts with the After Repair Value (ARV). Then work backwards.

  5. Bob Hucker

    Nasar, a few questions about the information needed to avoid these pitfalls:

    1. Where did you get the comps? Do you have MLS access? If so, are you a licensed agent?

    2. In the $100K example, how did you know the owner owed $95K?

    3. How did everyone else at the auction know who was the hedge fund bidder?

    • #1 Comps are easy to find in most states (just check Zillow!), the only fly in that ointment is if you’re in a non-disclosure state like Texas.

      #2: Most direct mail providers can filter equity, but likely this was discovered simply by asking the seller!

      #3: It doesn’t matter because $105K was too much regardless of the competition!

    • Nasar Elarabi

      Bob,

      thanks for asking

      1. I used a paid subscription service called CRSdata.net only available in some areas. I do not have MLS access. I am not a licensed agent.

      2. Thats what the house came down the foreclosure line for.

      3. Because at the Auction you have the same guys down their. And everybody knows who is who. Also our Bids work different than other states. We have a 10 day upset bid period here. That means if you win the auction. Some one has 10 days to upset your bid. And if some one does the 10 days resets. A bid has to be good for 10 days.

      Hope that helps

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