It seems like more and more people are getting into wholesaling every day. With all of the big education companies and coaching programs out there teaching aspiring real estate investors how to find deals, everybody wants a piece of the action. For somebody like me who is always looking for inventory, I think this can be good and bad. Good in the sense that there are a lot of deals that are brought to me for consideration—and bad because new wholesalers often don’t know what they are doing and end up giving us all a bad reputation in the process.
Even experienced investors tend to be guilty of doing what I would consider “bad business.” Just in the last week, I’ve had two different experiences with wholesalers that left a bad taste in my mouth. As such, I thought it would be appropriate to lay out five simple rules that I believe wholesalers should follow in order to protect their reputation as well as the reputation of this business.
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5 Simple Rules All Real Estate Wholesalers Should Live By
1. Have a legitimate sales channel before you put a property under contract.
Many new wholesalers are so eager to start earning a dollar that they often put the cart before the horse. It’s great that you’ve gone out and found a seller willing to sell a property below market value, but who are you going to sell it to? This is how potential sellers quickly get jaded with the “I Buy Houses” signs. They find out that the guy who says he buys houses doesn’t actually buy houses—and may not have anybody else to buy the house either.
Before you spend your Sunday afternoon sticking bandit signs on every telephone pole in your town, make sure you have a legitimate buyers list or at least a few birddogs that can help you get a potential property marketed properly. Nothing ticks off a potential seller more than a wholesaler who can’t deliver.
2. Stick to your contracts.
It’s important that wholesalers understand what their contract says when putting a house under contract with a seller. If your contract allows for 14 days of due diligence, be sure that you mark your calendar accordingly. For most wholesalers, this is your marketing period. If for some reason you can’t get the property sold, you need to either terminate the contract with the seller or get an amendment extending due diligence.
The same goes for earnest money and closing date. If you say you are going to deposit $1,000 earnest money with a title company, then deposit the earnest money. If you can’t close by the contracted close date, get an amendment extending your close date.
This would seem very self-explanatory, but I find that many wholesalers are way too loose when it comes to following contracts and basic contract practices. Again, it’s the wholesalers who don’t watch these things carefully that give us all a bad reputation.
3. Set a realistic repair value and ARV.
How many times have you received an email from a wholesaler with a “hot” property, only to do a little research and find out the ARV (After Repaired Value) isn’t even remotely accurate? Of course, the wholesaler is motivated to sell the deal, but too often they end up sacrificing their reputation with investors in the process.
There are a number of wholesalers in my town who I’ve literally written off because I know they don’t use realistic math when sending out deals. Either it’s the repair value that’s understated or it’s the ARV that’s over inflated. Either way, I know they don’t send realistic values and it’s not worth my time to even open their emails.
The biggest and most successful wholesalers are always the guys who maintain a good reputation as presenting good deals with realistic numbers.
4. Be honest about your role in the transaction.
Just this week we sent out a wholesale deal to our buyers list. A few hours later, somebody in my office got the exact same email from somebody we’ve never heard of—except they’ve literally increased our asking price by $20,000. I emailed the guy out of curiosity and asked him if he had the contract with the seller. He said, “Yes.” Then I ask him how to gain access to the property, and he gave me OUR lockbox code! After a few emails back and forth, I called him out. It was clear that he was a brand new wholesaler who was simply trying to re-market our deal at a ridiculous mark-up.
I swear this business feels like the wild West sometimes. It’s these kinds of shenanigans that drive legitimate buyers and sellers crazy. The truth is, if he had simply called us and asked to re-market out deal, we probably would have let him. Instead, however, he decided to steal our email, put a ridiculous price on the property and then lie to me about the fact that he had the deal under contract directly with the seller.
If you are simply re-marketing the deal for another wholesaler, it’s better to be honest about this so that your end investor understands all of the players involved. I’ll leave it at this: Just be honest about your role in the transaction.
5. Set expectations for your buyers.
This rule could actually be an article in and of itself. I believe there should be some sort of wholesaling practice standards around selling a property when you know there will be a lot of interest from your buyers. So often, wholesalers stumble over themselves when selling a desirable property because they have multiple investors who feel like they unfairly lost out on a deal.
When you set up a time to view the property and five investors show up with checkbooks in hand, how do you decide who gets the property?
Or if you send out an email with access information and 10 investors call you before they’ve even gone to look at the property, how do you decide which one of those investors gets the contract?
I think the key to running a good wholesaling business is to set the expectation up front. In your email blast, you can simply set the expectation that the first investor to bring you a contract with earnest money gets the deal. Or perhaps you set the expectation that you will meet at the property and take the highest bid. Heck, there is a group in my town that actually draws from a deck of cards when there are multiple buyers at the property.
Whatever your rules are, just make sure they are clearly defined so that your valued investors don’t feel like they were unfairly treated in the process.
Wholesaling real estate can be a very lucrative business when run the right way. It’s also an easy way to get a bad reputation. I’ve found that the guys who are the most successful in this business are the ones who are honest, who are careful about treating people fairly, and who truly care about operating their business with integrity.
Investors: What would you add to this list?
Let me know with a comment!