5 Costly Pitfalls That Catch Wholesaling Newbies Off Guard 

by | BiggerPockets.com

I love talking with newbie investors, especially those who want to enter the real estate space via wholesaling.

The reason I love speaking with them is because they truly don’t know what they don’t know. Some portray themselves as know-it-alls. They know the concepts of wholesaling but have not actually put theory into practice. So they can tell you the mechanics, but the application is missing.

Others are so fearful, they are not willing to do anything but play the “what-if” game. Well, what if this happens? What if that happens?

Then you have the group that is humble enough to say, “I don’t know, but I’m willing to learn.”

I still inform each group that there are a few things that will make you surrender and quit if you are not attentive to these red flags. Here are a few.

The 20 Best Books for Aspiring Real Estate Investors!

Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.

Click Here For Your Free eBook!

5 Costly Pitfalls That Catch Wholesaling Newbies Off Guard

1. Underestimating Rehab Costs

This is an area that is very subjective. Even experienced rehabbers have problems in this area. The difficult part about estimating a rehab project is the cost of the unknown. These unknowns can quickly blow a budget.

Newbies have an extremely difficult time estimating the rehab cost, which is understandable. However, some people just completely underestimate the rehab tremendously to try and make a deal. J Scott, an avid contributor to BiggerPockets, wrote an awesome book called The Book on Estimating Rehab Costs. this book will help give you the points of emphasis you need to do better on your estimates.

Related: A 60-Day Action Guide to Wholesaling Your First Property

I’ve personally written the article Wholesalers: Having Trouble Estimating Rehab Costs? Try This! These materials will help you get closer to nailing down that number, but remember that they are only estimates. Leave the exact numbers to the pros.

what-is-wholesaling

2. Going Past the Inspection Period

You have to keep firm dates organized. This has happen to so many newbies—I know because I hear the horror stories of those who fail to cancel the contract before the inspection period is up.

I must admit this has happened to me as well, so I definitely keep those dates locked in my phone to remind me. If you don’t know, you will forfeit your earnest money if you do not cancel the contract before the inspection period is up.

3. Over-trusting Savvy Buyers

Buyers are investors too, and they want make sure they can secure a deal with great margins. Some newbies are so excited they have a contract and a buyer interested that they are willing to cut their wholesale fee just to move the property.

Here are a few cunning tricks a buyer will try and pull to get you to sell at a lower price:

  • They will ask when your inspection period is up to see how much time you have.
  • They will overestimate the rehab to make you drop your price.
  • They will not make an offer and let you sweat a few days before presenting one.
  • They will ask for a deal on this one because the margins are thin, but they will make it up on the next one.

These are just a few of the cunning things they will do. Remember, they are negotiators just like you. Be confident in your numbers, and don’t get too excited to close the deal. You don’t want to leave a lot of money on the table.

4. Assuming the Deal is Done

Never assume a deal is done until all docs are signed and the transfer is recorded with the county. So many deals are lost right before closing, some even at the closing table. Honestly, this has never happened to me, but it has come very close to happening.

I tell newbies that if they have a questionable seller, sometimes they may need to sit with them at the closing table to answer any questions that may come up.

For example, I had a seller willing to walk because they didn’t believe they had to pay the property taxes. They thought that when I’d said we’d pay all closing costs, that meant we would pay everything. If I wasn’t there, I would’ve lost the deal.

Be patient with the seller. Sometimes they are just misinformed, and your job is to walk them through the process. So don’t assume in escrow it’s a done deal.

dont-wholesale

5. Failing to Pay Taxes

This one eats newbies alive.

Don’t forget your uncle is always looking for his cut of your hard-earned money. Yes, Uncle Sam. Many newbies come from working for someone else, but there’s a big difference when you work for yourself. You have to make sure you allocate for taxes. Some people get caught up in the fact that they just made $10k. They go and spend or re-invest the whole $10k, failing to set aside money for taxes. I’ve heard the stories.

Related: The 8 Most Common Lies Newbies Believe About Wholesaling

It’s very enticing to go and spend the dough, and it’s very enticing to say “I’ll pay Uncle Sam later,” but you do not want the IRS to come looking for you.

Make sure you set aside 20-30% of your proceeds to cover your taxes. Make sure you speak with an accountant who can show you how to set things up. Discipline in the beginning will pay huge dividends in the end.

These are just a few of the pitfalls that can catch you off guard if you’re not prepared.

Let me hear from some of you who have other red flags newbies should be aware of.

About Author

Marcus Maloney

Marcus Maloney G+ is the Executive Officer of Equity Realty & Investments as well as 3rd Generation Management & Holding LLC, both are family owned and operated real estate investment firms. The firms’ goal is to provide affordable solutions in real estate while providing exceptional opportunities for community redevelopment for the residents of Phoenix, Arizona and Chicago, Illinois. You can follow Marcus on Twitter

9 Comments

  1. Rob Cook

    Good points Marcus. I would second all of those. And add, one which you have written about before, that Wholesaling still requires cash! Not necessarily for down payments, but certainly for marketing expenses. Direct Mail, advertising, bootleg signs, and phone and email services can add up, especially when just starting out and one has no deals in the pipeline. So, as with any and all businesses, don’t start without adequate capital to carry you thru the dry period of a startup. Depending on what you do and how you market, $10K seems like a good number to me, generally, for most new wholesalers. While that is not a LOT of money, it is not “NO” money either as often insinuated by the gurus hyping Wholesaling training.

  2. Rob Cook

    Another thought is, in addition to sticking with your analysis and not caving into a savvy buyer’s manipulation and underestimating rehab costs, is don’t overestimate the After Repaired Value (ARV). Be realistic and pick a realistic ARV that will enable your buyer to sell in 3 months marketing time, not “maybe sell” in 12 months on the market – which would kill all of the rehabber’s profits. Not that your buyer’s profits are your primary concern, BUT your own purchase price from the seller is. And if you pick a pie-in-the-sky too high ARV to base your purchase price on, you will overpay, and thus compress or eliminate your own wholesaler’s profit margin (spread).

    • Marcus Maloney

      Rob,

      Both great points. I’ve been holding some free strategy sessions and this is one of the biggest misnomers newbies have is that they don’t have to have a dime to get into real estate. The guru pitch is a little tired and I’m trying to inform those getting started not to fall for the glitz and glamour of becoming a real estate tycoon without hard work and money.

      You’re right on point about the ARV over-estimation as well. I was going to add that to the post but the post would have become a bit lengthy. Man great input thanks.

  3. Jordan Solomon

    Great info as always! I actually just got off the phone with Marcus as he was nice enough to do a consultation with me about issues involved with wholesaling, and I can say that he definitely knows his stuff and is a great person to learn this business from. Thanks again!

  4. Glori kari

    Hi Marcus. I really appreciate the time you take to share. I notice the options when signing up often donot include much about specifically wholesalers. I watcjed a video of a young man in a show called the breakfast club (usually dedicated to young urban american music) and he did an bery detailed interview giving away a ton of detailed information about this and he had my attention. Unlike most he wanted to share his knowledge to help others out of poverty stricken Baltimore & beyond. So it led me here. I noticed everytime I go to am article about this on this site… Im led back to you. I would love to speak to you if possible on a few details like how to draft contracts/ state licensing requirements/ ect. Thank you in advance for all that you share

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here