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.
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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.
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.
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.
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.