Have you set any wholesaling goals for the year? All real estate investors (really, everyone actually) should have big goals. And once you have goals, you need to figure out the steps to meet those goals.
But have you ever thought about what you should avoid doing in order to meet your goals?
I want to see you succeed. So I’ve put together 7 mistakes you should avoid as a wholesaler. If you can steer clear of these things, you’ll be well on your way to exceeding even your own expectations.
1. Contracting the Property at Too High a Price
One of the most common mistakes I see new investors making is messing up on the numbers. The best thing you can do to avoid that is practice your numbers like crazy. There are two common numbers mistakes—the first is putting a wholesale property under contract at too high a price.
Everyone wants a deal. So if you’re asking too much for your wholesale property and it’s not a deal for a real estate investor, no investor is going to want it.
How do you make sure you’re offering a deal (for your area)? Find out what investors are paying.
In my area, investors are paying 65–70% of ARV (including their repair costs). That means my purchase price usually needs to be about 50% of ARV.
Let’s look at an example:
|My Contract Price (50% of ARV):||$100,000|
|Investor Pays Me:||$110,000|
|Investor’s Repairs Costs:||+$30,000|
|Investor’s Final Cost:||$140,000|
That’s 70% of ARV, which is a deal most investors would do all day long. But what if you got a contract for the property for $120,000 and offered it to a real estate investor for $130,000?
|My Contract Price (50% of ARV):||$120,000|
|Investor Pays Me:||$130,000|
|Investor’s Repairs Costs:||+$30,000|
|Investor’s Final Cost:||$160,000|
Of course, my profit still looks good, but now the real estate investor is looking at a deal where they are paying 80% of ARV. Plus we haven’t factored in closing costs and other expenses. After taking out those costs, they’re probably only going to make $10,000–$15,000. For an investor, that’s not a good-looking deal.
So practice your numbers. Get to know how to offer deals any investor would be crazy to pass up.
2. Thinking the Property is Worth More Than It Actually Is
The second numbers mistake is coming up with an ARV that’s too high. Many new investors just haven’t mastered the process of running comps—and that’s so key to coming up with accurate numbers.
Your best friend for finding comps is the MLS. As you start wholesaling, it’s a great idea to have an inside track to the MLS. Maybe that’s where you’ve got a good friend or a family member who’s a realtor and can run comps for you.
Seriously, I know there are tools out there that get you a ballpark number, but you should rely on those when you can pair them with some experience. They’re ballpark numbers for a reason.
You can also become a realtor assistant to get MLS access, or hire a realtor to show you how they go about figuring out what a property should sell for. Seriously, hire them—as in pay them for their time. These are great friends to have and keep happy.
You might also be able to work out an arrangement with a real estate investor who’s also a licensed realtor. You could give them first shot at your wholesale deals. If you can find a person like this, pick their brain to learn how they run numbers—find out what specific things you need to know about your area.
Don’t go it alone.
3. Wasting Time on Things that Don’t Matter
This is a universal truth—you shouldn’t be wasting time on anything that doesn’t make you money.
As a wholesaler, don’t go out on very appointment and look at every property. Of course, in the beginning this might be a little tricky. But as you learn your numbers, you should be able to quickly figure out over the phone whether you and the seller are in the same ballpark price range (within $30,000 at the most). If you’re not, don’t waste your time going to see the property—it’s not likely to work out.
And don’t waste time in your marketing efforts. Don’t spend days making the perfect logo or wait until your business cards come in to do anything else. And definitely don’t waste time posting on social media... get out there and start looking for deals.
Deals are the lifeblood of your business. Find the deals. Meet with the motivated sellers. And you’ll be running a thriving business in no time.
4. Advertising a Property You Don’t Have Under Contract
One mistake I often see on social media is a wholesaler advertising a property they don’t actually have under contract. It’s not just a mistake—it’s illegal.
Don’t do it.
5. Forgetting the Disclaimers
Related to #4, some states require that you advertise your contract, not the property you have a contract on. In other words, if you don’t own the property, you can’t advertise it for sale. Ohio is at the top of the list for its policy on this.
It’s not that you can’t advertise. You just have to disclose that you’re not the owner of the property, but you have the property under contract and you’re selling your interest in the contract.
Bottom line: disclose, disclose, disclose.
Don’t forget to disclose to the seller too. If you do that, you’ll save yourself any potential misunderstandings. In some states, title companies actually require the seller to sign off on the assigned contract.
Make sure you know what the rules are for your area. Talk to other investors, and if you have other questions, check with a real estate attorney.
6. Giving Your Earnest Money Directly to the Seller
If you give your earnest money directly to the seller and then need to cancel your contract, you’ll never get your money back. If you instead give the earnest money to the title company and then need to cancel, you’re more likely to get your money back.
I don’t even ask the real estate investor who’s buying the property from me to write me a check directly. It’s good practice to do everything through the title company.
And even if you do go through the title company, there’s no guarantee you’ll get your money back if you cancel the contract. I had one situation where I had met with the seller and looked over the property with him. I put up $500 earnest money. Then I went back to the property with a business partner, and when we went into the crawlspace we discovered that part of the property was sitting on a wood foundation.
I knew that was going to be a huge repair cost, and I had put the property under contract for too much money. I went back to the seller and told him what happened, and I explained that our contract said the offer was contingent on inspection. I was also within the seven days the contract gave me to cancel.
But the seller argued with me. He got a little crazy and just kept insisting that he didn’t owe me the earnest money. He tried to blackmail me by threatening to badmouth my company online.
In the end, it wasn’t worth arguing with him to get the $500 back.
7. Not Verifying a Buyer’s Funding Source
Don’t forget to verify that your buyer has legit funds to close on a property. If you don’t, you could sign a contract with the buyer and then watch the deal fall through because the buyer didn’t actually have the money.
Your potential buyer might be trying to wholesale the property to someone else. They might be requesting a hard money loan but not actually get approved.
The best practice is not to sign a contract until you get proof of funds. Just require proof before signing, and then make sure you call and talk with the bank or funding source to make sure it’s legit before you sign.
Well, that’s it. There are 7 mistakes you don’t need to make as a wholesaler, because now you know to avoid them. But don’t forget, making mistakes is part of the learning process. And of course you want to learn and grow your business.
So go, make your own new mistakes. Learn from them. Then move on. Find that next deal. And watch your business grow.