Wholesale real estate is the fastest way to make money in real estate investing if you can avoid some common wholesale real estate mistakes.
It is also the business model that requires little cash investment.
However, some common wholesale real estate mistakes have taken down some real estate investors hard. Here are 7 mistakes you need to avoid to succeed in wholesale real estate investing:
Mistake #1: Buying From The Wrong Area
Avoid buying houses from the low-end areas (“war zones”) even if it’s cheap – it’s hard to find any interested buyers when you need to sell.
Likewise, avoid the high-end neighborhoods – it’s hard to wholesale expensive properties, and the numbers won’t make sense. You’ll end up making a loss.
Stay in middle to lower middle income neighborhoods. There are more properties here. In my area, I stick to neighborhoods to houses between $100,000 and 200,000.
You have to establish the right safe price range where you live.
So why are these houses so profitable?
i) Most wholesale properties are in the middle to lower middle income neighborhoods
Most people live in the middle to lower income brackets and neighborhoods, hence more houses to buy. You’ll get better results in your marketing when targeting these neighborhoods.
In most markets, high end and low income houses are usually fewer.
ii) Most properties are easily affordable
Of course you must target properties you can afford.
Middle to lower middle income houses are more affordable regardless of your business model.
Likewise, they also happen to be easier and cheaper to fix.
iii) The houses are easy to rent
When you are a wholesale real estate investor, chances are you’ll sell your properties to a landlord.
It’s easier to rent houses in these neighborhoods, since most tenants prefer this price range.
iv) The houses are easier to sell
Most people buying houses are looking for the middle to lower income houses. Therefore, you’ll find it easier to wholesale these properties.
v) Some lenders for wholesale deals will only lend within a medium price range
Some lenders will only lend if you buy within the price ranges they have defined.
These usually fall within the medium range neighborhoods.
Mistake #2: Making Poor Repair Estimates
To be a successful wholesaler, you must be able to estimate repairs fairly safely. However you don’t need to be accurate to the nail.
You should be able to spot all required repairs – some of them can get expensive like the roof, foundation and other structural repairs.
The less costly ones include carpet, paint, kitchen bathrooms, windows, fixtures, etc.
The best way is to have ball-park figures for each item. This way, it’s possible to have fair repair estimates in 10-15 minutes.
Of course, your estimates must be on the higher side so you remain safe in case you make a mistake. Making low repair estimates is one of the most common wholesale real estate mistakes.
Interactive real estate investor websites are quipped with rehab estimators to help you avoid this mistake.
Mistake #3: Paying Too Much For Properties
The biggest mistake real estate investors make is paying too much for houses.
Making an offer is the most important part of real estate investing because the offer you make must be accepted by the seller, and still allow you to make money.
It should also leave a profit for your real estate investor buyer.
Obviously, as long as you know the estimated repair costs and the after repair value (the value after repairs), you can make good offers.
If you have one of our websites, you can easily estimate repairs directly from your virtual back office.
Do not go above your offer price. Negotiating with the seller is better than being stuck with a property you cannot sell.
Our real estate investor websites offer a deal analyzer tool that comes in handy in this.
Mistake #4: Not Making Enough Offers
You can only buy houses if you are making offers.
They will accept some, they will reject some. The more offers you make, the more offers will get accepted – and the more houses you will buy.
Remember, don’t assume you need to have a lot of cash, and ready buyers, before you can buy houses.
This is not true. In most cases, you probably just need some earnest money.
Mistake #5: Not Having A Good Follow-up System In Place
Always follow up in time.
Whether you are following up with motivated sellers, or if you are following up with your buyers when you are selling your houses, you must follow up in a timely manner.
Then nothing will fall through the cracks.
You’ll end up closing more deals when you buy more properties and you sell most or all of them promptly.
Mistake #6: Not Verifying The Source Of Funds For Your Buyers
When selling your wholesale deals, you must collect earnest money from your buyer.
In your contract whether you use a contract assignment or simultaneous closing, make it clear the buyer will lose their earnest money if they do not close.
Make sure this is a substantial amount – at the very minimum, I collect $500 in earnest money.
Secondly, verify their source of cash.
I have had some real estate investors tell me their source of funds is “cash”.
- Have they just sold a house?
- Are they using a line of credit?
- Are they getting a mortgage?
- What is the specific source of this “cash”?
Never fail to verify the ready availability of cash – or you can easily lose the deal.
If they are planning on getting a mortgage, get another buyer. Wholesale deals are not funded by conventional mortgages.
Mistake #7: Not Keeping In Touch With Your Seller
Keep your seller on the loop at all times until you close the deal.
I like to give them a call every few days to update them on my progress in closing the deal.
And sometimes you might need to re-negotiate the deal.
For example, I recently had a wholesale deal where my motivated told me she did not know where to take all her belongings when she sold the house to me.
Since she had no money, she could not take her belongings to a storage facility.
I ended up re-negotiating $2000 with her.
I return, I hired a moving truck and paid 2 months’ worth of storage for her. The entire process cost me a few hours and about $500 in cash for the storage and handymen.
Just by keeping in touch, we closed the deal and I pocketed an extra $1500.
At the end of the day, we closed the deal, and we all went home with money in our pockets.
These are the most common wholesale real estate mistakes that a lot of investors make, and they end up losing a lot of money.