Four Mistakes That Can Lead to Real Estate Wholesaling Disaster

11/15/2017 05:48 pm ET

There are real estate investors out there who consider real estate wholesaling to be the perfect business for the short-term investor. After all, you can have no or a tiny out-of-pocket investment and roll it over in weeks to a finished transaction with thousands or tens of thousands in profits.

In truth, it can be great for you if you have the right attitude going in and spend the time and effort to learn what makes it work and what will make it fail. To help you out, let’s take a look at four big mistakes that can take down a real estate wholesale business.

Mistake #1 – Don’t make a thorough effort to understand your local investing market.

This isn’t just reading about the local economy and where homes rent well or the most popular neighborhoods. It’s also about understanding the local government that influences housing and construction. Go to a planning and zoning meeting to see how it works.

Watch what’s happening to older neighborhoods, even those that have been popular areas for rental homes for many years. Are they beginning to get zoning variances to put offices in what were previously residential homes? This isn’t necessarily bad, but does it mean you may want to think twice about single-family rental homes in an area that’s changing in demographics.

Mistake #2 – Not Understanding Your Buyer Customer Base

As a wholesaler, you can resell homes to retail buyers, but it’s rare. You’ll be dealing with homes from excellent condition to those in need of extensive repair and renovation. Your primary buyer pool will be other investors. Either you’ll be selling homes to fix & flip investors or to long-term rental property investors.

The rental property investor will generally want a home that needs no work, quickly rolling in a tenant and getting cash flow started. They may be OK with some cosmetic things, but they must be low cost and quickly done. Since you’re a wholesaler, you are not in that business, so it’s left to them.

The fix & flip investor is interested in a home that they can repair and rehab and then flip to a rental investor or to a retail buyer. You’re also not doing any work on the home, simply locating the best investments based on which type of buyer you’re working for.

Build your buyer list, preferably a database, with each buyer’s main objective, preferred neighborhoods, and price range. Be as detailed as you can be about each potential buyer so that you can use this information to locate good deals.

Mistake #3 – Poor Due Diligence

This is all of the math of the deal. You should start at the end of the process, the buyer closing transaction, to come up with the numbers you’ll need to meet and the homes you’ll need to seek. In other words, if a rental home buyer wants to be in one or two specific areas, likes 3 bedroom homes, and they have a preferred price range, know all of this.

You’ll need to know what a 3 bedroom home in the desired areas will rent for competitively. You’ll need to know what the costs of ownership will be so that you know the most the rental investor buyer can pay to get the cash flow they desire. Once you reach that number, you can back up and see if there are homes out there you can locate to add a profit for you and supply what the buyer wants.

Of course, you’ll need to know your transaction costs as well. What will it cost you for transactional funding if you need it, and what closing costs will you incur?

Mistake #4 – Getting Comfortable & Not Adapting

If you’re good at what you do in a reasonable market, you’ll be profitable and enjoy your business results. You’ll begin to build a relationship with certain active real estate investor buyers who will become your go-to customers. You’ll know what they want, and they’ll know that what you bring them are the right deals.

You’re rocking along and take on a deal because you know that a specific rental home buyer will love it. When you tell them you have a home for them, and you’ve committed, it is a tough time to find out that they’re maxed out on their funding or are having family or medical issues and cannot take the deal. Keep in constant touch with your top buyers.

Avoid these four mistakes, negotiate well, and you’ll be one of those investors who swear that real estate wholesaling is the best form of short-term real estate investment.

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