Top 5 Profit-Killing Wholesaling Mistakes by Vena Jones-Cox
Editor’s Note: If you’re learning about wholesaling, there’s a webinar you’ll want to attend on May 1st at 9 p.m. eastern called “How to Find and Process Wholesale Leads”. It’s free; register at https://attendee.gotowebinar.com/register/2313290383709519106
Ahhhh, wholesaling…so deceptively simple that everyone who watches a 10 minute YouTube video about it thinks they can do it.
But I can tell you that after 20 years wholesaling in up markets and down, and with over 800 deals under my belt and 10 years of teaching others to do it, too, that there are LOT of ways to mess up a business that lots of people seem to think is as easy as “Buy low, sell higher”.
Here are the big whopping mistakes I see over and over as I operate in the market and talk to others who do the same. Solve these issues, and you’re 90% of the way toward having a profitable wholesaling operation.
- Completely misunderstanding the point of the wholesaling business. The bane of my existence is this type of ‘wholesaler’ who sees the business as something akin to selling collectibles on EBay. They seem to think that the idea is to put a property under contract, then shop the contract to see if anyone will pay more for it. And best of all (in their minds), there’s absolutely no risk to the wholesaler, because unlike buying a beanie baby at a garage sale and trying to resell it on Etsy for twice the price, the wholesaler has NO RISK, because if there’s no buyer, they simply don’t close on the contract.
While the last part of that paragraph is mostly true, the first part is hatefully incorrect. Properties aren’t tchotchkes; they have a knowable, calculatable value. Our buyers aren’t (or at least shouldn’t be) people who purchase a property because they’re tickled by it; they’re people who have actual buying criteria based on getting an adequate profit for the risk they take in acquiring and rehabbing it. And our sellers aren’t people who put a $25 item out on a garage sale table for $5 because they didn’t know what they had; they’re people who have a painful problem of some sort, who are selling a valuable asset at less than market value because they’ve been promised that the sale will be quick and hassle free.
Your job as a wholesaler—the VALUE you bring to the transaction that allows you to get paid thousands or tens of thousands of dollars for each deal—is to properly evaluate the property so that the seller gets what he’s “paying for” (paying for by discounting the property, of course), which is a quick, seamless closing, and the buyer gets what he’s LITERALLY paying for: a deal that will make him money.
Wholesaling fun, but it isn’t a game. Train yourself to do what you need to do to actually SERVE your customers. Otherwise, not only will you spend a lot of time spinning your wheels trying to sell deals that make no sense; you’ll also mess with people’s lives and get yourself a bad reputation.
Not taking “weird” into account. As wholesalers, we see more than our share of properties that have something odd, and usually unsolvable, about them. That’s because those properties are less desirable and harder to sell, so owners have a tough time selling them, and they get motivated, and they call us.
Weird properties CAN be wholesaled, but the mistake I often see—and, to be honest, have made myself—is that wholesalers don’t mentally deduct ENOUGH value for the oddness of these properties.
Anything that makes a property unusual relative to what people are used to or relative to other properties in the area has a negative effect on what a buyer will pay; round or octagonal houses, the 8-bedroom house, the 1- bedroom house, the house with a bedroom off the garage, the house with the kitchen in the basement, the house next door to a gas station or with a loud factory in the back yard: these are all properties that are worth a lot less to our buyers than a more standard layout or location.
The mistake is not necessarily in putting it under contract; the mistake is in not evaluating a house like this for what it is, which is 1. A rental (rehabbers don’t risk buying properties like this because their entire profit is based on a quick resale, and there may not be a market at all) and 2. A rental that’s going to rent for LESS than similar-sized houses in the area, and thus should be priced really aggressively in order to be interesting to any investor/buyer.
- Saying that they “buy and sell houses”, or “put buyers and sellers together”, or anything else that shows a complete lack of thought about their role in the real estate world. Unless you actually close your wholesale deals before you sell them (and some wholesalers do), you do NOT buy and sell houses, and you should never say you do.
If, like most people, you assign contracts to buy houses, then your product is a just that: a contract. Saying “I have a house for sale” when you, in fact, have a contract for sale is both practically and legally incorrect. YOU don’t have a house for sale because YOU don’t have a house, and you can’t sell someone else’s house for them unless you have a real estate license AND the seller has signed an agreement with you to let you market their property. And chances are, neither of those things is true.
You also don’t “Put buyers and sellers together”. You don’t go out looking for a deal that a particular buyer wants, then introduce the buyer and seller and let them do their thing. No, you are legally acting as a principal in every step of a wholesale transaction, agreeing to buy from the seller and sell to the buyer, NOT put them together to arrange their own deal.
Why am I so rabidly insistent that you both understand this and use the right language when you speak to others? Because a) Come, on, you should actually know what it is you do and b) it’s idiots who DON’T what they do who say the wrong things to the wrong people and attract the attention of regulators to our business.
A few years back, a local wholesaler got a cease and desist order from the State of Ohio basically saying, “We think you might be doing things that you need a license to do, if so, stop right away”. He called the division and said, “No, I don’t need a real estate license, all I’m doing is getting paid to find properties for my buyers.”
Which is, of course, exactly what you need a license to do.
- Trying to take too much money out of the deal. Biggest complaint you’ll hear about wholesalers, from the people who are your very best buyers? “They try to take too much money out of the deal.”
Let me translate for you: a lot of cash buyers think that a lot of wholesalers price properties too high for the BUYER—who, let’s face it, is going to have a lot more money, time, and risk in the deal than you are—to make an adequate profit for his efforts.
Much of the time, I think that what these buyers are really observing is #5, below, but yes, a lot of wholesalers—especially in a hot market where a lot of newbies will pay WHATEVER just to get a deal—seem more interested in getting the maximum money out of every single deal than they are about assuring that the buyer is well-compensated for having done that deal, and thus will be a returning customer.
Wholesalers in this business for the long term want raving fans, NOT to get rich from every deal
- Trying to get by without the resources they need. Look, I get it: when you start wholesaling, you might well be operating on a shoestring. Subscribing to a real comping software system at $1,000 a year might be outside the budget. The lack of this particular resource means that you depend on free online Zillow-type systems (which are not actually set up to be comp properties, but rather to be lead-generating devices for agents) or tax appraisals. And THIS means that, unless you make a LOT of effort to look up comparable sales one…by one…by one…you often have no real idea what a property is worth, and thus both put it under contract for the wrong price AND offer it to buyers for the wrong price, which means you make no money.
That’s bad, but with enormous effort, it can be overcome. However, trying to wholesale without the basic knowledge you need to evaluate repair costs, understand how to use those in combination with property values to come up with a reasonable sale price for a buyer, not having contracts or having the wrong contracts for tying up and assigning deals, not understanding when and how you get paid…it’s just insane.
There is NO business in which you can make money without understanding the product, the process, and the customer.
Imagine someone trying to deal art who couldn’t tell the difference between a Picasso and a Velvet Elvis. Or someone trying to open a coffee shop who didn’t know how to use a coffee maker. Or trying to buy and sell used cars without understanding how to identify a bad engine, or how to fix that engine, or what it would cost.
I don’t know WHY so many people think they can just go out and wholesale without an in-depth education about the topic, or why they think they can get a serious, in-depth education off a 90-minute webinar or a free online forum or whatever, but it doesn’t work. You know it, you’ve seen it yourself in those poor desperate “wholesalers” who try and try and try and never manage to sell a deal.
If you want the rewards that wholesaling gets you—that freedom of time, that income in the top 5% of all American, that incredible sense of joy and fulfillment you get from owning your own business and life—then you’re going to have to make your own sacrifice of time and money to get the basic resources wholesalers need to have.
And yes, that may mean you must use vacation days to go to a training, or put off buying that new couch for another year so you can pay for it, or even borrow money from family so you can get the education you need.
If I may be so bold as to suggest it, the most complete, comprehensive, down-to-earth, immediately implementable training around is my own Hand-On Wholesaling Academy. I only do it 2-3 times a year, so you have to plan ahead, but it is literally guaranteed to put $10,000 extra dollars in your pocket in the following 90 days, or your money back.
Plus, as soon as you sign up, we ship you my comprehensive home study course to get you started before you even attend, and it comes with all the forms and contracts you need to make a wholesale deal happen, real-life property inspections, and more.
You can learn about the next Hands-On Wholesaling Academy at www.REGoddess.com and grab one of the limited seats in the next event. But whether you study with me or someone else, please do yourself the favor of committing to learn this strategy at a deep level, so that you can achieve the enormous success you really want.