Getting started in wholesale real estate is an exciting time for new and experienced property investors alike. However, many underestimate the unique aspects of this strategy. While some general real estate or investment principles apply, others are particular to wholesale deals. And those who aren’t aware are at risk of some very common pitfalls. Read on as we explore these frequent but impactful issues and provide tips for avoiding them.
Inadequate Due Diligence
Wholesaling is different than traditional real estate in a number of ways, including the amount of work involved in due diligence that would often be completed by real estate agents or title companies in other cases. One of the biggest potential issues is with the home’s title, which may have liens or other encumbrances that owners aren’t aware of or don’t disclose.
These risks are particularly significant when using quit-claim deeds, which provide no guarantee the property is free and clear or even fully owned by the supposed seller. Furthermore, expenses like insurance (especially in areas like flood zones), property taxes, and HOA fees can vary widely, dramatically affecting the actual monthly out-of-pocket costs for future owners or investors. Inadequate due diligence can cause major issues with a sale or scuttle it altogether.
Overestimating Property Value
Wholesalers may often find themselves looking at sales a bit too optimistically. It’s natural to hope things work out for the best, but it can be a critical error when underwriting deals. It’s vital for wholesalers to have an intimate knowledge of their market, including the mix of housing, the pace of sales, how close the sales price is to the list price, and various smaller factors unique to neighborhoods or areas that can have an impact. By overestimating the final sales price and overpaying, wholesalers can blow their entire margin or make the deal unattractive to end investors.
A related aspect to this pitfall is the potential for underestimating repairs. Wholesalers need an excellent eye for spotting necessary maintenance or updates, including ones that may be less obvious, like mold, foundation issues, and older electrical or plumbing systems. These naturally need to be factored in with appropriate price deductions to entice investors.
Unlike traditional real estate transactions, those practicing wholesale real estate do much more of their own negotiation. Unfortunately, lousy negotiation skills can have a significant impact on your business. Sometimes, you may end up overpaying when a more skilled wholesaler could have gotten the same property for less.
In others, you might find deals falling through due to a lack of trust and connection between you, the sellers, and potential investors buying it. While many focus on the numbers and hard facts of the deal, skilled negotiators know the personal element is equally, if not more, important toward a successful sale. It’s vital to know when to push and back off, which issues are significant enough to bring up, and which are relatively unimportant.
Lack of Networking
At its core, wholesale real estate is a marketing and networking job. To be sure, wholesalers need to know about the particulars of real estate, but without an investor to sell to, there’s no potential for profit. Wholesalers need to actively network with other real estate investors in the area, developing relationships and learning the types of properties they’re looking for. This can be done in a variety of ways, from online forums to local real estate investment association meetups.
Those who don’t develop many connections could see deals fall through if they can’t find an end buyer, sacrificing the valuable time and work they’ve already invested. Networking can also be critical to the continued education of those wholesaling, who can learn about market conditions and other factors from fellow wholesalers.
Legal or Ethical Issues
Wholesale real estate laws can vary from state to state and even city to city. As one of the newer fields of real estate, regulations tend to be less firmly set. However, it’s critical to fully understand how they affect your business. Deals conducted outside the law’s bounds could result in the cancelation of the sale and potential penalties for wholesalers. When in doubt, having a skilled attorney with real estate experience as part of your network can be helpful, ready to help with unclear or new situations.
There’s also an ethical element beyond the requirements of the law. Homeowners selling to wholesalers are often under financial stress, need to sell quickly, or may simply not have much knowledge of real estate. Unscrupulous wholesalers could take advantage of these people, buying their houses for far less than they’re truly worth and scoring a windfall profit. Others may fudge their numbers or conveniently fail to mention potential issues to clients they sell properties to. While both actions might appear helpful at the time, they risk damaging your reputation and potential for long-term growth and success.
Thrive in Wholesale Real Estate By Avoiding Common Mistakes
There’s no doubt wholesale real estate presents incredible opportunities for hard-working real estate investors, especially those looking to get started without a lot of cash. But there’s an equal amount of pitfalls that can derail wholesalers as well. Remember these common issues, and you’ll be far ahead on your quest for real estate success.