I admit it, wholesaling houses is a whole lot of fun. Itʼs exciting, it’s easy, itʼs fast. Bid -a bang, bid-a boom. Youʼre in and out – real fast- like- leaving the scene with a big check in your hand. Thatʼs how it goes…most of the time. There are always exceptions to the rules and horror stories that go along with it. I think there should be a 5 day event specifically designed to warn you of the real estate wholesaling pitfalls of this business.
You can get caught in some traps, and you have to swim your way out. Iʼm going to tell you about 7 of these deadly sins or real estate wholesaling pitfalls right now. Why am I doing this? Well, Iʼm all about whatʼs real. I like for people to know exactly what to expect when they get into this business, and that itʼs not always peaches and cream. Donʼt get me wrong, itʼs an awesome business and I love it. I wouldnʼt change a thing if I had the choice, but good things DO go bad. Itʼs inevitable. So Iʼm going to warn you of these things ahead of time so that if they happen to you, youʼll be prepared. And youʼll know how to handle them.
These real estate wholesaling pitfalls and deadly sins (in no particular order) are:
Don’t Go Shopping Until The Wire Hits
This is one of the most common real estate wholesaling pitfalls. Hereʼs the scenario: You got an awesome deal on a property from a motivated seller. You sold it quickly to an all cash investor buyer. Your profit on the deal is $13,500.00 All of this went down pretty quickly. No problems from either party. Youʼve even got a closing date set with the title company, and now itʼs just a matter of time before you get paid. Ahh, you sit back in your office chair with your hands folded on the back of your head and exhale a giant sigh of relief. You CAN pay your car payment that was due last week. Think to yourself “Thank God this deal is closing, or I would be in big trouble”.
Get out your stack of bills and start allocating the money appropriately. Then you plan a nice dinner with your wife, and maybe even a cruise to the Bahamas or something like that. You plan on stashing some money away in your savings account, and then buying that new iPhone thatʼs coming out. You can finally do some of those things youʼve been wanting and needing to do, just as soon as this deal closes. “I love this business”, you say out loud as you smile a big smile and have a beer and a slice of pizza as you wait for the big day.
Two days before the big day, you get a call from your buyer. Heʼs calling to let you know that heʼs got a little “problem”. Now anytime you hear that come out of your buyerʼs mouth, itʼs usually not a little problem. Itʼs a BIG problem. Just then your heart lands in your stomach, but you hold it together so that you can panic appropriately. Your buyer explains to you that he has a partner, and that the partner wasnʼt in town when he decided to write a contract on your house.
The partner just got back in from his trip to Italy, and had a chance to go take a look at the house. He wasnʼt too thrilled about the location, and it really needed more work that he thought. He doesnʼt want to close on the deal. By the way, the partner is the guy who has the cash.
Not Every Deal Will Close [In Fact Only 60-70% will]
These kinds of things happen, and you should expect that not every deal will close. Usually when you get a call from your buyer and theyʼve decided against the closing, there isnʼt a lot that you can do to get them to the closing table unless itʼs a matter of price/closing costs or something that can be negotiated.
The point is, donʼt sit down and count your chickens before they hatch. The deal is not a done deal until it has made it to the closing table, the paperwork has been signed, and the cashierʼs check was handed to the closing attorney. Even then, donʼt consider it safe until the money is in MY bank account and is reflected in my available balance. THEN I can plan my cruise and hit the mall.
There are a lot of investors out there who are trying to break into the business. You may even be one of them and need to keep in mind this real estate wholesaling pitfall. If youʼre dealing with the seller then I say to always write the contract with as little of a binder deposit as possible. If you can get away with NO Binder, then thatʼs even better. Some states require that some money exchange hands, so how about a dollar? Will that work? Sure it will!! Remember, when you write a big check, you lose a big check. It happens every time, I swear!
When youʼre dealing with investor buyers, itʼs a different story. You have to switch your binder mentality over to being the seller. If the buyer ties up your house for 14 , 21 or even 30 days, and then doesnʼt close, what will happen? Well, the buyer will be in default of the contract. Just like when YOU are the buyer, he will lose the binder deposit that he put up when he signed the contract. Youʼre not in this business to make $1,000 on a deal BUT if the buyer ties your deal up for 30 days and then decides to back out at the last minute…how much will you have made on the deal if he didnʼt give you a binder deposit? Answer: $ Z $ E $ R O $ (and thatʼs the wrong answer).
Always Collect Earnest money from Your Buyer
If the investor buyer is not willing to write you a NON-REFUNDABLE Binder deposit when he signs the contract, then heʼs probably not a serious buyer and you should keep marketing the house until you find a buyer that is.
Oh! One more thing about binders – cashierʼs check or money orders only. No Personal Checks* – they WILL bounce – (ask me how I know). Every time Iʼve bent my rules and accepted a personal check from an investor buyer for a binder – it bounced.
*Personal checks are o.k. if you know the investor and have done a deal or two with him.
I was dealing with a seller once who called me up and had a list of properties at least a mile long. He was practically GIVING them away. I couldnʼt believe it. I was in hog heaven. They were all in borderline war zones, but safe enough that I could scoop them up dirt cheap and sell them to landlords.
So without thinking twice about it, I went ahead and signed the contract to purchase some of his houses – the ones that I felt confident that I could sell quickly and make some fat money. He obliged without a fight, and I moved the files into the “for sale” column on my white board.
Clear Title is Required for a Clear to Close
Immediately, I sent the wholesale real estate contracts to Attorney Bernie, my investor-friendly real estate attorney to pull title work. Within a week, he called me on the phone to tell me what a complete MESS we were dealing with. The seller owned a funeral home. He was the “go-to “ guy for low-income families that couldnʼt afford to bury their loved ones.
When the person dies and the families came to him, he would have the heirs sign the deed to the dead personʼs house over to him as payment for burial services. Not a single one of these cases had been through Probate or any legal proceedings whatsoever. Some of these deeds were so old, that the person who signed the deed over to him was dead. These titles werenʼt marketable without thousands of dollars being spent in Probate court, and who knows what wouldʼve surfaced.
Iʼm glad I didnʼt find a buyer for these and have like $50,000 coming to me. Iʼd have been smoking hot pissed. Instead, I kept playing by the rules of the game and made sure I had clear title before I pimped the properties out. I donʼt know what ever happened to that guy, but heʼs probably doing things a little different now.
Make sure you get the word from your closing agent or attorney that the title is marketable. That gives you the green light.
One of the real estate wholesaling pitfalls you want to avoid is letting your sellers and buyers talk to each other. I hate to say this, but itʼs just the truth. People are sneaky. And if they think they can save a thousand dollars by cutting your throat, then they will. And I donʼt want you to find that out the hard way. So listen. When you have a contract with the seller to purchase their property, it doesn’t mean that they wonʼt back out. Itʼs a lot harder for the seller to back out of the contract than it is for the buyer, but possible indeed.
Buyers and sellers discussing the property with each other will almost certainly lead to how much you paid for the house. When those two get tighter and start comparing notes, they may not accept the fact that youʼre making money on the deal. This could blow up in your face.
Maybe it’s scarcity mentality on this real estate wholesaling pitfall issue, but I just would rather keep my seller and my buyer about a football fieldʼs length apart. I donʼt even want them at the closing together if Iʼm not present.
When dealing with sellers vs. dealing with buyers, youʼre working in two different capacities. You should be able to control the deal once you have the contract signed with the seller. If your investor buyer doesn’t want to play the game your way, then give him the boot.
25% of Your Income is Found in Follow Up
Another one of our real estate wholesaling pitfalls is not following up on your real estate leads. Statistically speaking, In the marketing world, it takes 7 contacts with a prospect before they say “yes” to an offer. Itʼs just the psychology and behavior of a human. It doesnʼt change because thereʼs a house involved. Now that youʼre in the marketing business (did I just say that?) you have to implement a consistent and routine follow up system for each type of contact that you have.
It starts with direct mail. If you mail a seller one letter, you may not get a response. Each time that seller sees another piece of mail from you, he/she gets closer to contacting you. So the more you mail to them, the closer you get to a deal.
If you donʼt strike a deal with a seller on the first contact, donʼt give up! Follow up with that seller at LEAST 7 times before you move them to the “dead leads” category.
Remember this: WRITE BIG CHECK, LOSE BIG CHECK
Probably the worst real estate wholesaling pitfall of all. I know there are a BOAT LOAD of real estate investors and real estate wholesale companies out there who use their own money to buy deals. Or maybe theyʼre using their credit score by obtaining low interest rate bank loans. None of these are good practices for any creative real estate investor.
Itʼs called Creative for a reason. Thereʼs nothing creative about sitting at the desk of the Bank of America banker and filling out a 1003 Loan Application. There is, however, something creative about structuring a deal with a seller in which they finance 100% of the purchase price with no money down and no interest for 1 year.
There are too many ways to get the seller money without EVER using your own. Private lenders, split funding, owner financing, hard money, lease/option tenants, etc. Resorting to writing a check out of your account is not what I want to see anyone doing.
When the Machine Stops, You Die
Iʼve seen this real estate wholesaling pitfall happen to a lot of real estate investors, and it has certainly happened to me more than once. You implement a solid marketing campaign and the leads start pouring in. After sifting and sorting, you cherry pick the deal that youʼre confident you can sell quickly to your all cash buyer. In fact, you even know who he is. You call him up and heʼs totally stoked. he writes you a binder check and the deal closes in only 10 days. Woo Hoo!
You worked hard to land that smoking lava hot deals and get it closed. And now the day has come. Youʼve got a big fat check in your hand for $12,000.00. Itʼs more money than youʼve ever had in your hands at one time. You walk away with a big, giant grin on your face as thoughts of paying of bills and spending that money dance through your head. Thatʼs all fine. Iʼd expect nothing less.
Lead Generation is the Biggest Challenge for All Investors
The challenge comes when you get wrapped up in your “new” life and you turn the buying machine off. What is the buying machine, you ask? Itʼs your marketing! When you quit marketing to buy houses, then guess what happens? You donʼt buy houses. Sure, youʼve got enough money to keep you going for a while. And yes, it was definitely easier than you thought to make that check. But itʼs also easy to spend A LOT of money in a short amount of time.
By keeping your marketing running automatically in the background at all times, youʼll keep an endless supply of motivated seller leads, hot deals, and big checks. The best way to ensure that your lead generation machine is well oiled and always running is to hire a virtual assistant to get things done! Create a monthly marketing calendar and assign the tasks to your Virtual Assistant to make sure that the marketing campaigns continue to run, EVEN when you’re not there or don’t feel like working that day.
Hereʼs a tip: Whatever youʼre doing TODAY is what youʼll get paid for 30 days from now.
Property M.O.B.: Your Go-To Source for Avoiding Real Estate Wholesaling Pitfalls
Property M.O.B. specializes in wholesale real estate and teaches members how to invest in real estate. The goal of Property M.O.B. is to help you make more money. If you want to learn how to wholesale real estate or become a house flipper, we are your go-to source. Forget “real estate school” or “real estate classes.” We’ll take you through wholesaling houses step by step.