8 Do’s & Don’ts of Wholesale Real Estate Investing
Knowing what “not to do” can be just as important as knowing what “to do” when wholesaling houses. Wholesaling is an easy profitable way for beginning real estate investors to get started in real estate investing but doing (or not doing) certain things can add or subtract from your bottom line, or even “make or break” a deal.
When wholesaling houses, keep these strategies in mind…
1. Don’t send a purchase offer without an inspection contingency clause.
DO: Put an inspection contingency clause on each and every offer you submit when wholesale real estate investing. An inspection contingency clause protects you if there is anything wrong with the property that does not pass your inspection. This allows you to legally cancel on the deal, or negotiate the purchase price due to the repairs needed on the property.
Over the years, many people have reached out to me who have had extremely angry sellers because the offers they submitted did not have a single contingency clause. When a buyer submits an offer without any contingency clauses, this essentially means they will buy the property, no matter what! Now, this is how you get yourself into trouble!
For example, let’s say you submit an offer on a property with zero contingencies and you have a closing date seven days from now. Well, let’s say on day five you find out the property needs a new roof and that there is a twelve-foot crack in the slab. With both of these repair items, there will now be an additional $35,000 in repairs that was never originally accounted for. Well, if that offer has no contingencies, then you can very well be legally obligated to purchase it!
So, DO be smart and protect yourself by sending offers with at least an inspection contingency clause.
2. Don’t inflate/deflate the numbers when sending wholesale deals to your cash buyers.
DO: Send accurate numbers when sending deals to your cash buyers. Cash Buyers are the ones who purchase your wholesale real estate deals for all cash and also, pay you your wholesale fee.
Think about this: who wants a business partner that is going to fudge numbers by inflating an ARV (after repair value), and deflate the repairs needed on a deal? This quickly erodes trust between you and your cash buyers, and makes you look like an amateur, very quickly.
The wholesalers who misrepresent numbers on their deals begin to ask these questions when sending properties to their cash buyers: “Why don’t they promptly respond to me?” and “Why don’t they take me seriously?” – Well, if you inflate/deflate your numbers when sending out a “deal,” then your cash buyers will put your email, or phone call, on the back burner. This is because these cash most likely have professional wholesalers who do not waste their time and get straight to the point with legitimate numbers.
So, DO send accurate numbers to your cash buyers. It will streamline communication with less back and forth, and will create stronger working relationships with your cash buyers.
This leads into the next point.
3. Don’t wholesale deals that are solely a WIN for you.
DO: Wholesale deals that create WIN scenarios for all parties involved: the Seller of the property, the Cash Buyer, and yourself.
This is what a WIN-WIN-WIN scenario looks like: the seller is saved from a distressed situation because you line up the cash buyer for their property = WIN for the Seller. The cash buyer of the property gets to renovate the property and resell it for a nice profit = WIN for the cash buyer. You get paid your wholesale fee for selling your equitable interest in the contract to the cash buyer = WIN for you.
When you ask the question: “How can this deal be a WIN for everyone involved?” – You will begin to think creatively, gain repeat business, and gain new referrals from the other parties.
So, Do create WIN scenarios for everyone involved.
4. Don’t speculate on an investment property.
DO: Always take a conservative approach when analyzing a deal. When determining the ARV of a property, use the most recent comparables to get an accurate assessment of the property’s future value. Do not speculate that the market is going to rise 10% and only then will you realize a profit. If you speculate and the market does not appreciate, or even depreciates slightly, then you can lose your shirt!
Being rational is the correct approach. Many times real estate investors become emotionally invested into deals and actually start to convince themselves that a sour deal is a good one. Don’t do this.
Taking a breather to take your mind off the deal, and getting a third party opinion on the estimated numbers are two great ways to get back into a rational state of mind.
5. Don’t state you are the one selling the wholesale deal.
DO: State you are only selling the equitable interest of a contract when you are wholesale real estate investing. If you do not have a real estate license, then you are not able to sell property as a wholesaler. However, what you are able to sell is the equitable interest of the contract you have to buy the property. Be clear in your communication that you are a principal in the transaction and not the actual owner of the property.
6. Don’t focus on several marketing streams to try and get investment deals (as a beginner).
DO: Focus on 1 or 2 marketing streams and become extremely well-versed at them. Automate the marketing process, and then build another profitable marketing stream for your company.
For example, maybe you become a rock star at finding deals and wholesaling them off the MLS. Perfect. Now, automate that process by plugging in an employee or two. Now, learn how to implement direct mail campaigns to motivated sellers. Once your direct mail marketing stream starts bringing in new deals, automate this new marketing stream, and begin building the next one.
Many wholesalers and real estate investors spread themselves (and their marketing dollars) too thin by focusing on several marketing streams at once. This is the real estate investing equivalent of being a jack-of-all-trades and master of none.
Get great at 1 or 2 marketing streams, automate and systematize the process, then move onto the next one.
7. Don’t send out a wholesale deal to thousands of potential cash buyers.
Do: Send out a wholesale deal to a handful of your BEST cash buyers that reply to you quickly, have the capacity to purchase multiple deals, and pay top dollar for properties.
This is where I differ from a lot of other educators. Some will teach you to try and build a cash buyers list with thousands of buyers on it from all different parts of the Nation. New real estate investors can get stuck on the task of building this list for months! After a few months of trying to build a cash buyers list, they may even have hundreds or thousands of cash buyers, but they cannot put one face to one name.
I take the opposite approach by finding the serious cash buyers interested in building their businesses for years to come. These top-notch cash buyers are not satisfied with only doing a deal or two per year – they want volume. These cash buyers also get back to me within 24-72 hours whether my wholesale real estate deal will work for them.
Find these types of cash buyers, continue working closely with them, and build a mutually beneficial relationship where you both WIN on every single deal. Be sure to check out this article for an in-depth approach to building & working a cash buyers list.
8. Don’t believe that every single investment deal is going to work out.
DO: Understand you will have to send multiple offers to complete one wholesale deal. In my experience, it is not unreasonable to get one wholesale deal from submitting ten offers. To be clear, that is one successful deal for every ten offers sent; an average of a 10% closing rate on the offers sent.
One of the greatest hockey players of all time, Wayne Gretzky, said it best “You miss 100% of the shots you don’t take.”
After taking over 5000 shots on goal, Gretzky scored about 17.6% of the time! Wayne Gretzky knew that every single shot wasn’t going to work out. However, he also knew that if he didn’t at least try, he would never score!
The same thinking applies to us as wholesale real estate investors. We always have to try our best and give ourselves the best shot. We do this by sending a multitude of offers. And, if our offer doesn’t get accepted, then it is OKAY because we know one of our next offers will get accepted!
These 8 Do’s & Don’ts will help you focus on some of the most important activities of wholesale real estate investing.
Remember that greatness takes time. If you are just starting out, continue educating yourself, and keep on learning from your mistakes. Soon, different ideas and strategies will begin to click, and you will be well on your way to becoming a successful wholesale real estate investor.
And, never forget: “You miss 100% of the shots you don’t take!” Cheers!