Real estate wholesaling, some of it in the "house-flipping" mode, has been a profitable short term real estate investment strategy for many, and with good reason. However, it's also taken some, usually a newbie, investors down the drain financially. Real estate wholesaling does not have room on the way to the bottom line for these five mistakes:
Mistake #1: Not Understanding Your Market
Buying the wrong house or even the right house but in the wrong neighborhood could stick you with a home you can't sell to an investor buyer and that will suck up your profits selling in the retail market. Know that often your most reliable buyer will be a rental property investor. Know the neighborhoods that work for them and that support a strong rental market.
Mistake #2: Not Understanding Your Buyers.
Part of this is knowing the neighborhoods they prefer, as well as the style and type of homes each investor buyer wants. You can't get this information unless you cultivate relationships with buyers and ask for it. Know which neighborhoods your rental property buyers prefer and the size and characteristics of rental homes they like. Build a database and keep up with this information so that you know what type of homes to look for that they'll want to buy.
Mistake #3: Poor End-to-End Due Diligence
This covers a lot, but it all amounts to the same thing; not running the numbers such that you end up with a losing deal. Here are the components of a thorough wholesale or fix & flip deal due diligence process:
- Know which type of buyer you're seeking to supply and what they will pay for what they want.
- Know what your target buyer wants for a discount to market value.
- If a rental buyer, know the rental market, what they want for cash flow and how to calculate rental property investment potential.
- If a fix & flip deal, a VERY thorough estimate of the cost of rehab work.
- For fix & flip deals, a realistic schedule and timeline to completion.
- How to market for and locate distressed properties that you can buy at a price that will generate a profit for you while meeting the needs of your buyer.
Short-changing on any of these due diligence items can and often will lead to disaster.
Mistake #4: Complacency When It Comes to Your Buyer(s)
You get off to a great start, work hard to build a strong buyer database, and you ask them all of the right questions to be sure that you're out there seeking the homes that your buyers will want. After all, doing this will help you to be certain of a sale, even if one buyer decides to pass on a deal. Meeting the needs of several solves that problem, and it can even create competition.
Your first half a dozen deals go well, and you're getting into a groove. You're even increasing your activity and doing more deals simultaneously. You may have three or four working at once, taking advantage of smart buying opportunities. The problem may come months down the road when you call up a frequent rental buyer with the deal you just inked and find out that she doesn't want homes in that neighborhood anymore. They've moved their focus to a different area and price range. You can't just build a buyer list then ignore them until you have a potential deal. Stay in touch and update your information.
Mistake #5: Getting Too Reliant Upon One Contractor in Fix & Flip
Unless you've set up an LLC or partnership with a contractor, you should seek options and cultivate relationships to back up your favorite rehab contractor(s). Of course, if you're doing your own general contracting and hiring the subs, then you will do the same by having more than one electrician, plumber, etc. on tap.
No matter how good you are at running the numbers and having accurate job estimates, a change in contractors can throw a wrench into your plans. There is also a quality component. Sometimes the subs a contractor uses, or their employees change. There can be a drop in work quality that will damage your buyer relationships. Always have backups and options.
Avoid these five mistakes and you'll make more happy trips to the bank with your real estate wholesaling profits.