There is a substantial difference between reading and learning about wholesaling pitfalls and actually having the experience and scars to prove that you have paid your dues. And in the case of newbie wholesalers, most don’t grasp that this crater exists. Some think they know it all, while others are at the other end of the spectrum and are too fearful to make the first deal or move forward in their business plan.
Eventually, all newbies need to embrace that they don’t know what they don’t know until they get into the business and start learning on the fly.
However, here are five red flags that you can be on the lookout for and hopefully avoid without suffering the consequences of these pitfalls.
Underestimating Rehab Costs
This process can be challenging, even for experienced wholesalers and rehabbers. The problem is that there is always the possibility of an unknown issue. And many unknowns can be very costly. But in some cases, newbies will severely underestimate the rehab cost in an effort to make a deal work. If you can’t make the numbers work with a legitimate rehab budget, then it is best to pass on the deal.
Missing The Inspection Period
It is essential to keep all of the firm dates on your timeline organized. Nothing good will happen if you miss the inspection window to cancel a bad deal. Usually, it only takes getting stuck with one awful property to learn this expensive lesson. No one wants to give up their earnest money, but it is going to be less costly than taking on a project that is not worth what you will be spending on it.
Over Trusting The Savvy Buyer
As a newbie, it can be exhilarating to see the finish line on your first few deals. And when you are working with a savvy buyer, he or she will know that excitement and try to capitalize on it. This can mean encouraging you to cut your fees to close the deal. But that is not the only trick that most savvy buyers have in their bag. Watch out for all of these as well:
- They ask when your inspection period is up to see if they can pressure you with a short timeline
- They overestimate their rehab cost to get you to drop your price
- They wait to make an offer leaving you to sweat for a few days and reconsider your price
- They ask for a break on this deal and promise to make it up to you on the next sale- which might never happen
Never forget that your buyer is in business to make money also. And they will try to negotiate the best possible outcome for their bottom line. Don’t leave your money on the table.
Assuming The Deal Is Done
Never consider that a deal is done until all of the docs are signed, and the transfer is completed with the county. Many sales have fallen through as late as at the closing table. Be patient, answer questions, and be present for all phases of the transaction to make sure that the deal stays on track and really does get singed and transferred legally.
Failing To Pay Taxes
Never forget that your cut also needed to be shared with Uncle Sam. And because you are now working for yourself, that process is a bit different. The money that you get is pre-tax, unlike a paycheck from your employer that is post-tax. If you earn 20k, don’t look for a new deal that costs 20k.
You need to slice off the tax portion of your earnings and then reinvest or spend what is left. Never dig a hole and owe more tax money than you have on hand to pay that bill. Back taxes are the fast track to closing your real estate investment business. A safe amount to tuck away is 20-30%. And if you owe less, look at that as a bonus that you can reinvest in your business.
This list is far from all of the unfortunate choices and pitfalls that newbie wholesalers need to avoid. But it is an excellent place to start as you begin your on the job training.