I visited three properties this month pitched by newbie wholesalers. I am a cash buyer looking for my next deal and you never know when a newbie wholesaler may dig up a winner. I have bought good deals from newbie wholesalers in the past. Unfortunately, in all three cases this month, the newbie wholesalers made the same third most irritating mistake.
The most irritating mistake newbie wholesalers make is overestimate ARV and that was pretty much the case for these three properties. But I can understand their inability to reasonably estimate ARV since newbie wholesalers rarely have the skills (and sometimes the data such as seller concessions) to properly analyze comps. I will do my own due diligence on ARV anyway, because I know that the newbie wholesalers will be off by $20k to $50k on a home worth $150k to $300k. In other words, I do not rely on wholesaler’s estimates of ARV though they are useful for getting a ballpark idea of whether I should invest my time visiting a property. The second most irritating thing newbie wholesalers do is underestimate repairs. Again, I don’t get overly irritated by this because, after all, what can you possibly expect from someone who has never rehabbed a house? They simply don’t know how much repairs cost. Besides, different investors renovate to different quality and we all have different repair estimates. So, it is not reasonable to expect that a newbie wholesaler will nail the repair estimate number, even though I do expect them to give me a range for their estimate and give me an idea about the scope of work.
Of course, I’ll do my own due diligence to estimate repairs and ARV since I must assume each number will be off by many thousands and tens of thousands of dollars.
The third most irritating thing that newbie wholesalers do is something they really shouldn’t do and that is to totally ignore buying costs, holding costs and selling costs.
Let me illustrate with an example for one of the properties that I recently visited.
The written pitch from the wholesaler read: “Asking Price: $149,980 After Repair Value: $300,000 Estimated Rehab Cost: $65,000 Taxes: $10,266 Potential Profit: $80k”
If we assume that the ARV really is $300K and that the repairs really will be $65,000, then if I buy the property for $150k, then the ARV plus repairs will be $215k. As typical for newbie wholesalers, they subtract the repairs ($65k) and purchase price ($150k) from the ARV ($300k) and tell me that my potential profit is $80k with a rounding error of $5k.
Of course, I already knew that this would be a newbie wholesaler, because the commission on the sale of the renovated property alone would already be 6% of $300k which is $18k. That $18k already negates the "$80k potential profit" number.
In fact, buying costs, holding costs and selling costs for this property with high property taxes and a 6-9 month turnaround time would be at least $30k, and maybe much higher depending on the terms of financing. That already means that the maximum profit is $50k if all the other numbers are right and that's still not a small chunk of change.
So, I showed up at the property anyway because you never know when a newbie wholesaler will stumble across a very good deal. I explained to the newbie wholesaler about the buying costs, holding costs and selling costs and I said that there is really no justification for ignoring those costs when promoting the potential profit. The wholesaler agreed to modify his advertising and shortly thereafter he reduced the price by $15k and increased the ARV a bit by citing a range for ARV with a higher upper end.
During the walkthrough, I stopped estimating repairs when my repair estimate significantly exceeded $65k for this house that was more than 100 years old and had issues above and beyond standard renovations for which I would want a structural engineer to assess. Needless to say, I did not buy the contract on this house and I see that it is still on the market.
I fully recognize that calculating the maximum allowable offer for a flip is not an exact science since it’s hard to achieve even 5% accuracy on the total all-in cost of a flip before the purchase. Since 5% is $15k in this case, I am not irritated by the wholesaler who can’t guess ARV and repairs to my level of standards.
However, there is NO EXCUSE, for a newbie wholesaler (or experienced wholesaler), to “forget” or ignore buying costs, holding costs and selling costs. Those costs are an inseparable part of real estate investing and they CAN be predicted within 5%.
Looking at this another way, if the wholesaler is trying to make $10k-$30k profit on this deal and ignores $30k of known and fully predictable buying costs, holding costs and selling costs, the wholesaler is doing himself/herself a huge disservice and will not last very long. It is not a good idea when newbie wholesalers try to make "too much" on a deal when they know "too little." Reality and the market will dictate what works and what doesn't.
I predict that a newbie investor will eventually buy this property from the newbie wholesaler. The newbie investor will learn a valuable lesson and there is a higher than 50% probability that the newbie investor will not do well on this flip (this will likely not be a rental), get discouraged and maybe conclude that real estate investing is not the best path form him/her/them. I have seen this happen and it is a shame for all concerned, when it does.
My point is that newbie wholesalers and newbie investors MUST ALWAYS account for buying costs, holding costs and selling costs as part of the proper due diligence process that is absolutely necessary to be a successful real estate investor.
The details of calculating buying costs, holding costs and selling costs is described in our training video “Top 10 Essentials for Successful Flipping.” The details for the top 6 mistakes made by wholesalers are described in detail in our training video “Wholesaling…From the Buyer’s Perspective.”
If you want to make hundreds of thousands of dollars by investing in real estate and generate thousands of dollars per month of passive income, you need to learn the basics and then learn the advanced best practices. Now buy the Smarter Investing home study course to learn the basics and the advanced best practices.