The Top 5 Reasons New Wholesalers Lose Money

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So you’re looking for a fresh start and believe real estate is the way to go. Maybe you’ve heard that 90% of millionaires maintain their assets in real estate. You might have also heard that the majority of millionaires became millionaires because of real estate. You’ve probably watched a few flipping shows on HGTV, and now you have the itch to get into real estate.

You might have thought, “But I don’t have the money, so I can’t become the next big real estate tycoon.”

Then you heard about wholesaling and the ability to get into real estate with no money down. “Make your first $5,000 check in 90 days!” Immediately, you might think either “sign me up” or “here comes another scam.”

So what’s the truth? You have a right to be excited about a new endeavor, and wholesaling is a powerful way to get started in real estate. On the other hand, many of these messages are hyped up and offer a too-good-to-be-true image of real estate investing. I want to play the neutral party and give you some things to think about when beginning in wholesaling.

The Top 5 Reasons New Wholesalers Lose Money

In my experience, you absolutely can make a lot of money in wholesaling; however, there are definitely things you need to be mindful of if you want to be successful.

Here are the top ways I see wholesaling newbies lose money.

Related: A 60-Day Action Guide to Wholesaling Your First Property

1. They purchase courses.

This is the quickest way to lose money, hands down. When I was starting out, I had to fight the temptation to buy every educational material related to wholesaling, and believe me, there are a lot. These courses and coaching programs can cost a fortune.

I’m not saying that no education is worth paying for. I wish all education was free or I wouldn’t be paying back massive student loan debt, but you have to find effective education.

In fact, I’m an advocate for education and even coaching but you have to know when enough is enough. I was speaking with a gentleman a few months ago, and he told me he spent $40,000 on his real estate education. I asked him, “Then why are you scheduling a free wholesaling consultation with me?” If I spent $40,000, I would be calling those I pad that money.

Be careful—their are sharks in the water, and you do not want to be the fool who jumps in with a bloody leg. Find what you need, and leave everything else alone. Don’t waste your money.

2. They gather garbage leads.

Leads are the lifeblood of sales, and you should know by now that wholesaling is sales. The most important aspect is finding quality leads. Many people ask me how to do that. Well, that’s an article for another day. But I will say that when you’re focused on driving for dollars and putting out bandit signs etc., you may find that they’re effective, but you really don’t know who you’ll be talking with if you ever get that point.

Not focusing on your target audience is one of the worst ways to lose money Yes, I’ve tried bandit signs and did have some success, but man, I talked with some nuts. I even had a lady try and sell me a house she was renting.

Be focused on who you want to market to. You can have all the amazing marketing tools in the world, but if you don’t have a solid list with criteria on who you’re targeting, guess what? Your money is gone.

3. They’re unprepared for lawsuits.

Now, don’t let this scare you. If you have all your ducks in a row, you will be able to withstand this. I’ve been in court twice, and because of my documentation, I’ve won both cases. Still, lawsuits are an easy way to lose money. To avoid this, you have to make sure all your documentation—i.e. contract, assignment agreement, memorandum of contract, etc.—are in order, signed, organized, and maintained.

Attorney fees can rack up quickly, but if you have everything in order, you will pass those fees on to the litigant who loses the case. Always have an lawyer on your team for those crazy sellers who forget they’ve signed a contract.

4. They don’t budget for attorney’s fees.

We were just discussing lawsuits, so this is a great segue to attorney’s fees. Now, when I talk about these fees, I’m referring to documentation creation, including contracts, leasing documents, and other needed articles. A lot of this can be found for free by doing some research. No, I’m not saying just download anything from the internet and use it. However, you can use that document you downloaded as a rubric.

Related: The Big Mistake I Used to Make When Qualifying Wholesaling Leads

I have a contract and assignment agreement I offer for free, but I tell people to have it reviewed by an attorney. Yes, it may cost, but it’s marginal compared to having a document created from scratch.

5. They don’t account for the inspection period.

This is a boneheaded way to lose money. I can raise my hand and say I am a bonehead because I lost money this way. In your contract, you should have an inspection period, and that inspection should correlate with your earnest money deposit. If you have a property under contract and you exceed your inspection period time, you will forfeit the earnest money if you do not close the deal.

Yes, a savvy seller will take your earnest money deposit.

I would love to hear your thoughts below. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.