The Top 5 Reasons You Shouldn’t Wholesale Properties

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Wholesaling is often made out to be an easy and glamorous story. Reality shows, websites, and the so-called real estate leaders often talk about how it can be a great way to invest in real estate. In fact, many even claim that it is the perfect way for newbies to enter the real estate market with little or no money.

You hear talk of how all you need is a cheap property to wholesale, purchase it or get it under contract, and then sell it off or pass on the contract to a buyer. You’re constantly fed success stories of people who became millionaires overnight just by wholesaling.

Yes, wholesaling is a great way to invest and can be all that it promises to be, but not all the time. In fact, let me rephrase that. Wholesaling doesn’t get you those dreamy-too-good-to-be-true results most of the time. In fact, there are many instances where this investment strategy gets you nothing but despair. While wholesaling is a good option for some, it doesn’t suit every person, especially those new to real estate. It’s not even fit for every home or even geographical region.

So, before you decide to jump onto the wholesaling bandwagon, read on. Here are some lessons that many newbie real estate people have learned the hard way.

It’s Not an Overnight Marvel

Unfortunately, many people get into wholesaling because they do not have the money to purchase homes for flipping and renting. In their dreams, they hope to make a lot of money on the deal overnight. Unlike what the so-called experts proclaim, wholesaling usually isn’t a rags to riches real estate story.

Also, unlike what most beginners believe, this isn’t the path of getting something for nothing. It also isn’t the quickest and easiest way to start your journey in real estate. So if reality television shows have made you believe this isn’t the case, now is the time to take a hard look at reality. Wholesaling has been glamorized to look very easy to do, with no risk involved. In the real world, however, it isn’t that easy.

The reality is that it takes a boatload of patience and a good amount of time before you start making money in the market. You need to do extensive market research before you’re in a shape what property suits wholesaling. You also need to network with people in your own neighborhood to find new deals, potential sellers, and buyers.

This translates to one simple thing: You need to get out of your comfort zone and into the market, work on strengthening your base, and actually take the time to study the real estate market in your region. You will be sending out mail to people, building your foundation in the region, and knowing how the market works there. You also need to work on promoting your brand through marketing, negotiating your deals to get the best ones, and understanding how contracts need to be drafted. All in all, be prepared to work hard and constantly before you start getting results.

The “Legal Stuff” Could Bite You

What most reality shows also don’t bother to tell you about is the legal side of wholesaling. In fact, if you check out real estate forums, you’ll see that many wholesalers constantly keep getting fined for their so-called “illegal practices.” The states that consider it illegal do so because of their concerns around brokering.

Different states define brokering in different ways, and in many places, the definition of what a wholesaler does tends to overlap the work of a real estate broker. This means that the work you do may be considered illegal if you’re not properly licensed.

However, there are also places in favor of wholesaling who say that it is legal because it simply involves signing a contract and then giving it to someone else. Another legal concern pops up when you’re marketing a property. Here, depending on what you do exactly and where you are, you would be advertising a property that doesn’t belong to you.

The reality is that whether you are licensed or not, wholesaling certainly walks a tightrope between legality and illegality issues, especially with definitions changing in every state. So, you need to check how it works in the state where you want to conduct this deal. Before you decide on whether it is the right option for you, check out what laws apply with your attorney in your region.

You Might Encounter Paperwork and Other Issues

While it doesn’t seem like much, paperwork is often the number one time consumer in real estate. There is plenty of it involved, and it starts with drawing up a contract with the party you’re buying from. Then, this is followed by a contract with the person who would buy from you. Also, wholesaling deals aren’t always simple and straightforward. While some are simple enough, others are extremely complex. You’ll need to be able to put in plenty of time for paperwork. You’d also need to consider any legal issues when you’re drafting a contract.

The reality is that paperwork is a great place to start learning the ins and outs. Not only does it take up plenty of time, it also eats up a lot of your energy and zeal. Get the help of a mentor to see if you’re filing your paperwork properly and whether your contract covers all the essential aspects. You will also need to hire an attorney to check whether all legal aspects are taken care of.

There Are Hidden Costs

While this seems like a great option because you need a little cash for investing, many of the websites that say it’s a good tactic forget to mention the hidden costs. For example, sometimes you may have to invest in rehabilitating the house before a buyer picks it up. There may be repairs that can turn out to be very expensive, eating away all your profits.

The reality is that the hidden costs that come up while wholesaling can actually hurt what you make from the project. So if you are new to the wholesaling market, you may want to get an expert to identify the hidden costs involved for home repairs. Another area of concern is the ARV or after repair value of the house. Having a good ARV is crucial to profiting from wholesale deals. You need low purchase prices, little rehab costs, and a good sale value to actually profit from the deal.

It May Not Match Your Personal Style

Most real estate professionals get into wholesaling because they see every other peer in the region doing it. This herd mentality doesn’t help anyone. In fact, many overlook that success in real estate doesn’t come just from wholesaling. There are many other aspects involved as well.

For one, you need to decide what your own strengths in real estate are. You need to have a strong grasp of identifying what makes a good deal. You need to have a thorough understanding of the market and properties. You need to be good at marketing, as the best deals aren’t always the ones that are listed. You would need to find a way to get good deals and be persistent in your approach. You also need to be a good negotiator, as these skills will help you buy properties for less and sell them for more. Finally, real estate involves patience. It takes plenty of failures and learning before you make it big. Gather all this experience and try to be different from the others. But there’s more to it than this.

The reality is that you need to take a hard look at your personality before you decide that wholesaling is the right thing for you. You also need to gear up for long hours of hard work, sacrifice, and failure, so decide if you have what it takes. There might very well better options for you personally. It all depends on your environment and your working style. Once you actually learn and are able to implement all of the above, why even bother taking the “easy” route of wholesaling? You might as well start flipping and making twice as much as you would wholesaling.

Sure, there are people out there who got into real estate wholesaling and made a fortune for themselves. But to expect that a newbie can make huge profits with their first wholesaling deal is just plainly unrealistic. You need to take a look at all the people who have failed at it.

While wholesaling isn’t a bad option at all, knowing how it works and learning from someone else’s mistakes will help you go a long way. There are just a lot of pitfalls. What is more important: As a newbie, do not fall for the lure of the glamorous wholesale market. Rather than jumping into this line of work without any funds, save money, work hard, and start with small investments. Do not get into these deals without a financial backing. More importantly, understand your personal strengths and style, know your market, network like a madman, and be different. After all, success only comes to those who do things differently.

What do YOU think? Is wholesaling a good path for many investors or not? 

Feel free to disagree — just be sure to leave a comment below!

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