Wholesaling Real Estate Risks
Real estate wholesaling is one of the most rewarding types of real state investing. Wholesaling in real estate means finding properties at prices below the market value, getting invested in a property by acquiring it under contract, and then selling the rights of that contract to an end buyer for a profit.
Real estate wholesalers put homes under contract for low prices then get investors who are willing to buy the properties at higher prices. These wholesalers never own properties. They act as middlemen connecting low-price real estate contracts with investors.
There are risks associated with wholesaling real estate that you should be aware of as an investor looking to get into this type of investment. Some of the wholesaling real estate risks include:
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#1 – Deal failure
As an investor in real estate wholesaling, you should be ready for worst-case scenarios. You might not close every contract you come across successfully. You need to be aware that there is a possibility of failure.
For example, buyers may back out of a deal. You should have a backup plan in case of a deal closing failure. It’s smart to have back up buyers to market the property to that can step in and close instead if the original buyer backs out.
Also have a get out clause in your contract with the seller in case you need to back out with the seller so you don’t get stuck being the responsible buyer who is required to close on the home with the seller if your end buyer backs out on you.
#2 – Legalities
Every state has its regulations and requirements for real estate investments. Local authorities also have rules on real estate investing. These requirements observe certain patterns throughout the country. It is good to know the regulations in the area you intend to invest in.
Some states require wholesalers to have a license and without this license, then they may be fined and even criminally charged for acting as a licensed professional (fraud).
Be sure to adhere to your area’s rules and regulations before getting into wholesaling real estate.
#3 – No guaranteed income
Real estate wholesaling does not promise a steady income. There might be months you do not close any deals. Be sure to be diligent and have a savings plan to cover you during slow months.
Wholesaling also does not offer benefits that other jobs give like retirement benefits and insurance coverage.
Be reliable and prudent in managing your finances. Have an emergency fund to finance your plans in case it takes long before closing another deal.
#4 – The contract
The contract itself can restrain your capacity to make money.
A real estate wholesaling contract stipulates the period within which the property on the contract must be sold off. Failure to sell the property within the given period will render the contract void.
#5 – Instability of real estate market
The instability of the real estate market is a challenge for real estate investors as well as wholesalers. Price increases could suggest a profit missed out for the investor.
The price increase may be caused by an increase in demand and a decrease in the supply of housing. The price increase can also happen when demand outpaces supply trends or when the supply of housing is slow to react to an increase in demand.
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#6 – Not having a buyer
As a real estate wholesaler, it is vital to have a network of buyers. Having no buyer means no deal. You need to get a buyer so that you are compensated. You may have to repay the seller if you do not get a buyer.
Get the property under contract for a reasonable price. Line up prospective buyers before placing an initial offer with the seller to reduce any potential risk of losing money. Ensure you maintain an active buyers list.
Stay on top of your buyers’ list. Know what type of property each buyer would prefer. Tailor your offers to suit everyone’s tastes and preferences. Contact a buyer when you get a property that suits their preference. Doing this will enable you to get a loyal clientele.
Read: How to Find Houses to Wholesale
#7 – The hustle
The competitive nature of the real state market makes it tough to get good deals. You should do a comparative market analysis to get below market value homes for sale.
How to Lower Your Risk with Wholesaling Real Estate
Once you get a deal you need to get a buyer before the stipulated time on the contract lapses. It takes time to build a reliable network of buyers and contractors. Wholesaling real estate is not passive income.
Some of the ways to avoid wholesaling real estate risks are:
#1 – Build a network of potential buyers
As you start a career in real estate wholesaling, you need to establish a network of contractors and buyers. Keep in touch with them and stay updated on their preferences. Know what to offer and to whom.
Building a network of buyers will make it easier to get a buyer when you get a deal.
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#2 – Make an appealing offer
Make it easier for potential buyers to say yes to your deals. Get your clients interested by presenting your offers in a lucrative way and with accurate information. Offer real value, for your property to sell and keep buyers coming back to you.
Avoid long chains that will make your deal more expensive. Find your wholesaling deals from motivated sellers.
#3 – Do your due diligence
To make a profit in wholesaling real estate, you should know the value of what you are buying. Doing this will ensure you offer the best price. You need to know the repairs required, any liens attached to the property, and any other concerns that may affect resale or value.
#4 – Manage your finances wisely
Be a good money manager once you close a deal. Wholesaling real estate has no guaranteed income. Wholesaling depends on your ability to find deals and close them within the stipulated time.
Monitor your finances. Calculate your expenses and keenly keep track of your financial matters. Look for properties that have good resale value and avoid overpaying for properties.
#5 – Keep learning
Things in the real estate market are continually changing. You should commit to keeping learning. Be armed with enough knowledge and information. Know how wholesaling in real estate works, know how to negotiate deals, and how to build a network of buyers.
Overall, real state wholesaling can be very lucrative. It is also more complicated than it seems. You must be knowledgeable and be prepared to face the market and meet real estate investors’ demands. Know wholesaling risks and how to avoid them and plan accordingly.
You can get started on real estate wholesaling without a cash investment. Have the time and dedication to learn, find the right deals, the right sellers, and buyers. Once you have the right strategy laid down, you will be successful in real estate wholesaling.
Thanks for reading,
Nick Foy, founder Under30wealth.com
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