Unsuspecting naive people are lured into real estate wholesale investing by slick, smooth talking hucksters. The hucksters are separating folks from their money by promising easy riches, with little to no work.
Many victims are young people, just starting out in adult life, maybe with young children. They are working hard and not seeing much gain in their situation. Then the huckster catches their attention with a spam email, or a tweet, or a random match on a google search. The huckster’s slick website promises freedom from the daily grind, a life of leisure, pictures of sexy people clad in nothing more than a revealing swimsuit lounging on the beach or on an expensive yacht. The huckster asks poignant questions that stab directly at the heart of what’s important to the young people, like the welfare of their children and the responsibility to take care of their elderly parents.
I was witness to a young couple who tried to get into real estate rehabbing. I was bidding on a distressed property at a price that I thought could make a decent profit, without knowing more about the property. My bid was subject to my approval of a thorough inspection and a general contractor would produce a scope of work with cost estimates and a renovation plan. If I found more repairs than I anticipated, then I would renegotiate my offer or cancel it.
I guessed about $12,000 for simple repairs and cosmetic updating. My profit margin was narrow, just $21,000 if everything worked out ok. From my analysis, the After Repair Value (ARV) was $210,000. My bid was around $143,000. After subsequent close inspection, I had to revise my bid below $120,000.
On the advice of an incompetent real estate broker, the young couple bid $175,000 and got the property. They started working on the property, mostly by themselves in the evenings and on weekends. They both had weekday jobs. After 4 months of work, they ran out of money. Many things were left undone and they made some mistakes. They put the property on the market for $225,000 and it sat vacant for 6 months. They finally dumped it at $210,000. $210K is exactly the amount that I had estimated for the ARV. The young couple also had a second property under renovation at the same time. They went out of business and I lost a profit opportunity to these incompetent fools.
Real estate investing is an industry where incompetent competition can hurt the competent professionals by bidding up property prices, thus removing potentially profitable properties from the market. It is little consolation that the incompetent go out of business; it is a lost profit opportunity that hurts the professional. I cannot blame the property seller, because everyone wants to sell a property to a greater fool to hide their own foolishness.
If they had used a competent real estate broker to advise them on the After Repair Value for that property in that neighborhood and they had used something like my Property Analysis Worksheet to calculate the Maximum Allowable Offer (MAO), then they would have made a decent profit or not bought the property in the first place. Avoiding a bad deal is more important than finding a good deal, strange as it may seem. One bad deal can cost more than the profit of several good deals. Invest a few small dollars to get the right tools to operate like a professional. Just take a look at my wholesale analysis video and compare it with what you are doing now in the wholesale business.