From JP Moses, Director of Awesome...
Profitable wholesalers are made, not born. If your wholesale deals don’t have investors lining up like high school guys trying to get a date with the cutest girl in school, maybe it’s time you rethink a few things.
Let’s talk about one…
Recently I overheard a rehabbing colleague of mine say, “I believe most wholesalers ARV is inflated with unrealistic rehab numbers.”
And as a wholesaler myself, I must say I agree. (With the statement)
And I also disagree. (With the philosophy)
Let me explain…and if you’re a wholesaler, pay attention. I think there’s a really powerful philosophical lesson here that’ll stand to make you/me/us a whole lot more money in the long run if it’s learned and applied.
But also, not everyone agrees with me here. And I’d love to hear your thoughts on this and whether you agree or disagree afterward.
How Most Wholesalers Seem to Think
In my view, the typical wholesaler will more often than not simply set the price of a deal too high right from the get-go. After all, the more you make, the more you take, right? – and because someone might just jump on the deal, the idea being that:
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There’s a sucker born every day;
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Real estate is worth what someone is willing to pay for it;
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Buyers are used to dealing with inflated prices; and,
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It might just sell at a higher price point, and if it does, you stand to receive better tangible cash benefits from the transaction
Here’s one problem with this flawed thinking: Savvy investor-buyers aren't going to jump on a deal just because you wrap it up in a blanket of wishful thinking and happy jive talk. The numbers still have to make sense.
If you don’t price your deals right in the first place, sure, you might find a sucker. But you might also be left holding the bag on an overpriced property that won’t generate any interest. And I say we all have too much “treasure” on the line in terms of time, energy and reputation to get wrapped up in trying to unload an overpriced property.
Wholesaling Truth in a Nutshell
So much about effective wholesaling is about volume and the velocity of money.
It isn't all about seeing how much you can squeeze out of each deal; it’s seeing how quickly you can turn a deal at a price you can live with that leaves everyone with a serious case of the “warm and fuzzies”.
And one of the best ways to do this is to make sure you price your deals right from the get-go.
Other investors have noses that are actively seeking the secretions of what you might call profit glands. By keeping your pricing structure fair – read this as “value-priced” – multiple investors are going to jump when you have a good deal.
Let me share a real-time example of why this matters to me.
A Non-Meeting of the Minds
I’m working a wholesale deal right now locally – it’s a co-wholesale deal, meaning me and another wholesaler are working together. I have better buyer contacts locally and he had the deal, so we partnered up.
[Side Note: Co-wholesaling can be a great way for wholesalers to make some scratch by scratching each other’s backs. But the downside is, we’re both kind of sitting in the driver’s seat, so if we disagree on which way to go with something, it can be troublesome.]
Before we started working the deal together, he had already decided the right price to wholesale this house to another investor is $90,000, based largely on an estimated ARV of around $200K, which is what he felt the comps supported with no problem from his perspective.
However based on my own read of the neighborhood (I used to live there, and I know the values are street by street) and also knowing my buyers in this market much better, I felt the ARV is closer to $180K and the right wholesale price to another investor is probably $70K tops, maybe less.
The problem is he signed the deal up under contract for $70K (my top price to wholesale to another buyer). I tried to sway him to renegotiate with the seller, but he insisted we try to wholesale it at $90k
Now could there be someone out there willing to pay $90K for the house? Sure. Could there be an appraiser or end-buyer who’d roll with a higher ARV than $180K? Certainly possible.
But in my opinion…that’s a path that spells a lot more work convincing, and finger crossing. Basically we’re rolling the dice and we might score, but the odds aren't in our favor. Plus it starts leaving a salty aftertaste in the mouths of each person we present the deal to.
Slanting My Odds
I prefer to slant the odds in my favor by pricing my deals where I think they’ll really sell. To sell the deal quickly, yes – but also to protect my rep, rather than being seen as just another wholesaler who always slightly over-inflates things.
Why? Because I want people to snap to attention when I bring them a deal, and say, “Hey, JP consistently brings me solid stuff! When he sends me a deal, I’d better take a look!”
…RATHER THAN having them say, “JP…yeah, his deals can work, but he puffs things up a bit and I usually have to negotiate him down to make the deal work for me.”
As a wholesaler, your reputation is a huge part of what you have to offer. And it doesn't take long when fluff-pricing to discover that your buyers have very little “brand loyalty” – they’ll buy property from those investors who help them make the most profit on a consistent basis.
Back to the Deal
Long story short, turns out we've had a hard time unloading this property. Go figure :-) I let my co-wholesaling compadre sway me into working the deal at $90K…and believe you me, we've worked it. So far we've received ONE offer. At $60K.
From here, I think we should renegotiate with the seller if possible to buy it from him for a more realistic price of around $55K, flip it for the quick $5K profit and move on. While my partner wants to keep working it at the current numbers.
So we’re at odds on how to play it out – which can certainly be par for the course anytime you partner up with someone on a deal. But my point here is to highlight our different philosophies as wholesalers.
He’d rather try to milk all the profit he can out of any one deal. This means pricing it as high as he thinks he can get away with, and maybe even inflating values or deflating rehab estimates a little to suit his case. Personally I feel like even if this ends up making me more on a deal, it’s a negative for me in the long run in my relationships with my buyers.
"Stay Thirsty, My Friends"
As a wholesaler, I’m dealing with the same pool of buyers most of the time. I want them to be salivating when they get an email from me, and eager to respond quickly.
If you’re constantly pitching over-inflated crap, eventually the real buyers out there who have cash and are doing deals…they’ll simply start ignoring your emails, calls, texts, etc. They don’t want to waste their time
I want my buyers saying, “JP, do you have anything coming down the pipeline? I want more!” And the only way I’m going to do this is to condition them to this, by pricing right and having a reputation as a wholesaler with a good head on my shoulders.
Bottom line: I believe this approach makes me more money in the long run.
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Reassess… Carefully go through each deal you’re currently working to make sure it passes the fairness sniff test. If the deal seems borderline or is blatantly overpriced, either renegotiate the deal with the seller or walk away from the deal.
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Rededicate… yourself to the penny principle – earning enough from each deal to make it worth your while, yet priced with enough sex appeal that your buyers will start panting with anticipation.
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Consider a known formula… One investor in Atlanta I know has a standard policy of making $5,000 on every single deal he does, regardless of his buy price, no negotiation allowed. Many would say he’s shooting himself in the foot, especially when there are $10,000-$20,000 wholesale paydays to be had. But he vehemently disagrees. While other investors are out hopping their bigger profit deals, his deals tend to be sweeter for the end-buyer…and thus they’re always begging him for first dibs on whatever he’s got coming down the pipeline.
Could a standard formula like this serve you well in your wholesale endeavors? Take some time to mull it over right now and see what you think.