Wholesaling houses is trending fast, but while it offers easy entry to new investors, it can also offer easy to fall in traps for those that haven’t invested in their education.
Wholesaling properties can offer big paydays and fast. What makes it the most appealing first step into real estate investing for many is that it is easy to get started at, especially for bird dogs, those flipping or assigning contracts and others with limited resources or time.
However, while wholesaling houses has proven to be both hugely profitable in the short term, and very successful long term investment strategy, it does have a pitfall or two for those brand new to real estate too.
One of the biggest traps facing new real estate investors, especially in the wake of the foreclosure crisis is illegal properties.
There are many ways to define this but the term can extend to include multiple buildings on a parcel which shouldn’t be there, illegally rented units such as in the crosshairs of NYC right now, and variety of other permitting and code violation issues.
Sadly there are some out there that specifically look to prey on green investors and take advantage of them by lumbering them with these homes or at least contracts on them.
While this is not always a catastrophe, and going in recognizing the situation can actually lead to big profit margins the main danger is that these ‘deals’ can quickly become far more expensive than anticipated, or become dead weight that cannot be resold.
Properties with these flaws can be uninsurable, not qualify for title insurance and are frequently not eligible for conventional mortgage financing by end buyers.
However, even worse than being stuck with a worthless contract, or a deadbeat property that can’t be cashed out, this can mean ongoing holding costs and some could be stuck with some pretty big fines and interest penalties. In areas like South Florida this has encumbered investors and properties with extreme penalties to the tune of $1,000 a day.
So what do real estate wholesalers need to watch out for and double check? Some potential areas and elements to look at include the number of units, safety of a property, recent work done, conversions, landscaping, rent roll exclusions, etc.