Chris,
I can back that up. I have done a few flips with wholesaling companies that didn't quite fit the MAO formula, and have in fact lost money each time. Each one had the potential to make 'some' money on paper, but then reality came flying in. However, it is not just the big wholesalers that are demanding $5k non-refundable deposits. The big problems that I ran into were:
Inaccurate/ no rehab estimates. - I got a contractor to come with me before signing the contracts on each, but the contractor grossly underestimated the repairs each time on initial walkthrough. Unfortunately, with a $5k non-refundable deposit already down, I chose to go ahead with each one, thinking I would still make a bit of money. I lost each time. The last one was a HUGE loss. I won't say just how much, but it was enough to bankrupt most investors. Yes, I'm telling you that to scare you.
Inaccurate comps - each time, the comps looked quite realistic. In fact, I actually got more than estimated on one property. However, on the other two, both the wholesaler and myself missed subtle, key details regarding the property location that a new investor can easily miss. Both times, I had to reduce the price well below estimated ARV to unload the property.
No inspection/option period - once we got started on the rehabs, all sorts of expensive items emerged that would have been easily found by an inspector, but I'm not crawling through crawl spaces, climbing on a roof, checking plumbing, or walking through the house with a 300-point checklist. Nor do most investors have the time to do so on these deals, as there is a list of new investors that are just excited to be in the game and are buying these properties in hours without doing their homework. As long as there are new investors buying these up and taking big chances, they will exist.
I will say this again. Pretty much every deal that comes my way does not fit the MAO formula, whether it comes from a larger wholesaling company or a smaller group. Several are approaching retail price after you do proper repairs. I don't know if the wholesalers are even aware of how little margin is actually left once you add in purchase costs, holding costs, rehab costs and selling costs.
My advice is to avoid anything with a $5k non-refundable deposit until you are highly experienced and comfortable comping a property, recognizing needed repairs, accurately estimating those repairs, and you have vetted a MINIMUM of 5 of your own contractors (general or subs) that are willing to provide you estimates on properties that you don't yet have under contract. You may have to pay for those estimates, but TRUST ME, IT'S WORTH THE UP FRONT COST TO AVOID LOSING A $5k DEPOSIT, OR MORE IF YOU MOVE FORWARD WITH THE PURCHASE.
You won't hear this story from most investors, because not many people want to
admit their failures, or they are so turned off by investing that you
won't ever hear from them again. Well, I didn't die, and I am trying to prevent this from happening to more people.
Hey, if a deal with a $5k non-refundable deposit comes your way and it actually looks good, check it out and DO YOUR DUE DILIGENCE (more on that soon). But math is math. If it's not 70% of ARV minus repairs you're not going to make enough money for it to be worth your time, I promise. You'll make more money and do less work if you pick up a side job one day a week or pick up an overtime shift. That's not a joke. That's a mathematical fact.
