Exposing the 3 Biggest Con Artists in House Flipping

TLDR

Real estate agents on average sell their own houses for 3 percent more and take 10 more days to do it than they do for clients. That is not a villain story. That is how incentives work. Three vendors in this business have incentives that drift against yours. Learn how each one gets paid and you can protect yourself.

Table of Contents

• Incentives Drive Behaviors
• Con 1: The Real Estate Agent
• Con 2: The Wholesaler
• Con 3: The Cost-Plus Contractor
• The Four False Cons
• The Only Real Protection

Incentives Drive Behaviors

I read somewhere that real estate agents on average take 10 more days to sell their own house, and they sell it for 3 percent more than they sell a client’s house for. That is not evil. That is incentives. Incentives are like a current that runs underneath everything. Most people do not even realize they are being pulled by it.

I know this firsthand because I hire these people, and I am also a vendor on the other side. Every day, as a contractor, I face the struggle of what is best for my customer versus what is best for my family. That is how I know that when incentives are not aligned, no matter how strong you swim, eventually the current wins.

This is why I hate the advice to “build a great team.” A great team means nothing if you do not know how to align incentives and manage the current.

Con 1: The Real Estate Agent

Real estate agents get paid by commission on the sale price. “I don’t get paid unless you get paid.” It sounds aligned. It is not.

Early in my career, I had a flip that I was going to list myself. I had spent more on the rehab than I expected. If I could sell for 200,000 dollars, I would break even. An agent came by and said, “Because of my social media following and the ways I market that you don’t have, I can get you 220 pretty easily.”

Let’s do the math on that 220 sale.

I let him list it at 220. A couple weeks later, “market cooled, let’s go to 215.” Then 210. Then 205. I accepted an offer at 200,000.

At 220, he would have made 3,300. At 200, he made 3,000. For him, a 20,000 dollar drop on the sale price cost him a few cases of beer. For me, it was the difference between breaking even and losing money on the flip. Does that sound like aligned incentives?

How to Protect Yourself

A real estate agent is a tool. You would not hammer a nail with a screwdriver. Use the right tool for the right job. That means a few specific things.

• Evidence-based pricing. Ask what will the house sell for based on comps. Show me the evidence. What finishes do the houses that sold for that number have?
• Real days on market numbers. Not their opinion, the statistics for this neighborhood at this price point right now.
• Fighter energy. I want someone willing to go fight for every inch. On the listing itself, on offers that come in, on inspection resolution. Not someone trying to make best friends with the other agent so they can show up at the same real estate parties next week.

The listing itself is the digital introduction. Professional photos in the right order. Real copywriting in the description, not “welcome to 123 Main Street.” Persuasive language. Real estate agents should be the best marketers, and most of them are terrible at marketing.

Con 2: The Wholesaler

A wholesaler makes a deal with a homeowner to buy the house, then assigns that deal to an investor like me for a fee. Here is how one of mine actually went down.

Wholesaler gets the house from the seller at 100,000. Brings it to me at 130,000. On the closing docs, I am buying at 100,000 and paying him a 30,000 assignment fee.

Where does the 130,000 come from? The 70 percent rule. He says the after repair value is 230,000. 70 percent of 230 is 161. Subtract his estimate of 31,000 in rehab, you get 130. That is his number.

Two problems in that math. First, he said the ARV is 230. When I ran comps, 230 was way on the high end. More like 200 to 220 realistic. Second, he said the rehab would be 31,000. I could not get inside the house because there were tenants in it, so I had to take his word based on photos. When the tenant left and I could actually scope it, the rehab was closer to 60,000.

He sold me two numbers, both in his favor. I lost on the deal.

How to Get Better Wholesale Deals

Wholesalers are going to push both numbers as far as they can. That is the job. So you work around the current.

• New wholesalers. No big buyer list yet. They take smaller assignment fees because they are trying to build the list.
• Stuck deals. If a wholesaler cannot move a deal, it might be bad, or the buyer list might be too small, or they might be on a short fuse from a fast-close commitment. Any of those can be your opportunity if you know why it is stuck.
• Focus over volume. Early in my career I tried to be on 20 wholesaler lists. Better to be number one on one list than number 20 on 20 lists. Pick one or two and build the relationship.

And always verify both numbers yourself. Do not trust the ARV. Do not trust the rehab.

Con 3: The Cost-Plus Contractor

There are two ways a contractor can bid a job.

Bid price. Agreed scope, one number. Contractor does the work. If it cost them less than the bid, you still pay the bid. Not your problem, not your business. If it cost more than the bid, also not your problem.

Cost plus. Contractor charges you whatever materials and labor actually ran, plus an agreed markup. If costs were 10,000 and markup is 25 percent, you pay 12,500.

With the bid contractor, he is motivated to stay under the bid number because anything he saves is his margin. With the cost-plus contractor, what is his motivation to stay under 10,000? If it costs 15,000, he makes more money. You might not hire him again, but he does not care about next time. He cares about this job.

Dumb Mistake

Hiring a cost-plus contractor and then walking away to let them run the job. With cost-plus you have to micromanage every decision, every material purchase, every hour clocked. Most investors cannot, and the bill explodes.

I hire bid price. Always. If you take a cost-plus deal, be ready to micromanage.

The Four False Cons

Not everyone you think is out to get you is actually out to get you. Four vendors get a bad rap that is mostly unearned.

• Codes enforcement inspectors. Everyone thinks they are trying to screw them. But every time I go to a job site and look at what they are seeing, I think, if I were them I would not pass that either. They have licenses and paychecks to protect. They are not putting their butt on the line for you.
• Appraisers. I fought appraisals plenty in my day. Every once in a while I won. Mostly a waste of time and bandwidth. They have licenses to protect too. Usually the honest answer is that we as investors think our property is worth more than it really is.
• Home inspectors. Hired by the buyer. Their job is to find things wrong with your property. Even brand new builds built perfectly, they find things. If they did not, nobody would hire them again. Expect an inspection resolution. Plan for it. Just get the deal closed.
• Lenders. These guys are actually aligned with you. They make money by writing loans. They want you to succeed, because you succeeding means more loans, more interest, more deals. Some of my best mentorship in this business has come from lenders. Do not be afraid of them.

The Two Contractors You Should Skip Entirely

Before I get to the real cost-plus conversation, there are some types of contractors I do not even consider real companies.

• Remediation companies. Their pricing reflects fear from homeowners. Driving around in trucks charging 10 times what the work should cost. I am not saying avoid houses that need remediation. I am saying do not hire the truck guys.
• Structural companies that run on sales commissions. Last week I got a bid for over 120,000 on work my crew priced under 30,000. Over 90,000 dollar difference. Get a structural engineer to tell you what to do, but the crew that actually does the work does not have to be the guy giving 120,000 dollar bids on the spot.
• Roofers who work with insurance companies. Heavy admin teams, estimators who are really salespeople. They are set up to milk insurance companies, and they charge you the same way.

The Only Real Protection

There is no way to fix the fact that real estate agents get paid by commission, wholesalers leave less meat on the bone as their list grows, and cost-plus contractors have no reason to stay under budget.

So globally, what do you do? You gain the skills to know what to expect from each of them and the confidence to hold them to it. Skills come from knowledge times experience.

House flipping and real estate investing changed my life. Not just financially. Work and life kind of become the same thing when you are doing work you actually like. I want that for you. But it is not on the real estate agent, the wholesaler, or the cost-plus contractor to make it happen. They are trying to take care of their families. So are you. The only real protection is yourself.

FAQ

How do I interview a real estate agent the right way?

Ask them for the comps that justify their suggested list price. Ask for the actual days on market statistics for the price range and neighborhood. Ask them to describe how they are going to market the listing, specifically. If they lead with “I have a big network” instead of “here are my last five listings and their photos and descriptions,” keep looking.

Are all wholesalers con artists?

No. Some are clean and fair. But all wholesalers have an incentive to maximize the assignment fee, which means pushing ARV high and rehab low. Verify both numbers yourself on every deal, every time, regardless of who the wholesaler is.

Is bid price always better than cost plus?

For investors flipping and buying rentals, yes. Cost plus can make sense on a custom owner-occupied build with a trusted GC where the scope genuinely cannot be defined upfront. That is not you.

How do I tell if an inspector is being unreasonable versus just doing their job?

Look at the code book. Most codes enforcement officers are citing actual code, and if you read the code you can usually see why. If you think they are wrong, bring the code book reference to the conversation. If you just think they are being mean, they are probably not.

Just starting out. Can I trust my lender to give me straight advice?

Mostly yes, with the understanding that they cannot give you deal advice. A lender cannot tell you if a specific deal is a good deal. But they can tell you what loan products exist, what terms are realistic, and what a clean underwrite looks like. Some of my best education came from lender conversations early on.