The Basic Series: Step 2, Find the Property - Part 1
At some point you have to ask yourself:
"Self? What are you going to do?"
Are you going to be an expert at going out and digging up great
deals, or are you going to specialize in adding value to
houses...by rehabbing them.
Are you going to drive neighborhoods and send mail to the ugly
properties, or go right up to them and knock?
Are you going to comb through the Les Pendens at the courthouse
and try to beat wholesalers to the owner and try to talk them
out of their home?
What I'm getting to with all these questions is that I believe
there are MANY ways to make plenty of money in real estate. The
problem is that it's really hard to master more than one area of
investment at a time. Real hard. Not to say you can't eventually
make great money doing several things, but not in the beginning.
As you learn your local real estate environment...who's who in
the zoo so to speak, you will learn that many folks make a great
living specializing in their area of real estate. You'll have
your rehabbers, your wholesalers, your buy-and-holders, your
retailers, and so on. You'll wind up being a combination of
these I feel sure.
In the early days, just buy a property you'll be safe in and
rehab it. There is no need trying to find the greatest deal. If
you're waiting for that, it might be awhile. I've noticed
fortune favors action, and the best deals are going to those
that are moving and shaking things, not those waiting around for
a better deal.
Have your criteria in your mind, and buy something.
But, where to buy it? Who's got the property I want?
There are many souces for buying distressed properties, but I'm
going to limit this article to one, which is my personal
favorite.
I buy the majority of my properties from wholesalers.
Wholesalers are the ones who are driving the streets,
approaching people, having lunch with attorneys, making
strategic alliances...you name it. They are doing it to find
properties at the very lowest possible price. Then, they
contract to BUY THE PROPERTY. They do this hoping and believing
that they can sell the contract for some profit before closing.
If they can't, they are stuck buying the property! Yes, they
incur some risk.
So, do you think a wholesaler would love getting a call from
you? A wholesaler will do cartwheels when you tell them that
your money is already pre-arranged with Mr. X, your hard money
mortgage broker and you are ready to buy. (Make sure you are
indeed ready. If you waste the wholesaler's time, he'll remember
it!)
A little more about how a wholesalers work. Let's say that Mr.
Flip is our wholesaler. Mr. Flip works night and day to find
properties and get them under contract. Mr. Flip's world is a
blur and is all about speed. He's permanently connected to his
cell phone working his contacts for leads on properties. When he
gets a hot lead, he RACES to get it under contract. It's tough
work.
Once Mr. Flip gets a property under contract, he RACES to get
someone on his list of investors (rehabbers) to buy the contract
from him. Buying the contract from Mr. Flip is called an
"assignment of contact." Mr. Flip's goal is tie houses up under
contract and assign the contract to someone for a higher sales
price prior to closing. To be sure, Mr. Flip would like to get
his contract assigned within a day or two of him tying a
property up.
Here's an example. A wholesaler I get many properties from
recently bought a property for $33,000. He assigned me the
contract to me for $38,000. Sometime this is called "flipping."
I closed the house, rehabbed it for $9,000 and it's in my rental
inventory now. The house recently appraised for $80,000. Not too
shabby. So, do I worry about my wholesaler making his quick
$5,000? Nope. Not even for a minute. I don't have time to do
what he does, and he brings me good deals! I'd venture to say
that he brings me better deals than I can find myself.
Here's how the process works from my prespective:
I get a call from my wholesaler telling me about a property. He
(in this case) does a pretty good job of telling me what I need
to know. a) bedroom/baths b) square footage c) address and part
of town d) lock box or entry method e) what he thinks of the
property in general f) how much he thinks it'll take to rehab g)
his asking price and h) WHAT HE BELIEVES IT WILL APPRAISE FOR.
Ignore what he thinks it'll take to rehab. It's a data point,
but you HAVE to make that decision for yourself. My wholesaler
is very predictable...he's always got several people interested
and I'd better hurry. (He's a great salesman, building a sense
of urgency.)
If it sounds interesting, and I'm in the market for a next
project, I check out the area in the tax records to see what
properties have been selling for in the area. If your county
doesn't have their record online, befriend an appraiser if you
don't already know the area. I'm not trying to pinpoint a value,
I'm just assessing whether my wholesaler is in the ballpark with
his value.
I hop in the truck and take a look. I make my own mind up about
how much it will take to rehab. I run through my checklist, no
exceptions. (This is it's own topic!)
If I'm still interested and I don't know the neighborhood, I
drive around and call about all the houses for sale in the area
to see what things are on the market for in that neighborhood.
If I like it, I call my wholesaler back and tell him I'll take
it. I don't sleep on it, and I don't let the opportunity go by.
If I feel I need to sleep on it, it means "pass!"
The wholesaler and I get together that day or the next. We have
a great talk and I sign the assignment of contract. Here's a
copy of a recent one. In this case he only made $3600. In the
early days, this wholesaler left his part blank until he knew I
would not react negatively to the money he was making off me.
Don't make the mistake of baulking at his money. Wholesalers
will bring you hundreds of thousands of dollars in net worth if
you establish a good relationship with good wholesalers. That's
it. He doesn't show me the original contract...no need. I give
the wholesaler a downpayment, which essentially covers the
binder he put on his original contract. We shake and that's it.
I'm on the hook to buy the property.
Another note: I generally don't even ask how or why the property
came to him. Wholesalers are like fishers and aren't too willing
to share information on their fishing holes. They want to
protect their sources. I'll find out who the seller is at the
closing table, but I won't contact them. I let the wholesaler do
what he does and I don't interfere with his living.
I call my mortgage broker and get my financing arranged.
I usually don't have to call to check on closing. My wholesaler
is calling me. Sometimes he even checks on the status of my
mortgage (because we both use my mortgage broker). You might
think he's in my business, but understand that he's got
everything to gain by getting you successfully to the closing
table, because if you don't close, he has to. You've got your
downpayment at risk, but he's got an unwelcomed property at
risk. Big difference. Your wholesaler can help you if you run
into problems with financing, etc. Wholesalers are usually
experienced investors in your markets and a real asset!
Anyway, we both push everything to close.
When closing day arrives I get the property, and hopefully
enough cash left over from the mortgage to do most or all of the
rehab. The wholesaler gets his assignment fee and is thrilled.
He's done and the property is all mine!
Notice that I didn't have to drive streets, make deals, or talk
a down-on-their-luck family out of their home. I don't want to
do that. My wholesalers bring me enough quality property that I
only turn down 1 in 3 or 4. So, I'm a wholesaler's dream. So,
who do you think gets the best deals?
Something that might happen to you. is this: You might just
discover at the closing table that the property you bought has
multiple assignments of contact associated with it. This would
mean that wholesaler 1 tied it up under contract, then
wholesaler 2 did and assignment of contract with wholesaler 2
(your wholesaler), then you came along and did an assignment of
contract with wholesaler 2 (your wholesaler). Don't worry about
that. Your goal is to be safe in the house, and if you're
satisfied enough with the deal to buy it, then who's making
money on the transaction is not a concern of yours. Just buy it
and make your money as planned. I've bought houses with THREE
assignments associated with it, and I made plenty of money with
it!
You might be asking yourself if anything prevents you from
assigning your contract to a hungry rehabber that you know. Go
right ahead. If there's enough money left in the deal, sure! You
can assign it to whomever you like. Then you'd become the
wholesaler. (This is how most wanna-be wholesalers become
wholesalers!) You'd just sign an assignment of contract with
your prospect, get the assignment of contract to the title
company and babysit your prospect to the closing
table...remember if he doesn't buy it, you will have to. It
might even be worth developing a list of rehabbers who want
properties as you meet folks.
I don't use wholesalers to acquire the majority of my property
because I think they're cool. They are bar none the most cost
effective, money-making machines for ME! I like that. I like
that ALOT!