By: Tom Bukacek
One of the best strategies to use for beginning real estate investors is Wholesaling. Why is this technique a great beginning? Because wholesaling properties does not require the investor to use any of his or her credit or money to complete the deal (as long as you know what you are doing).
So what is wholesaling? Here is how it works: An investor finds a property well below its market value, gets the property under contract, and then assigns or sells the CONTRACT to another investor or buyer to complete the purchase!
You do NOT improve the property; just get it under contract and SELL the contract to another investor who is looking for a house in need of repair. That’s it! It’s as simple as that! You can typically sell a CONTRACT for anywhere between $500 - $10,000+ profit!
Your basic end buyer will be someone who enjoys fixing up a house. People who like to do “fix & flips” and “rehabs” are typically working on properties and they don’t have time to look for their next deals. These investors use wholesalers to find cheap deals so they can purchase the contract and get right back to their next project. Fix & flip investors love to work with wholesalers since they do not have to take the time to find the next the project and they can have their repair crew’s move from one project to another without any down time between projects.
Some people have the genetic makeup or skill set in which to fix properties. In some peoples’ hands, tools are objects of creation. In others hands, like my own, tools are weapons of mass destruction. If you do not possess the skill set, desire, or the finances to fix up a property, then read on.
The challenging part of wholesaling is finding the property at a discount. How many people do you know willing to sell their house for 50% of market value? Searching for these discount properties takes a great deal of time, research and leg work. However, once you get a property under contract for the right price, you will all almost always be able to find a buyer. Note the phrase ‘right price’. So what is the right price?
Generally, you will be able to sell a property to an end buyer at between 60-70% ARV. Therefore, you want to be able to find a property at 50 – 65% of Market Value. Properties that are available at this price range have two things in common: 1- they need repair and 2- you will be dealing with a motivated seller. A motivated seller may not have the cash to get his house in necessary condition to sell it by conventional standards and may sell at steep discount to someone who can fix it up.
Sellers can be motivated for some of the following reasons:
• Probate property (out of state family member passed away and left property that needs repair to unexcited heir)
• Moving (person doesn’t want to be a landlord or own multiple houses)
• Job loss (cannot afford to continue making payments or fix up to get to market value)
• Vacant house
• Burned out landlord
• Divorce
Let’s look at an example. Suppose you find a motivated seller who is moving out of state. The home needs some repairs, such as carpet, paint, roof, and landscaping, but is structurally sound. They are moving in 2 weeks. The sellers have no desire to fix up the property or be a landlord from afar.
What would be the steps necessary to complete a successful transaction?
Step 1- Determine the After Repair Value (ARV). The best way for beginners to determine ARV is to utilize the services of a Realtor. You will want to know the comparable price per square foot of similar houses (within 10% of size) in the subdivision. Analyze a set of the lowest comps in the area and the highest comps of the area. For your purposes, when making an offer, seek out the lowest comps in the subdivision.
Step 2- Calculate the repairs. Do a quick drive by, look the property over, and determine what repairs may be needed. As a rule of thumb, it is a good idea to figure in a set amount as repairs when making an offer. If the amount of repairs turns out to be significantly higher than you originally set, then you may need to walk away from the deal. If lower than you thought, then you may increase the assignment fee. For the purpose of this example, during the drive by, the foundation looked fine, so we will assume $10,000 in repairs. It is ultimately up to your buyer to do the due diligence and determine the actual amount.
Step 3- Make an offer. Understand that you are making offers that will benefit your business, so your asking price will be lower than what most people’s expectations are. Expect 90% of your offers to be emphatically declined, 10% of your offers to be countered, 5% to be interesting, and 1-3% to accept. Also, it is a good idea to construct an offer that will allow your end buyer to profit. Many new wholesalers make the mistake of not caring about the end buyer. If the end buyer cannot sell to someone else, then they will not be in business long and you will have lost a good partner. Losing partners will cut your career short in this business.
Determine how to construct an offer taking into consideration what repairs they will have, an assumed profit (generally the same amount as the repairs), the estimated holding costs for 6 months, and the estimated closing costs. For the holding costs, most fixers acquire money from a money lender. The cost of acquisition of this money is expensive. Generally, I figure 65% loan to value of the property at an 18% interest rate for 6 months.
The following is how I construct an offer
* Know the conservative ARV $100,000
* Determine Repair Costs -$10,000
* Fixer’s profit (gen same as costs) -$10,000
* Est holding costs (6mo @18%) -$5,878
* Est closing costs -$9,000
* Total Costs ($34,878)
* My PROFIT or assignment fee -$5,000
* Maximum Asking price $60,122
The asking price of $60,122 would be a offer of about 60% ARV. This would fit into your criteria. Should you then offer $60,122? No. I would submit an offer between 45-50% ARV and go from there. If you start with your maximum asking price, then you will not leave yourself with any negotiating room. For the sake of this example, let’s say the eventual purchase price is $55,000.
Step 4- Get a Buyer. The ideal situation is to have a buyer in mind by the time you have a property under contract. But for many starting out, this may not be the case. When making him an offer, add your assignment fee to the sales price. So in this example, you would add $5,000 to the $55,000 and offer them $60,000. Have a stipulation in your contract that states the buyer will need to buy with cash within 5 days. After the fixer agrees to purchase, then you go to the final and most important step.
Step 5- Collect $5,000!
How many homes do you think you can sell for $.60 on the dollar? No matter what market or economic condition, if you purchase at the right price and sell at the right price, you will find buyers!
Now, before you get into any strategy or put your name on any contract, you need to know what you are doing. You need to get educated, get your real estate team set up (lawyers, Realtors, title agents, & buyers) and get others around you that have done wholesaling to assist you with the fist few deals. You will want to have an experienced real estate attorney who has solid contracts (or addendums to existing state contracts) that will allow you to do what is in the best interest of your business. There is a lot of time that goes into building your team for wholesaling, however, it’s still a great way to get into real estate with no money or credit, since you are just using your time and knowledge of the market!
For beginners looking to get started, I highly recommend networking with others who are more experienced than you. This mentorship will allow you to learn from others mistakes. Having the support of others will also assist you in overcoming any fears that may be holding you back from taking action. Find a local Real Estate investing Club and get our there and network with others to advance your career!
Tom Bukacek is a real estate investor / mentor located in Austin, TX. For more information on how to get started, visit my website at http://www.austinmillionaireblueprint.com.
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1 comment:
You have clearly explained each and every step for the real estate property dealer that what should be kept in mind before doing the transaction.
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