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How to Cash-In on the Wholesale Real Estate Market
The Lump Sum Solution
Real Estate truly is an equal opportunity employer. There aren’t any forms or applications to fill out. No interviews. No time clock. In fact, there really aren’t any educational requirements at all. You can learn as you go.
Becoming successful in Real Estate is an evolutionary process. Through solving problems, we become more educated in this business. The more solutions we develop… the more educated we become. The more educated we become… the more success we enjoy. Solving one set of problems leads us to another set of problems. Thus… we evolve.
The funny thing about this process is… we are slow to utilize the solutions until we encounter the problem. The solutions are floating around us constantly… yet we don’t see them because we have no immediate need. Once the need or problem finally manifests itself, we will run to all ends of the earth for the solution, when all along the answer was in our own back yard.
Learning how to cash-in on the wholesale Real Estate Market is part of the evolutionary process of a Real Estate Entrepreneur. It offers solutions to a whole bunch of problems you either have or will encounter. It’s a tremendous tool that unfortunately most will never discover – or more unfortunately – ever utilize. And it’s available to everyone. Read on to find out how you can put this powerful tool to work for you immediately…
What Is The Wholesale Real Estate Market?
The Wholesale Real Estate Market is what I like to refer to as the “Buy Low – Sell Low” market. It’s where you go out and control (option, contingent contract, purchase) a piece of Real Estate (house) under some set of price and terms that renders it more valuable to another investor. This investor could be in the “Buy And Hold” business… the Retail business… the Rehab And Retail business… the Rent-To-Own business… or in the Wholesale business.
You are buying below market and selling below market… quickly picking up a spread in the process. This spread could be $500… $2,000… $10,000… or more. Not to shabby considering that these deals can be done in very short periods of time… and often without any of your own money invested. We’ll talk more about that later… but first let’s examine something we’re all more familiar with…
Inside The Automobile Business (What?)
Most of us are familiar with the automobile industry. We have to be. Owning and learning how to drive a car is essential in most parts of our country today. Automobiles are big business. Inside this industry you have the manufacturers… the distributors… the dealers… etc.
The Manufacturer builds and sells cars at one price. The Distributors buys the cars from the Manufacturer and sells them at another price. The Dealers buy the cars from the Distributors and sell them to the end consumer at their final retail price.
Everybody knows that each of these links in the chain must make money… or the system would collapse. You could say that the Distributors and the Dealers are wholesale buyers… although at different levels. Because of the capital intense nature of the new car business… this is somewhat of a closed system. You have to buy your way in… if you can get in at all.
The Used Car side of the game is a little different. You can become a Used Car Dealer on a shoestring. A Used Car Dealer acquires his inventory from several different sources. He buys at auction… he buys trade-ins from New Car Dealers… he buys from the general public… and he buys from other Used Car Dealers. Successful Used Car Dealers have an unbelievable network of wholesale buyers and sellers. Pricing at this level is ultimately driven by the retail market – what an end consumer would be willing to pay.
I haven’t bought a New Car in almost 30 years. I like the Used Car market for several reasons. First of all, I can save a tremendous amount of money by purchasing a 2 or 3 year old vehicle that looks and drives like new. In fact, all cars are Used Cars as soon as the muffler passes the curb. Secondly, I like dealing with Used Car Dealers. I learn something from them every time I buy or sell.
The Same Market Exists For Houses!
Wholesaling houses and wholesaling cars have a lot in common. In fact… you could learn a whole lot by applying these same methods. The thing that makes wholesaling work at any level is the speed at which business can be conducted. The margins are smaller than if you did the necessary work… and took the corresponding risk… to bring your product to the retail market.
In wholesaling… it’s important to remember… you’re not trying to hit a home run. It’s base hit… base hit… base hit. You can’t get greedy. It’s imperative that you leave room for your buyer to make a profit. In fact… to keep your market viable… your buyer must make a profit. You must become the source of profitable transactions.
Conversely… when your buying… you must provide benefits to the Seller also. When buying wholesale… you have to be prepared to do business. The biggest benefit you can provide is peace of mind. You can provide this benefit by making offers quickly… following up in a timely manner… taking care of the details… and closing fast! Remember… when you are buying property wholesale or sub-wholesale… price is a secondary issue. You have to provide superior service.
The Top Ten Reasons Why You Should Add Wholesaling To Your Business!
1. You are finding more deals than you can physically, emotionally or financially buy.
2. You are buying more deals than you can physically, emotionally or financially support.
3. You don’t have another source of income to support your lifestyle.
4. You don’t have any money… or a readily available source of money.
5. You want to make money with Real Estate but you don’t want the hassles of tenants.
6. Your acquisition program is right on track but a shot of cash would feel good.
7. You want to accelerate your acquisition program.
8. You want to improve your lifestyle.
9. You are tired of dealing with the banks.
10. You are tired of being broke all of the time.
11. Baby needs a new pair of shoes.
Here’s How The Game Is Played…
O.K… Your phone rings. It’s someone who wants to sell you their home. You qualify them over the phone and determine that you should go and meet with them. During your meeting they agree to sell you their home at a deep discount for cash. You whip out your trusty Real Estate Contract (I’ll show you how to create your own!) and sign the deal up.
Well… just as you have done a good job of prospecting for Sellers… you’ve also done a good job of prospecting for Wholesale Buyers. You’ve established good working relationships with other investors who are interested in buying houses below market. You have quizzed them about their buying criteria and ability to close fast. The table is set.
You pick up the phone and start calling. “Hey Joe! Fast Eddy here. Want to buy a house you can make some money on? (yes) Can you close quick for cash? (yes) Good! I’ve got just what you’re looking for… but you’ll have to move fast. When can I show it to you? The sooner the better? Great! I’ll be buy to pick you up in 30 minutes. We can have some lunch while we’re out.”
Joe likes the house. He agrees to buy it for $20,000 cash. Your contract price is $17,500 cash. Your profit is $2,500 cash (adjust these numbers to your market). You buy lunch and take the rest of the day off. Not bad!
How To Prospect For Wholesale Buyers
This part is not as hard as you might think. Chances are you already know other investors who are interested in buying. They are your friends… business associates… competitors… confidants… etc. They are either currently buying… or would like to be buying.
Talk to these people. Find out what they are looking for (buying criteria). What would they buy? What wouldn’t the buy? Can they buy for cash? Do they have good banking relations? Can they close quickly if they found the perfect deal? And here’s the most important question of all…
Are they going to be hung-up on how much money you’re making… as long as you are bringing them profitable transactions? Basically… you’re asking them if you can do business together. Believe it or not… there are some people you can’t do business with. Discover this early… and move on to someone else. There are plenty of investors who will appreciate you helping them locate properties. These are the ones you want to do business with.
If you don’t know other investor already… that’s O.K. There are two good ways of locating Wholesale Buyers:
1) Join your local Real Estate Investment Club. Most cities have such a club. Ask around. Creative Real Estate Magazine 619-756-1441 ($72 per year. Ask about specials) maintains a Free Listing of all of the clubs in the country with contact names, phone numbers and meeting times. Or you can go to the National Real Estate Investors Association’s website (www.NationalREIA) and check for clubs in your area. If you don’t have such a club in your town… consider forming one. They are a good way to share information and get to know each other. This is a great way to get to know other investors, as well as, find out who you can and cannot do business with.
2) Run an ad in your local paper. What should it say? How about… Handyman Special, Cheap, Cash, 969-6969… or Fixer-upper, Must sell fast for cash, 969-6969… or Way Below Market, Must sell fast, Cash Only, 969-6969. You get the idea. Put an ad in the paper that you would respond to… if you were prospecting for bargains. Leaving Town, Must Sell Fast, Bargain Price, 969-6969. Well… you could be leaving town… on vacation… if you could sell this house for a tidy little profit to another investor.
Don’t wait until you’ve found a property to locate wholesale buyers. Start prospecting for wholesale buyers right away. Wholesaling works because you can know… with some degree of certainty… that a property can be sold fast before you even agree to buy it. Building relationships with wholesale buyers accelerates this process.
How To Protect Your Position!
Once you have a house tied up with a Contract to Purchase or Option to Purchase… your first consideration should be protecting your position. If you are concerned about the Seller dealing off the bottom of the deck… that is… selling to someone else during the term of your contract… consider putting your position of record at the County Recorder’s Office (called different things in different parts of the country).
There a several ways to do this… you could make your contract recordable… but then the whole world would know under what price and terms you are purchasing. This could give away your negotiating position. Filing a Memorandum or Affidavit stating you have a Contract to Purchase or Option to Purchase… along with the legal description of the property… should be adequate to put the public on notice of your interest in the property.
This… in effect… clouds the title as to any other purchaser. You would have to be dealt with in some manner (cash?) in order for the Seller to deliver good and marketable title. This is an inexpensive way to protect yourself and can be done on a self-help basis. Be sure to include your contact information.
Probably the best way to protect yourself is by being up-front and honest… completely above board… staying in communication with the Seller… doing what you said you would do… and closing quickly. The longer you drag out a transaction… the more fertile the grounds become for problems to arise.
I’m not trying to scare you here. It’s just something you should be aware of. I have never had a problem with this. Knock on wood. (Ouch!) I like to deal with Sellers who have a problem I can solve… and who appreciate me solving it. I rely on my sixth sense… gut reaction… a whole lot. It’s not very scientific… but it works! If a deal doesn’t feel right… I back off and work on something else. I don’t need the hassles… and neither do you. But, if you have a big profit potential… and get the feeling something is amiss… protect your position… and do it fast!
What About The Closing?
O.K. Here’s where your skills as a transaction engineer will pay off for you in a big way. Let’s say you’ve done everything you’re suppose to do. Found a motivated seller… reached an agreement to purchase the property… put it under Contract to Purchase… located a Wholesale Buyer… struck a deal… and now your ready to close. What do?
This is where working with a knowledgeable Closing Attorney or Escrow Company is essential. But I’m getting ahead of myself. Let’s look at your options first.
Option #1: You could assign your contract to your wholesale buyer and let them close. Cash money and they step into your shoes. In theory… this sounds good. But… you are giving up a certain degree of control. Not my favorite… but a viable alternative.
Option #2: You could close on your contract… and at some point in the future… close with your wholesale buyer. This requires the ability to close. But… If you don’t have the resources available to close… this becomes an impossibility. I will use this option only when there is a timing problem with the resale… and I wouldn’t mind owning the property. Still… not my favorite method.
Option #3: You could close the purchase and sale simultaneously. There are several methods of doing this. You can close with the Seller… then with the Buyer. Two closing statements… two deeds. You could reverse this process and close with the Buyer first. You could have the Seller deed the property directly to your Buyer… thus staying out of the chain of title… and have two closing statements… one from the Seller to you… and one from you to the Buyer. You could have everybody sitting at the same table… or you could separate the parties by time and/or space.
I like option #3 because it doesn’t require me to have the ability to close. I don’t have to tap into my resources for financing. And why should I. It’s a waste of everybody’s time since the Buyer is going to have to arrange financing anyway. I also like the direct deeding approach. There is absolutely no need for you to be in the chain of title. It can only lead to liability problems… and it simply isn’t necessary. I have closed many transactions where the Seller and the ultimate Buyer were sitting at the same table… but I prefer to keep them separated.
The truth of the matter is… nobody needs to be there at all. This could all be done through the mail… with all of the documents going back to the closing attorney for disbursement of funds. It’s your responsibility to direct this process. Do it any way you feel comfortable. Insure your success by using a Closing Attorney or Escrow Agent who can get the job done with the least amount of problems.
Do’s and Don’ts
Do incorporate wholesaling into your present business. Don’t be greedy. Do prospect continuously for Wholesale Buyers. Don’t waste time with people you cannot do business with. Do become a source of profitable transactions. Don’t let your lack of capital keep you out of the game. You can play without it. Do business with a Closing Attorney or Escrow Company who can close your transactions simultaneously without hassles or creating problems. Don’t try to hit a home run on every deal. Go for the base hit.
And… always make full disclosure that you are entering into the transaction for profit. The Seller needs to know this right up front. This is extremely important!
Wholesaling is a great business. It’s a great way to raise cash quickly. And best of all… it’s available to everyone.
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