First Attempt At A Wholesale Deal

We just finished our first attempt at a wholesale deal – and it didn’t go very well, but it wasn’t terrible either. What we did was look for properties on the HUD website that we could buy far below ARV. I found one that had an as-is value of $79k and my best estimate at an ARV based on comps was $93k. It was listed for $57k and my bid was for $47k. That was not accepted. So I raised it to $49k, which also wasn’t accepted. My realtor found out somehow that $52,100 was the lowest number they’d accept so I bid that and they did accept it. That’s where the fun started.

I went to the property with my realtor the day the bid was accepted and did an inspection to check the condition of the property better (I had already driven by it and walked around it before bidding on it), take a bunch of pictures, and get a better feel for what I thought it was worth compared to the houses around it. I think I got the ARV pretty darn close (though I may have been a little high), and I estimated the repairs to be around $10k (most of which was appliances and windows).

Then I ran the numbers on it and developed a flyer showing the pertinent numbers with a wholesale price of $65k. I sent that flyer to two investors that I know buy in this area and waited for a response. I got it the next morning – both said “no thanks.” One in particular who I’ve talked to in the past and asked if he would be willing to let me bounce ideas off of him and give me advice had more to say. He said that he found that the property was listed on the MLS for $57k, and was “sale pending” which he assumed was because I had it under contract. So since he could see that it was listed for lower than I was trying to sell it for, he did not consider that to be a wholesale price and that’s why he wasn’t interested. He said that if I could have gotten it for less than list price and sold it for less than list price, then it would be a wholesale deal and he would be interested.

Well I did get it for lower than list price, but in order for me to sell it and just break even I had to sell it for at least $60k (to pay the realtor fees, transactional funding fees, and make $1k or less and/or break even on any other misc costs). After praying about it and thinking about it more, I didn’t feel like this was a sure enough deal to go ahead and send in the earnest deposit money for and try to find a different buyer for over $60k in the next 45 days. I still think it was a pretty good deal, just not good enough to ensure my first real estate deal would be successful.

So I called my realtor reluctantly and told him I needed to cancel the deal. Since I hadn’t signed the purchase agreement yet or sent in the security deposit, I didn’t lose any money which is great. But my realtor isn’t very happy with me. But at least I learned something and won’t make the mistake of trying to wholesale a property for higher than it was listed for again. In retrospect, that lesson should be pretty obvious. I figured it was a big enough spread between what I was selling it for and what the ARV was so that some other investor could rehab it and still make close to $10k after selling it retail, but I guess that’s not enough to make it a good deal to many investors.

So I’ll learn from my mistake, get back on my horse and try to find a better deal now.

P.S. Another good thing did come out of this. I got worried when both of the investors I know didn’t want to buy it or even counteroffer, so I created a website to help me build a buyer’s list. I just finished getting it up and running this weekend, so I can hopefully build up a pretty good buyer’s list before I find my next deal and I’ll have better luck in finding a buyer for my deal.  =)    If you want to check it out, click here: https://sites.google.com/site/c3erehabs/

Back From My Break

So I took a break from real estate for a few weeks. I was getting a little too stressed out with work, church, kids, and life so I had to take a break and recharge. It’s been about a month or so, and now I’m back! The kick in the pants I needed came yesterday.

I got an email about a free webinar about a new method of wholesaling properties and decided I should attend. I signed up and asked my wife to watch/listen to it with me. We did, and it got us excited about real estate again. And the best part came afterwards when we talked about why I haven’t been doing anything with real estate for a while.

I admitted to her that I just needed a break, but I also told her that I hadn’t gotten back into it yet because I didn’t want to disappoint her. Recently money has been tight for us, and it’s caused from friction in our relationship. And being a new real estate investor, chances are higher than I would like that I could make a mistake that will cost us potentially quite a bit of money and I didn’t want to risk adding to the problem we already had if it was going to cause even more friction between us because of money.

She said that she understood, and that she thinks we should go for it anyway. She said she is behind me and trusts that I will do the best I can and if something happens we’ll just deal with it, but if we don’t do anything then we don’t have any excuse for struggling. That’s all I needed. Now that I know my wife is behind me for real, even if I make a mistake (which I don’t intend to do), I’m ready to get back into it again!

Stay tuned… this is going to be fun!

Putting The Pieces Together

Once you have all of the pieces for a deal, you have to put them together to be able see the whole picture. When you find a motivated seller, you negotiate the best possible deal that you can with them. There are so many different ways you can structure a deal that you can make almost any property into a good deal by negotiating the price and terms. Some of the key points in negotiating deals will be covered in future posts.

After you negotiate the deal, you need to control the property before you can do anything with it. Notice that I didn't say you have to own the property, you only need to have controlling interest in the property before you can make money on it. The most common and easiest way to do this is to get the property under contract by writing and signing a purchase agreement. Both the buyer and seller must sign (and date) the purchase agreement in order for it to be "under contract."

Now that you've got the property under contract, you need to get the other two pieces of the puzzle ready. The title company or attorney is self explanatory. But what about the buyer or tenant-buyer? If you are doing a wholesale deal or any normal sale, then this piece of the puzzle will be a straight out buyer. If you are going to lease-option the property, then this piece will be a tenant-buyer.

It's normally a good idea to put together a summary sheet of the key information your buyer will likely be interested in so you can effectively market the property to your potential buyers. Once you have someone who is interested, you sign the appropriate paperwork with them to attach this piece of the puzzle to the first one (the seller). If it's a buyer, you will be either using a purchase agreement or an assignment of purchase agreement. If it's a tenant-buyer, it'll be a lease and an option to purchase agreement.

Finally, all the pieces get put together on the day of closing when everything is finalized and the once pieces of a puzzle are now one complete picture, and a stack of money for your pocket.  =)

Now of course, this is a very simple type of deal with only a few pieces to put together. As the complexity of the deal increases so do the number of pieces you must figure out how to put together correctly. For instance, if you are doing a rehab deal then you'll need pieces that look like various contractors (painters, window installers, roofers, landscapers, flooring installers, electricians, plumbers, etc.), an appraiser, inspectors, and unless you are using your own cash, you'll also need the all important financing piece (hard money, private money, traditional financing, etc.).

But again, since we are just starting out - we're going to try to keep it simple by doing wholesale deals and possibly sandwich lease options.

Find All of The Pieces

Beginning to invest in real estate is sort of like putting a puzzle together. The number of pieces the puzzle has depends on the type of deal you are trying to do, but you'll need certain pieces no matter what. So here are the pieces you'll have to find in order to get started:

1. Motivated Sellers
2. Buyers (This includes Renters, Tenant-Buyers, and straight out Buyers)
3. Title Company or Attorney

These are the three pieces you'll need for every real estate deal you'll ever do. But before you start putting the puzzle together, you have to find the pieces.

I personally think you should find your Buyers first. Talk to people you know and let them know you are getting into real estate investing and are looking for people who want to rent or buy a home so you can start using your existing network. Go on Craigslist for the areas you are looking to invest in (choosing an area is a whole other subject), and peruse the "Real Estate Wanted" ads. Anything that is an ad for someone looking for a place to rent or buy will be a potential Buyer for you. Email them and let them know that you are looking to start investing in real estate in the area they are looking to buy/rent in and ask what they are looking for. Look in the paper for the same and contact those people. Get some business cards made up and give them out to everyone you know or meet. Post ads in the paper or on Craigslist and other similar sites, put up bandit signs around the area you're looking to start investing in, talk to real estate agents who have clients who can't qualify for a mortgage and have to rent instead, etc.
Make sure you have a good system for keeping track of all of these people and what types of properties they are looking for and areas they are looking in.

The next piece of the puzzle is finding motivated sellers. The key word here is motivated - if the seller isn't motivated, you aren't going to be able to get a good enough deal anyway. There are a lot of ways to find motivated sellers, and in order to be able to do deals you'll probably have to use just about all of them. I know it kinda sucks, but I'm here to tell you the truth, not just what you might want to hear. Some of these ways are posting ads on Craigslist, in the paper, putting up bandit signs, talking to people you know, looking for vacant properties and contacting the owners, watching for properties that have been listed for a loooong time and contacting the sellers, looking for preforeclosures, etc.
Once you find them, you have to contact them and get basic information from them:

• Where is the property?
• How many beds and baths does it have?
• How much are they asking?
• etc.

You also want to try to get information that will specifically help you in being able to make a deal that will work for both of you. These are things like:

• How much do they still owe on the mortgage?
• Why are they selling?
• How quickly do they need to sell?
• What are they going to do if they can't sell it?
• etc.

And you'll need to figure out other info too:

• Does it need to be fixed up, and if so how much will it cost?
• What are the operating costs going to be for the property (property taxes, utilities, property management, etc.)?
• Is this even an area you want to invest in?
• etc.

Finally, you are going to need to have a good attorney or title company to do your deals through. They will be the ones who can do the title search and take care of all of the documentation at closing. And certain title companies will also do simultaneous closings which can be a very valuable thing to be able to do for some deals.

The Strategy

So I mentioned in the last post that our strategy to start investing in real estate is going to be doing wholesale deals and sandwich lease options, but not everyone knows what that means so let me explain.

A wholesale deal is basically one where you find a property and negotiate with the seller to get an agreed upon price far below market value. Then you enter into a Purchase Agreement at that price - which is called putting the property "under contract." Once you have the property under contract, you have the right to sell that contract to someone else. The key point is that you have to make sure that you put "and/or assigns" after your name in the signature line, and make sure there is no part of the Agreement that disallows assignment of the contract in order to do this. So all you have to do is find someone else who wants to buy the property for a little more than you bought it for, and assign the purchase agreement to them for a fee. They will then close on the purchase agreement and pay you a fee of whatever you agreed on.
This obviously doesn't require any credit, and it doesn't require any money either if you can get the property under contract without an earnest deposit. The most it will cost you is the earnest deposit amount, and as long as you write the contract correctly (meaning that you include a clause that provides for a refund of your earnest deposit if the contract is not fulfilled), you'll get it back if you can't find someone to assign the contract to and back out of the agreement. And it's risk free to you as long as you put in a clause that allows you to get out of the agreement if you want to (worded more professionally of course).

So what about a sandwich lease option? Well this is basically a lease option that you enter into with the seller, and then a lease option that you offer to another person on the same property. So there are two lease options on the same property with you in the middle (hence the "sandwich" part). The key is to make sure that you are getting more from the person you offer the lease option to, than you have to pay to the seller who offered you their lease option. The details of this type of deal are extensive, so I'm not going to go over them here. But if you want to learn more about these, check out Wendy Patton's website - she's got some great information, including a free ebook all about them. But the bottom line is that this strategy doesn't require any money or credit either.

Now if you understand what was written above, that's all well and good. But understanding isn't enough, you have to really know how to do these strategies from start to finish. That's where a mentor (someone who's already done it and can help guide you through it), becomes invaluable! So if you want to try it, it would be best if you could find someone who's already done this and ask them for help! You'll hear me talk about getting a mentor often because I really think it's easily the best way to get started in real estate!!!

Image by thinkpanama via FlickrSo where do we begin? Well we decided that the first thing we needed to do was to learn enough about real estate investing to make sure we knew what we were getting into. So we went to a James Smith  Real Estate Investing Seminar, have attended a bunch of webinars by people associated with the Rich Dad brand, Wendy Patton, Jason Hartman, and others. We've read a bunch of books on real estate investing, flipping properties, commercial real estate, residential real estate, lease-options, starting a business, different business entities (C corporations, S corporations, LLCs, Limited Partnerships, etc.), grant writing, asset protection, and personal finances.

And it took about 2 months of a constant, fairly intense learning for us to get to the point where we believe we're ready to start actually getting into the game. We decided to start an LLC for our business and since we don't have any money and less than stellar credit - we're trying to start our real estate investment business by wholesaling some properties, and doing some sandwich lease options in order to build up some cash to do other types of deals - as well as to keep our own risk to a minimum.

How? We'll tell you in the next post! 

Welcome to Our Adventure!

Image via WikipediaAs new real estate investors, we know that we have a lot to learn. We will be successful, but we know it'll probably be a bumpy road with plenty of twists and turns along the way. So we decided to share our adventure with anyone who wants to read it.

It's our hope that this blog will help other aspiring real estate investors by providing encouragement, advice, and preventing them from making the same mistakes we do. And hopefully anyone else who is starting an entrepreneurial venture will benefit from the stories we share as well!

So without further ado,...let's get started!