How to Cash in on the Wholesale Real Estate Market
by Scott Britton
My Father always reminds me that nothing helps a Salesman's attitude more
than making a sale. It doesn't have to be a home run... any sale will do! The
same holds true for Real Estate. Nothing positively impacts a Real Estate
Entrepreneur's attitude more directly than making a sale. And the quickest way
to make a sale in Real Estate... is wholesaling!
Dear Friend,
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 Investing 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.
Which brings us to our topic of discussion... Cashing-In On The Wholesale
Real Estate Market. It's 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...
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 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
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 this later... but first let's examine something we're all more
familiar with...
Automobiles
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.
Let me tell you a little story to further explain this market. I haven't bought
a New Car in almost 20 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 new from them every time I buy or sell.
A couple of years ago I decided it was time to upgrade my vehicle. I was driving
a 1989 Chevy Caprice Classic. A baby blue four-door with good rubber... high
mileage and slight hail damaged (no insurance). I wanted to buy a
Suburban for my wife to haul the kids around. So I called my favorite Used Car
Dealer... "Red" Smith. "Red" said "If you've got something to trade...come on
down... I've got just what you're looking for!" "Red" knew that to make a
deal with me... or anyone else for that matter... we'd have to be looking
eye-to-eye. Plus... he was qualifying me. If I was serious (motivated)
about buying a car from him... I'd have to get my little butt on down there.
So... I did.
Guess what? When I got there... they didn't have a Suburban on the lot. "Red"
asked me if I had other transportation... which I did. He asked me how much I
would take for the Chevy... cash money... on the spot. He had a buyer on the
phone... and was ready to make a deal. "One spot left on the truck leaving
tonight. Sell the trade-in now... and we'll find you just what you're looking
for later."
I love this kind of action. Pure business. Deal making by the minute. Well... I
didn't sell my car that day. We did agree on a trade-in price that I was willing
to accept on the purchase of a Suburban. Over the next couple of weeks I was
called back down to the lot 3 or 4 more times to check out the latest phantom
Suburban. "Red" was running me through the ringer... but I was taking notes. I
spent quite a little time in "Red's" office waiting on someone who was bringing
one of the phantom Suburbans over for me to look at. During that time I
witnessed "Red" buy and sell several vehicles at the speed of light. Some of
them he looked at... some he never even saw. He conducted a lot of business on
the phone. And I do mean a lot of business!
Anyway... we finally made a deal. "Red" was persistent... and I held steady. I
got what I was looking for... at what I considered a wholesale price. "Red" made
money on my trade-in and on the Suburban. He never owned either one of them. You
see "Red" wasn't trying to hit a home run. He was trying to make a little money
off a lot of different deals. He wasn't greedy. He knew that there was more than
one deal.
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 you're 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!
- You are finding more deals than you can physically, emotionally or finanially
buy.
- You are buying more deals than you can physically, emotionally or financially
support.
- You don't have another source of income to support your lifestyle.
- You don't have any money... or a readily available source of money.
- You want to make money with Real Estate but you don't want the hassles of
tenants.
- Your acquisition program is right on track but a shot of cash would feel good.
- You want to accelerate your acquisition program.
- You want to improve your lifestyle.
- You are tired of dealing with the banks.
- You are tired of being broke all of the time.
- 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 (you do have one... don't
you?) and sign the deal up.
Now what?
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. I'll buy you 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. You buy lunch and take the rest of
the day off. Not bad!
Prospecting 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?
What have they bought in the past? And here's the most important question of
all...
Are they going to be hung-up on how much money you're making... if you can
get them exactly what they want? 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:
- 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. 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.
- 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 wholesale to locate a buyer. 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.
Protecting 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 of Deeds office.
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.
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. Avoiding problems
rates up there with accessing opportunities with me.
Bu... Bu... Bu... But! 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 first
choice... 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 completely... 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.
Wholesaling is a great business. If you haven't been involved in this market,
why not give it a try. It's a great way to raise cash quickly. And best of all,
it's available to everyone.
Best of Real Estate Success!
Scott Britton
Bio:
Scott Britton, author and publisher of the “University of Real Estate Letter” is
an active, full time Investor who has been successfully buying, selling and
investing in Single Family Houses and Mortgages since 1979. Beginners and
seasoned pros alike have profited from his down to earth, common sense
investment advice. Scott is known for his clear thinking and problem solving
abilities. His strategies for generating cash while building wealth, can help
anyone accelerate their investment program while improving their lifestyle.
Scott, along with his wife Cindy and their three children, live and work out of
their high-tech, low-cost home office in historic Jackson, Mississippi, where he
practices what he preaches on a daily basis.