Wholesaling 101, Option Periods, and Easy Money


I’ve been getting a lot of feedback on the subject of wholesaling. Right now it seems like each day more people are interested in investing their time and money into real estate, but the problem most people face is that they have time, but not the money.

Wholesaling is an alternative form of real estate investing, that requires little to no money to begin working and making some extra money. I’ve heard many gurus charge for this type of information, and like I’ve said before… don’t pay when you can get it free.

I must disclose that I am a licensed real estate agent, and I have never wholesaled a property before. I have bought a property from a wholesaler, but have never done this on my own. There really is no point for me since I am licensed, I can sell retail real estate and make more money. If the right situation came along, I might consider wholesaling a house, but I do not actively go out to find motivated sellers for wholesale purposes.

In earlier posts, I said that you’ve either got time or money. The money guys don’t have time, and the guys with time don’t have money. Step back and find out where you’re at in that equation, and if you’ve got money, wholesaling might not be for you. If you’ve got time, then this is right up your alley.

Wholesaling essentially is finding a good deal, doing the legwork, running the numbers, finding a buyer, presenting the numbers, and getting paid for your work. You are connecting both a motivated buyer and seller to benefit from a real estate transaction. Some states have laws against this, such as “brokering without a license”, which is why you actually have to “own” the house to do this. We’ll go over how this takes place…

First and foremost, you must understand what an option period is. If you’ve been reading up on the subject, you’ll notice everyone is talking about “option deals”, etc. The option period reads like this in a real estate contract:

If you read carefully, this is the part of the 1-4 residential contract that grants the buyer the option to back out of the real estate deal for X number of days, for X number of dollars. Real estate law says (I am not a lawyer) that you must have consideration to have an option period, which means that you must put more than $1 down for the option period. Most common is $100 for 10 days, in retail transactions.

How does this apply to wholesaling?

Sample wholesale break down:

Lets say I am wanting to wholesale a house I found in my neighborhood, and have spoken with the home owner. They can’t sell the home because of the repairs needed, banks won’t lend on a conventional sale. They don’t have the money to fix the house themselves, so they are in a lose-lose position – can’t sell and can’t fix. That’s where Mr. Wholesaler steps in.

You run the numbers, and find that the After Repair Value (ARV) of the house is $155,000. You walk through the house, and ask questions, and estimate repairs – you’ve estimated the repairs are $35,000. The seller owes $40,000 on their note. You make them an offer of $45,000 and include to pay for all their closing cost. They get to walk away from their note, make $5,000, and close fast – 7 days fast. The seller thinks about it for a while, and takes you up on your offer. You write a contract to purchase the home (either under your name or an LLC, S Corp, DBA, etc) and put an option date of 30 days with an option fee of $100. This gives you the option to back out of the purchase for 30 days and risk $100 for doing so.

In your contract, you include verbiage that will allow you to assign your contract to a 3rd party, for no fee.

After you sign the contract, you call your buyer and tell them you’ve got a great deal for them. The After Repair Value of the house you’re selling is $155,000, the repairs are $35,000, and you’ll sell it to them for $55,000. The investor crunches the numbers, and realizes $55k (purchase price) + $35k (repairs) = $90,000, or 58% of the After Repair Value. They are paying 58 cents on the dollar! Your offer is accepted by your buyer.

Note: typical investors use this formula to determine if the deal is feasible for them. Purchase Price + Repairs = 70% or less ARV. Depending on what you will charge for your wholesale fees, you could make or break the deal.

Did you catch what happened? You “bought” the house for $45,000, and “sold” it for $55,000. Where did the $10,000 go? Your efforts! You’ve got to pay yourself…

You contact the original seller, and let them know you are going to assign the contract to a 3rd party buyer. You assign your contract to the other buyer, and they close the deal. Upon funding, you get a check for $10,000 for finding the deal.

Everyone wins. This is your ideal situation in a wholesale deal. The transaction goes from A-B and B-C, with A being the original home owner, B being you, and C being the end investor who purchases the home. There needs to be enough room for A to want to sell, and C to make enough money – this means you can’t be greedy, and mark up the deal $20-30k.

Easy money is what most people think about wholesaling. I’ve got news for you – it isnt. Most of the time you’re going to be dealing with people who have other issues in their life making them have to sell, or commonly refered to the 4 d’s of real estate: death, divorce, drugs, or drinking. When dealing with these type of situations, you must remember that selling a house comes with emotional attachment, and some of these people might not be in the most stable period of their lives. Assure them that you want to help them (which you should), and stay away from predatory marketing practices. 

So that’s the easy part, understanding the process. The hard part is finding motivated sellers and qualified buyers. I would recommend building a buyers list before you start to market to find houses. Start with craigslist classifieds in the real estate section, and post an ad saying you’re looking for investors to buy discounted properties… they will call / email you.

There are other methods to wholesaling that I did not go over, such as “Subject to” deals. You can find more information on these type of deals from the links I have provided below.

If you’re not involved in the real estate industry, you’re going to need to make friends. Title companies, and REALTORS will be very helpful to your business. REALTORS will be able to pull comps straight off the MLS, so you will have an accurate value for your deals. Reward them kindly, because REALTORS typically make little to anything off wholesale clients. Find a title company who is experienced in working with wholesalers, and ask if you could come in to meet with them. They should be more than helpful to want to help you out.

Build your business from the ground up. People on BiggerPockets have operations as large as call centers answering their phones, offering to buy houses within 24 hours. They have systematically made the wholesale process so simple and easy for the seller to understand, they are profiting big from this business.

Now you know how the “WE BUY HOUSES” people make money.. essentially this is “house flipping” on paper. Some people are good at this – REALLY good. Steph Davis is a wholesaler out of Florida, check her blog out at http://www.flipthiswholesaler.net/ for more wholesaling tips & tricks. StrugglingInvestor (http://www.strugglinginvestor.com/) also has some great articles about probate wholesaling.

This was a simple break down on how the transaction happens, and how you would make your money. For more information on the subject of wholesaling, visit the BiggerPockets wholesaling forum at http://www.biggerpockets.com/forums/93-wholesaling.

Until next time,

Danny Day
Coldwell Banker United, REALTORS
Houston, TX
713-480-0050
www.dannysoldit.com
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Houston Area Market Snapshot: What you can buy for $65,000


I’ve been working this past year with numerous real estate investors, both in and outside of the Houston area. Most the real estate investors I work with have only been to Houston 2-3 times, but know the market here is thriving for buying real estate.

According to NAR statistics, Houston is ranked as one of the best places to find value in real estate in the country. Although values have not significantly dropped in markets such as Phoenix, or Los Angeles, there is still considerable investment opportunity in the Houston market.

Many real estate investors are finding their way to the Houston area from forums such as BiggerPockets.com, or Flip This House Houston (which they are currently shooting in the Heights area), or other methods drawing them here.

Some agents will tell you that “house flipping” does not exist in this market. I beg to differ, and you’ll see why. It might not be the best market for house flipping in Houston, but I have seen areas where it is happening. I will go over the parts of town that investors are currently capitalizing on, and my thoughts on the next “up and coming” area of Houston in my next blog post.

So, is the Houston area real estate market bad right now? I would say no. Based on a study done by Trulia, real estate sales in Houston have increased by 7.6% from 2010 to 2011.

We’re going to call this blog post: Houston Market Area Snapshot: What you can buy for $65,000. All of these deals are taken from the MLS, and are currently active on the market. These deals were taken randomly, and not selected for best / worst condition.

If the Days On Market has an astrict next to the number, then it means the house has been listed more than once. If the price has an astrict next to the number, then it means the price has been adjusted (most likely reduced).

Also be noted: some After Repair Values are less than list price. This reflects sold comps on each house, and the comps came in lower than list price, sometimes significantly lower. If the ARV could not be determined by comps, then I pulled Harris County Tax Appraisal District records and gave tax assessed value for ARV, which is noted.

Take this info and use it however it can help you. Notice the significance in the year built of the home. If I was buying a house to fix / flip or to rent out, I would pay close attention to the year built, due to maintenance issues.

North/Spring area:

24122 SPRING MILL LN, SPRING, TX 77373
List price: $65,000* / Days on market: 89 / After Repair Value: $84,000
Price Per Sq Ft: $35.91
Rental rate: $1,100
3 bed, 2.5 bath, 2 car attached garage
1,810 sq. ft
Year built: 1979

Northeast:

11306 MOONLIGHT RIDGE LN, HUMBLE, TX 77396
List price: $65,000 / Days on market: 254* / After Repair Value: $60,000
Price Per Sq Ft: $45.01
3 bed, 2 bath, 2 car attached garage
1,444 sq. ft
Year built: 2004

Northwest:

2522 COPPER VALLEY CT, HOUSTON, TX 77067
List price: $65,000 / Days on market: 17* / After Repair Value: $66,000
Price Per Sq Ft: $45.14
Rental rate: $1,050
3 bed, 2 bath, 2 car attached garage
1,440 sq. ft
Year built: 1979

East:

4202 ARAPAJO ST, BAYTOWN, TX 77521
List price: $59,999* / Days on market: 104* / After Repair Value: $85,000
Price Per Sq Ft: $35.38
Rental rate: $1,300
3 bed, 2 bath, 2 car attached garage
1,696 sq. ft
Year built: 1983

South East:

10906 NEWTON ST, HARRIS, TX 77075
List price: $65,000 / Days on market: 14 / After Repair Value: $80,324
Price Per Sq Ft: $34.74
Rental rate: $N/A
3 bed, 2 bath, no garage
1,871 sq. ft
Year built: 1958

South:

5207 BALKIN ST, HOUSTON, TX 77021
List price: $65,000* / Days on market: 135 / After Repair Value: $80,000
Price Per Sq Ft: $41.94
Rental rate: $850
3 bed, 2 bath, 1 car attached garage
1,550 sq. ft
Year built: 1949

Katy:

19627 BUCKLAND PARK DR, KATY, TX 77449
List price: $65,000 / Days on market: 16 / After Repair Value: $85,000
Price Per Sq Ft: $38.28
Rental rate: $1,175
3 bed, 2 bath, 2 car attached garage
1,698 sq. ft
Year built: 2006

Cy-Fair:

10318 AUTUMN MEADOW LN, HOUSTON, TX 77064
List price: $64,500 / Days on market: 14* / After Repair Value: $84,500
Price Per Sq Ft: $54.66
Rental rate: $1,150
3 bed, 2 bath, 2 car attached garage
1,180 sq. ft
Year built: 1980

Bellaire:

6439 IVYKNOLL DR, HOUSTON, TX 77035
List price: $59,900 / Days on market: 86 / After Repair Value: $95,000
Price Per Sq Ft: $41.28
Rental rate: $1,000
3 bed, 2 bath, 2 car attached garage
1,451 sq. ft
Year built: 1978

Clear Lake:

716 NUGENT ST, LA PORTE, TX 77571
List price: $65,000 / Days on market: 13* / After Repair Value: $25,000
Price Per Sq Ft: $70.27
Rental rate: $825
3 bed, 1 bath, no garage
925 sq. ft
Year built: 1955

Pasadena:

2012 LOCKLAINE DR, PASADENA, TX 77502
List price: $65,000* / Days on market: 146 / After Repair Value: $103,910 (tax)
Price Per Sq Ft: $29.76
Rental rate: $N/A
3 bed, 2 bath, 1 car detached garage
2,184 sq. ft
Year built: 1956

Are you a Houston area real estate investor? Are you looking to invest in the Houston real estate market? Leave feedback/comments on my blog and let me know what part of town you like to invest in.

BiggerPockets: The Best Real Estate Advice That Cost Me $0.


Have you stayed up at night flipping channels watching infomercials? I’m sure everyone has done this once in a while.

If you’re anything like me, you’ve at least tuned in to what these people have to say. They make millions from get rich quick systems that the infomercial is selling, and you can have it for the low price of 4 low payments of $49.99! Does this sound familiar?

Maybe you’ve watched public TV during the day and have seen the most “entertaining” Flip This House star, Armando Montelongo, talking about his system to make you filthy rich in real estate.

The sad truth is that every day, dozens of people fall for this hype and buy into false promises. P.T Barnum once said that there is a sucker born ever second..

This brings me to the point of my blog post today, BiggerPockets: The Best Real Estate Advice That Cost Me $0.

I am a firm believer in Napoleon Hill and his way of thought. He believes in a principal called The Mastermind, which is basically the old saying “2 Heads are better than one.” His theory on the mastermind states that if one or more people come together, with the same goal in mind, you form a 3rd mind – the mastermind, which is greater than each single mind separated.

Joshua Dorkin created the online “mastermind” of real estate, and real estate investments. Josh is the founder of BiggerPockets.com, an online resource for all real estate matters. BiggerPockets features forums that you can publicly read, sign up for free, and post on. There is also an article section on the site that has many great articles on real estate.

In my opinion, and many other real estate investors, anyone interested in real estate should take note of this resource, and try to utilize BiggerPockets before moving to their check book. Experts that sell products want you to buy those products. That’s the beauty of BiggerPockets – they are not trying to sell you, they are trying to help you.

Lets say I wanted to research short sales, and would like to read up on them. I could Google the term “short sales” and get about 63 million results. I may click on the Wikipedia article and read about them, but what if I have specific questions?

Here is the “AHA” moment – I head over to BiggerPockets.com, type “Short Sales” in the search bar, and either search the forum or articles for short sales. When I searched articles, I came up with 20 articles written by both real estate investors and agents – people who actually work in the industry. When I searched the forums, I came up with many questions people had regarding short sales.

Go do some further digging and you will find an abundance of knowledgeable professionals, investors, agents, lenders, and much more on BiggerPockets.com.

How to identify a good deal in today’s market


Lately I’ve been working with buyers. Not to say I have not been selling homes, but it is a buyers’ market – and buyers are getting great deals on homes, all over the country – as well as in Houston.

Most buyers that I come across tell me what they are looking for, and we find it. One of my goals as a real estate agent is to get my clients the best deal possible – financially. Most of the time my clients have been looking at HAR.com long before they call me, and send me houses they are interested in. This is great. I encourage this kind of behavior, because it gets them familiar with what they want, before we go look at 15-20 homes.

I am going to explain how a buyer can get the best possible deal in real estate, in today’s market. The old saying goes “In Real Estate – You Make Money On The Buy”

I am going to explain this article with a sample deal that I closed as of yesterday. My client got a great deal on his home. Here are the details:

After Repair Value: $85,000
Purchase price: $52,000
Repairs needed: $10,000
Equity Capture: $23,000

You can read dozens of real estate books (I have) and they explain how deals work, but not how to find the right deals. I have my own methods of finding undervalued properties for my clients, I cannot publish on the web because others would take my method – but here are some guidelines to go by:

1.       Find out the after repair retail value
2.       Estimate Repair Cost
3.       Find out purchase cost / closing cost
4.       Work backwards
5.       Submit offer

Step #1: Find out the after repair value
The after repair value, commonly referred to as the ARV, is what the subject house should sell for  – after repairs have been completed. Your local real estate agent will be able to get this information off of sold comparables, preferably in the past 90 days. This information is valuable, because you will begin with the end in mind. If there is a $20-40k variance in the after repair value and the list price, then you are off to a good start. If there is no variance, or a negative variance, than the house is overpriced. In my sample deal, the after repair value was $85,000 – and the list price was $55,000, this was a $30,000 variance.

Step #2: Estimate Repair Cost
Once you have determined the after repair value, you need to find out what repairs the house will need. I would recommend doing a visual inspection / walkthrough of the house with your real estate agent. Ask them what they think the repairs will be. Pay extra attention to the foundation, roof, HVAC system, and any sign of flooding or mold. These repairs are the most expensive, and can eliminate any kind of profit or put you upside down. Have a general contractor look at the house, and give you a written estimate on what the cost will be so you know for sure. On my sample deal, the repairs were $10,000.

Step #3: Find out the purchase cost / closing cost
Ask your real estate agent to find out how much the closing cost will be on your house. If you are financing, you will pay more fees in closing than you would purchasing in cash. Your real estate agent should give you an accurate estimate on what your closing cost expenses will be. You can also ask the seller to pay for some of your closing cost. On my sample deal, the closing cost expenses were $950 total.

Step #4: Work Backwards
Add up your Closing Cost, and Repair value and subtract from the After Repair Value. Now subtract your offer amount, and you will come out with how much equity you will capture on buying the property. If you have a negative number, than your offer amount is too high. The higher the number, the more money you will pocket. So for an example, on my sample deal: $10,000 (repairs) + $950 (closing cost) = $10,950. $85,000 (ARV) – $10,950 = $74,050. Then $74,050 – $52,500 (Our offer) = $21,550 profit.

Step #5: Submit Offer
You can run the numbers and see how much you’ll make based off different offers. Once you find a number you are happy with, then have your agent write up the offer and submit to the seller. Make sure you have determined your maximum offer amount, and stand by your offer. I’ve spent 2-3 months negotiating offers, and it paid off.

Now you know how to analyze a basic real estate deal. Don’t be fooled by the media – purchasing is a great way to make equity in a down market. If you can buy right, you will always be able to sell right..

Flip This House: Finding your deal


The third section of my recommend-blog post entitled “Flip This House” explains how to find the house you are interested in renovating.

There are many houses on the market right now, including short-sales, distressed homes, foreclosures, etc. The question I get asked most is, how do I find the right deal for me?

I am going to go over some things you may want to consider, before you purchase your “flip” house. As a real estate investor, your REALTOR should be able to give you the most accurate advice that makes both logical and financial sense. Hopefully I will raise awareness in your deals, to some things many people will look over.

As I said earlier in one of my previous blog posts, I would recommend finding a house that is less than 10 miles away from your own. My reasoning behind this is that you will be traveling to this house many times (sometimes multiple per day). With gas prices the way they are right now, you do not want all your profit sucked away in gas expenses – as well as time.

Once you have established a few different areas you would like to invest in, inform your REALTOR you are considering an investment property in those areas. Here are some questions you should be asking your REALTOR:

  • How many months of inventory are on the market?
  • What are the average Days on Market for the area?
  • What are the average sales price compared to average list price?
  • Is the area in a flood plane?
  • Is there high crime in the area I am interested in?
  • How are the schools in the area?

You should get a good idea of where you want to put your money, and where you do not want to put your money. The more inventory on the market, the longer your house will sit vacant to sell (unless you price aggressively). The sales price / list price will show you what percent the houses are selling for vs. listed for. For example, an area that is selling at 95% list price is better than an area selling for 81% list price. This could save you thousands!

Once you have found the area you will be investing in, let your REALTOR know your intentions, up front. Some REALTORS love working with investors (I do!), others – do not. If your REALTOR does not work with investors, find one who does.

You should now be considering what type of houses you want to target in the area. Before you purchase a house, the most important thing to consider is how well the house will sell, after it has been repaired. Houses with strange floor plans (walk through bathrooms to get into bedrooms, etc) do not sell fast. Houses with master bedrooms upstairs (in Texas) sell slower than houses with them downstairs. The key idea here is: know what sells fast. If you don’t know, ask your REALTOR.

Typically, I believe you can’t lose with a 1-story, 3 bedrooms, and 2 baths. Those are the easiest houses to sell (in my market!). You should be able to provide your REALTOR with what you are looking for, such as: 3 bedrooms, 2 baths, in X neighborhood, priced below $50,000. Your REALTOR can find that information fast, and will be able to start working on which one to pick. If you want cheap houses right now, have them only send you houses that are foreclosures or corporate listings.

The key idea here is get specific. Get specific as possible. If I did a general search for active 3/2/2’s in Houston I would come up with thousands. If I did a general search for 3/2/2’s under $50,000 in Winchester Country – I would come up with 3.

Note: from my experience, short sale houses dead end deals. Typically, the bank must approve short sales, and this process can drag out over 6 months. If you want to make a deal happen fast, stay away from short sales! Some investors only invest in short sales, but I would recommend you do not start there due to time constraints.

Let your REALTOR know which ones you want to view, and have them run a CMA on the subject property. A CMA (Comparable Market Analysis) will show what you can expect to sell your house for, or After Repair Value (ARV).

The first step is figuring out your ARV. If your ARV is not high enough to make the repairs, pay the commissions, the fees, holding costs, etc – and you do not profit, what’s the point? Don’t worry – that’s why you’re reading my blog! I’ll explain all of this.

After you have determined the ARV, and have comparable, you will see a nice spread between purchase price and ARV. Here is a sample deal I’m doing now:

ARV (After Repair Value): $139,000
Less Purchase Price: $65,000
————————————–
Total: $74,000

That’s a nice profit! Well – that’s not all profit. We have to take more money out before we can get to our goal, Net Profit. But its a start – a good one at that. If you start to see double digit thousands in your totals from this equation, then you’re on the right track.

On my next blog post, I will discuss a truly important skill you must develop – cost estimation.