Good morning folks!
I’ve had alot of people ask me about wholesaling real estate lately. Which is why we are having Alex and Kathy Schuck coming on Oct. 15th to discuss the ins and outs of wholesaling. All details on the event are here. I personally love wholesaling because you don’t take ownership of the property. Once you have the property under contract, you assign the contract to rehabber who will close on the property in your place. There is little to no risk in wholesaling and usually you can put the property under contract with little money down. You can make a nice profit from properties you don’t own. So, how do you do it?
First, you need to find a property
If you are marketing correctly, your phone will ring. There are many ways to find properties. You can generate leads online (for a free consultation on how to do this, contact Bernadette@BostonAREIA.com), you can do yellow letter campaigns, hang bandit signs (We buy houses) and network letting everyone you know you are looking for properties. There are many folks out there who are in distressed situation who need to sell their property fast. Nowadays, they are online typing in Sell my property fast, looking for cash buyers in MA, real estate investing in Boston, etc… So, whatever your strategy is, make sure you are online as well. People are looking to close quickly and they are looking for cash buyers. Once you find the property, you need to make sure there is enough money for everyone to make money. Make sure that you take lots of pics of the interior of the property to support the rehab estimates. So, how do you make sure there is enough money in the deal for everyone?
You need to get an accurate ARV (After Repaired Value). Be sure you know the area that you are working in and have comparables (comps) of similar properties that have sold within the last few months. Be sure to keep these comps in a file for the property. It will make life easier on you and your rehabbers who you will assign the property to. It’s great to say that the ARV is at a certain level, it’s much more powerful if you have the proof with your presentation. Don’t have access to the MLS to get comps? Make friends with an agent and tell them what you are doing. If you agree to refer property owners to them whose houses aren’t a good fit for a rehabber for listing the property, usually they are willing to help.
Ok, so your starting point is the ARV. You will need to subtract the following from the ARV to get your maximum allowable offer (MAO):
Your wholesale fee ($10k, $5k, what do you want to make on the property?). There is no standard fee associated with wholesaling. I’ve seen wholesalers make upwards of $100k on a property. It really depends on the price you negotiate with the seller. If there is room in the deal for you to make more money, then make more money.
What a rehabber will want to make on the property (A good guideline is if the ARV is between $200k-$300k, they will want to make between $30k-$40k and as you go up in $100k increments, increase this number by $10k. For example, the ARV is $300k – $400k, your rehabber will want to make between $40k-$50k)
Rehab costs (keep a list of repairs that need to be done and your estimated costs. For example: 1. New kitchen – $20k, New bathroom – $10k, New Roof – $20k, New Septic – $15k).
Financing costs – a rehabber who is putting a property under contract will typically use a lender that is charging 3-5 points and 10%-15% for the term of the loan.
Holding costs for the length of the rehab (is it going to take 8 weeks or 12 weeks? They have to pay the bills on the property like the electric bill and such, so include holding costs).
Contingencies (usually rehabbers like a 10% contingency for those oops moments when something unforeseen comes up).
Closing costs – Broker fees, title transfer, attorney fees etc. There will be a traditional sale when the rehabbed property goes on the market and this is something they have to pay.
So, now that you have your MAO, reduce your offer by 10%, so that you have wiggle room to negotiate with the seller. An example and I’m using made up numbers that are easy math.
- ARV – $300K
- Wholesale fee – $10k
- Rehabber profit – $40k
- Rehab costs – $60k
- Financing costs – $20k
- Holding Costs – $10k
- Contingency – $10k
- Closing costs – $10k
- MAO – $140K
- Start your offer at $126k
I know that might seem low, but, if the numbers don’t work for everyone, they won’t work. Once you have your MAO, make your offer. This can be done verbally and followed up with a contract. You can use Realtor sales contracts approved for MA. Oneof the first lines on the sales contract is a place for the buyers’ name. Put your name and the words “and/or assigns” after it. This will allow you assign the contract to the rehabber.
To make the contract binding, you have to leave a deposit with the homeowner at the time of signing. Some folks say if the seller will go for it, you can put down $10. I’ve seen contracts written on a napkin in a bar with $1 deposit before. But, this amount will need to be negotiated with the seller.
Whatever you offer as the deposit, speak with confidence. Say something like, “Typically we offer a ________ deposit and we close within 45 days, that won’t be a problem, will it?” Once you have the property under contract, put your packet with comps and rehab costs together and market the deal to rehabbers your know.
Next: Start marketing to your buyers list.
Make sure that I am #1 on that buyers list (Bernadette@BostonAREIA.com). I say that because I have a huge buyers list in Boston and surrounging areas. I can usually help you find a rehabber to sell the property to. Everytime you go to a networking meeting and you meet other investors, ask them if you can add them to your buyer’s list.
Call the “We buy houses” guys that you see their bandit signs everywhere. Let them know that you are a wholesaler in their area and are wondering what kind of properties they are looking for and can you add them to your buyer’s list.
Every time you get a deal under contract, email and text your the deal to your list. Remember, the faster you find a buyer, the faster you get paid.
Next: Negotiate a deal with your rehabber
If you do your numbers right, you won’t have a problem getting your assignment fee from the rehabber. Just make sure you present the deal properly. Don’t just call and say this is what I’ve got. Present the comps, list out the rehab needed on the property, show your numbers and not that you are talking out of your….lol. Once you find the rehabber and assign the contract with an assignment contract, it’s off to closing.
Next: Prepare for closing
Using your investor-friendly title attorney, move towards a closing. The beauty is that they do all the work for you. All you have to do is find the deal, wholesale it to your rehabber, and go to closing. The closing company does the rest. Don’t know an attorney in the area? Ask, I do and your rehabber may have an in-house title attorney.
Last – Cash the check
It really is as simple as that. Many people complicate the process and feel like it just can’t be that simple. But, it is. The difficult part is finding the deals. So, make sure you have your marketing systems up and running. If you are the one with the deals, then you are in control. Everyone wants to be your friend and it allows you to cherry pick projects that you may want to do if you decide you want to rehab properties as well.
Hope this was helpful and hope to see you on October 15th.
Bernadette Trafton, Boston AREIA Chief Connector