I was wrong. And I wasn’t just “a little bit” wrong, either…
No, I was the “totally-in-your-face-super-incorrect” type of wrong.
As mentioned in my previous post, before I had spent much time in the world of real estate investing, I thought I needed a ton of cash and/or a fat bank loan in order to get started in this business. And, boy, was I wrong.
You see, owning real estate and controlling real estate are two different animals, and the ability to correctly distinguishing between these separate concepts can have profound implications…
…especially when you’re just starting out as a relatively new investor (like I was doing) with little more than big hopes and bigger dreams (true story).
Which brings me back to the craft of real estate wholesaling.
Essentially, a wholesaler is someone who (i) hunts down discounted properties then (ii) pairs the properties with cash investors who are looking for good deals. And the results, I’m happy to say, can translate into big paydays for the wholesaler – who never actually needs to buy or sell anything.
Wholesaling 101, A Step-By-Step Overview
Let me take a moment to break down the wholesaling process into baby steps.
If you’re new to this business, then the following overview will hopefully help you understand what I’m talking about.
And if you’ve been in the game for a while, then stick with me here, because it was good exercise for my brain to revisit this stuff on a step-by-step basis, and it might likewise be good for your brain to have a similar “refresher” course.
Step #1 – Marketing to Distressed Sellers. You (the wholesaler) put out some marketing that searches for distressed sellers. Common examples of distressed sellers include:
- Homeowners facing job losses
- Homeowners facing foreclosure
- Homeowners moving out of state
- Homeowners who have inherited an unwanted property
- Homeowners who are simply tired of being a landlord
- Homeowners with distressed (ie. “ugly”) properties
Step #2 – Negotiating with the Distressed Seller. You negotiate to buy the property from its distressed seller for cash, at a significant discount to the property’s “retail value”. The property’s “retail value” is the higher price for which a distressed seller would normally be able to sell his property – if he wasn’t in such a hurry to unload the thing.
Step #3 – Signing Your Contract with the Distressed Seller. Once you and the distressed seller agree to a low sales price, you place the property under contract for eventual purchase (typically within 30 days of signing, for distressed sellers). In your contract, be sure to include a little phrase immediately after the buying entity’s information that says “and/or assignee”. (Example = John Doe and/or Assignee).
When you sign a contract to purchase the property, you gain what is called “Equitable Rights” to that property. These equitable rights, combined with your contract’s terminology for “and/or assignee”, give you the right to immediately re-market the property to other buyers. At this point in the wholesaling process, your search for another buyer becomes your top priority.
Step #4 – Marketing to Cash Buyers. Once you have placed the property under contract, you immediately begin marketing that property to your pre-crafted list of potential cash buyers. Your goal is to find a cash buyer who is willing and able to purchase the property at a price that is (i) substantially higher than what you contracted to pay and (ii) still lower than the property’s normal retail value.
When you find that cash buyer, then BOOM! The difference between your distressed seller’s contracted value and your cash buyer’s ultimate purchase price represents your profit as the wholesaler.
A Note About Closing Transactions
Now there are two equally valid ways to close a transaction and get paid – the “Assignment” method and the “Double Close” method.
Both approaches have certain advantages and disadvantages…
…and if you want to close wholesale deals as deftly as Mariano Rivera closed baseball games, then you’re going to need to be as familiar as possible with each of these methods:
The Assignment Method
- How It Works. To close a wholesaling deal with the Assignment method, simply “assign” your cash buyer to the role of stepping into your shoes with the distressed seller’s contract. You charge an “assignment fee” for this process, which is similar to the commission that a real estate agent would earn – but because you are a principal in the transaction you do not need a Realtor’s license to wholesale properties this way!
- Advantage #1. The Assignment method is the easiest way to wholesale a deal. Once you find your cash buyer, you simply need to fill-out a one-page assignment form that “assigns” your rights in the original contract over to your cash buyer. Then you simply kick your feet up and wait for the deal to close – at which time you will get paid your assignment fee out of escrow.
- Advantage #2. The assignment method is also cheaper than the Double Close method, as I will describe next. A Double Close transaction requires two separate sets of closing costs, but the Assignment method only requires one set of closing costs (paid by your cash buyer).
- Disadvantage. You can forget about privacy with this approach, because the major disadvantage of assigning a contract is that everyone involved in the transaction will learn how much profit you are making. This transparency can get weird, especially if you are making a HUGE profit (for basically doing nothing and taking no risk). For this reason, I only use the Assignment method if I am making $10,000 or less in profit.
The Double Close Method
- How It Works. To close a wholesaling deal with the Double Close method, simply use your cash buyer’s money to fund your purchase from the distressed seller. Think of it as two transactions (A-B and B-C), in which you play the “B” role as a distinct middleman. In the A-B transaction, you buy the property from the distressed seller. In the separate B-C transaction, you sell the property to your cash buyer.
- Advantage. The major benefit of using the Double Close method is that fact that nobody other than yourself sees how much profit you are personally accruing. For this reason, I always use the Double Close method if I am making more that $10,000 – or if the other parties involved appear to be unusually skittish about this sort of thing.
- Disadvantage. The major downside of this approach involves the fact that you will have to deal with two different sets of closing costs.
If I Was Able To Figure It Out, Then You Can Too
Sound too good to be true? That’s what I thought at first, too…
But after doing this stuff for many years, I’m here to tell you that the fact of the matter is this: the wholesaling process almost always tends to unfold quite simply, just as I described above.
And if I was able to figure it out, then you can too. Yes, you can become a real estate wholesaler – and, with a little help, you can get “up and running” in no time!
Still not convinced? Okay, I get it… Theories and concepts are fine and dandy for some people, but other folks prefer to learn through practical examples…
So, here’s a story describing one of my recent wholesaling deals, in which I “assigned” my rights to a cash buyer and netted a $10,000 profit. (Not a bad day’s work, eh?)
The Short & Sweet Story of 602 W. 5th Street (Tempe, AZ)
Thanks to one of my awesome “absentee owner” postcards, I recently received an indication of interest from a 60-year old gentleman – named “HA” – who wanted to sell his house (built in 1925 and located next to Arizona State University).
By quickly establishing good rapport and asking several strategic questions, my team and I soon uncovered Mr. HA’s real motivation for selling: His property was old and damaged (ie. “distressed”), and he had lost his desire to wrestle with all the necessary repairs. He was throwing in the towel.
Fair enough, right? Absolutely. It was almost time for Step #2 – negotiating.
After a bit of market research, I estimated the property was worth about $110,000 in its current condition. And if my seller had decided to renovate, rather than throwing in the towel, I estimated that the property would have been worth upwards of $200,000.
With these things in mind, I offered $45,000, just to test the waters and see what Mr. HA would say. This is where negotiations began…
He said the offer was too low, and when I inquired about his lowest acceptable price, he wouldn’t show his cards. So, I went out on a limb and offered $55,000, only to get the same response. Mr. HA was playing hardball, and I had to play along.
I then informed Mr. HA in a follow-up phone call that my “final offer” was $65,000, but he once again shot me down and said he would accept “nothing less than $70,000”.
Was this more than I originally wanted to pay? Heck, yeah!
But I knew that the property would sell to a rehabber or landlord, because it was so close to ASU. (Location, location, location!) So I agreed to Mr. HA’s $70,000 price tag, and he agreed to meet me at a nearby Starbucks the next day.
Our meeting at Starbucks was really quite easy, because I had already printed out all the contractual paperwork beforehand. After shaking hands and saying “hello”, I agreed to pay all closing costs and Mr. HA agreed to a 30-day closing schedule – including a 15-day inspection period…
…and voila! We signed the contract and I left Starbucks with equitable rights for the property (Step #3).
I didn’t technically own the house, but I controlled it.
Almost immediately after returning to my home office, I shifted mental gears and commenced my efforts to find a good cash buyer (Step #4).
Using my Mobile Marketing Machine software, I sent a mass email (and text messages) to approximately 250 local cash investors, advertising the property for $92,500. Within minutes, my text messages generated a solid response from a local investor who had immediately driven his car to the property for a curbside inspection.
This interested buyer offered me $80,000 cash, and he guaranteed his ability to close within 10 days. When I received no better proposals during the next few hours, I accepted his offer and sent over my one page Assignment Form, which he immediately signed and sent to escrow (along with a $2,500 non-refundable earnest deposit).
Less than two weeks later, I received a check for $10,320, consisting of my $10,000 profit ($80,000 minus $70,000) and my $320 earnest money refund! (Cha-ching!)
With only 2-3 hours of work, I helped my buyer get rid of his unwanted property, I sold to an eager investor (who would subsequently remodel and rent the property for student housing), and I earned some significant cash – in less time than it takes some people to watch a movie!
So the bottom line of it all is that wholesaling represents a very simple and straightforward strategy for netting significant cash as a real estate investor, once you get comfortable with the terminology.
As long as you possess a decent understanding of your local market (reasonable prices, active participants, etc.), you can execute some very lucrative wholesaling deals without breaking a sweat.
The key is to stay calm during negotiations, stick to your plan, take your time, maintain good rapport with your seller, and provide solutions for people who need them. In the end, you will close deals with this approach.
And if you don’t close one specific opportunity, then you’ll close the next. As long as you are continually learning from each attempt, then there’s no such thing as “failure”, and you can’t go wrong.
So here’s hoping that my recent success with the Assignment method lights a fire in your belly and gets you pumped-up to earn some quick cash through wholesaling – that is, if you weren’t pumped-up already!
In my next post, I will break down a recent wholesaling deal where I used the Double Close method to make over $29,000 in less than three hours worth of work.
See you then.
Trackback from your site.