Thread: Flipping Short Sales VS Wholesaling 4 a Newbie Investor?

I just want to make sure I'm reading your questions right in this post. You're wanting to know the best way to turn a profit off a flip? I think this is the gist of the questions above...

I would start by learning the laws in your state and learning them WELL. The scenario you described in your second list "Flipping Short sales process" above, if I'm reading it correctly, is currently being prosecuted in California & Arizona (to start with) as loan fraud. Yep, Loan FRAUD, people are going to jail for this one. There are quite a few things in your post above that can get you into quite a bit of trouble... at least in the state of Arizona.

For the quick response here, I would suggest you get your real estate license in the state you're located and join up with a broker to learn everything you can. It will maximize your future profits and keep you ass out of jail. Hopefully. As with any other business out there, start working for someone successful in that business. For free if you have to. The information will be invaluable & you'll learn first hand what works and what doesn't.

One thing to keep in mind in this business, just because "everyone's doing it" doesn't necessarily mean its legal. Do your homework, cover your ass & make sure you educate yourself. This business can be high risk but it's also high reward potential (one of the reasons I love it). Someone with the combination of a heart to serve people & business savvy can make quite a living. And there's no time like the present to cannonball into the pool & start making waves.

I agree. Get to know the laws. I do wholesaling personally and have yet to be bitten in the rear. I've always steered away from shortsales. Too much work for not any more profit per deal. It's easier to negotiate with a motivated seller than it is with a bank and the wholesaling process is much quicker and smoother. Here is a creative real estate document I put together for a few guys I mentored. There's all kinds of general information in here from a guy who wholesales regularly. In fact I close in two weeks on a probate. $4500 cash to pocket off a craigslist ad, some gas, and a couple hours of my time. If you decide to wholesale give me a holler. I'll help you out best i can!

Wholesaling In a Nutshell

Wholesaling comes down to 2 things.
1. Finding Buyers
2. Finding Sellers
I’ve heard 2 schools of thought when it comes to which you should do first.
1. If you build it they will come. Meaning find a great deal and you should have no issues finding a buyer if it’s solid. A good deal will bring buyers out of the woodwork.
2. Find buyers first. Talk with them about what they want. Then go shopping with their money.

My first deal…
• What I’ve found is just get started. I had a list of 10 “buyers” built when I locked my first deal up yet no one even responded to my emails for my killer deal. Reason was it wasn’t in the area they invested in. I had a killer deal, but no one to buy it. In this case although I found my buyers first this “deal” wasn’t their style and I had to end up finding another buyer anyways.

My background…
• I like to think of myself as a transaction engineer instead of a wholesaler and I’ll explain later. When I decided to start in real estate I had no idea what I was doing. So I spent 2 years reading, studying, and dabbling. Every millionaire I know has about 60% of their portfolio in real estate. Obviously if I wanted to be big time I would have to know something about real estate investing so I went to work.
• I came to the conclusion wholesaling would be a good place to start because it didn’t require a ton of capital outlay and didn’t require a huge line of credit, plus you could earn as you learn. I owned 2 marketing companies prior to real estate and enjoyed very moderate success with both although I was never able to go full time and replace my engineering consultant salary. However, I could use that marketing experience to spring forward my wholesaling business.

What I do as a wholesaler…
1. Find deals
2. Find buyers
3. Do both as often and as much as I can

Finding a deal…
• First I market for deals. I do this with bandit signs and web 2.0 (Craig’s List, BackPage, etc). I love automating as much as possible.
• You can drive for dollars, meaning you find where investors are buying and then you drive those areas looking for run down pieces of junk. In this case I’ll pull the tax records and find out who owns it. I’m looking for the address to not match. That means a vacant owner. Then I send a letter asking about the property. They may not want to sell now, but perhaps they’ll want to sell later.
• No matter how you do it the key to wholesaling is to find the deals before they hit the MLS. I prefer to market, because I’d rather have a steady flow of deals coming to me.

How to know if you found a deal…
• I’ll stick with single families for now because huge multi-units take on an entire different set of math rules and vernacular. Investors are buying these homes at 50-60 cents on the dollar in this market. That ensures a good capitalization rate, monthly cash flow, and a great return when they sell after the market comes back up.
• I’ll take a $100K house. Multiply by .6. That comes up with $60K. Subtract the repairs, say there’s $10K here. That brings us to $50K. Subtract double my profit (gives me room to work). So my offer would be $40K. I need this property at $40k in order to make any money on it.
• Remember different investors like different deals. Don wants a house that will consume no more than $100k in capital after repairs, and will sell for a minimum of $125K. In this case he’s buying at 80 cents on the dollar which is a great deal in his investing area. He deals in a higher end, lower crime neighborhoods. He’s a smaller, more selective operation. For instance he’s “ramping up” business and hoping to do 3 houses this year.
• Crappier neighborhoods make better cashflow deals because you can get them cheaper. They are easier to unload because more people can afford $15K vs $100K. Investors buy in volume in these neighborhoods. For $100K they can buy 6-7 homes in the same few blocks and control the rent rates. :-) Then when the market swings up they sell. It really just comes down to a matter of preference on the investors part.
• Once I find a deal I lock it up on a contract. Just says I have control of the property for 30 days and they can’t sell it out from under me.

Unloading a deal…
• First I email all my buyers that may be potentially interested.
• At the same time I’m putting up signs, ads, web marketing, flyers, etc.
• If the deal is right it normally sells in 30 days. If it doesn’t sell in 30 days we need to renegotiate a lower price.
• Sometimes I’ll accept a higher negotiated price knowing it has a 95% chance of not selling since some sellers have issues coming down. Usually after it doesn’t sell they are more willing to lower the price and better prepared to take my advice. Then I profit on the deal. Most wholesalers will pass it up if they can’t get it for a certain price. I go ahead and lock it up on contract because I know they will most likely come down. The entire reason they go with me in the first place is because I tell them there is a chance they can get a higher price.

Closing…
• Most investors have a title company they use and I require them to cover closing costs.
• Title company cuts me a check if the investor hasn’t already.
• I drive to the bank with a smile on my face.

Transaction Engineer vs Wholesaler…
There are all types of no money down real estate. The reason I call myself a transaction engineer is because I may not always “wholesale a deal”.
• Maybe I can’t get negotiated to price low enough to make $5-10K. So I point it out to and investor who pays me a smaller ‘finders fee” or “birddogging fee”. Usually $1-2K. And I could honestly care less. It’s still cash to me and I put in less work on these than a wholesale (no contract, no trip to the title company, etc).
• Maybe I assume the loan. There are very powerful ways to take control of property in this market for little to nothing. Sandwich lease, lease to own, rent to own, lease option, etc.
• I love rent to own homes.

Rent to own. Controlling property with no money out of your pocket. An option when you can’t shortsale…
• Keep a list of renters looking to buy, but can’t because they’re credit sucks. It’s repairable, but will need some work. I like to keep it simple. Credit able to be fixed in 1-2 years, 2-4 years, or over 5 years. Most of these people have cash available especially during tax season.
• Find a house going into foreclosure.
• Find out what that owner needs. Often they are ready to move anyways and just need an option that doesn’t kill their credit.
• I tell the seller if they’ll move I’ll pay up the default on the mortgage and keep it current for as long as I can and at no cost to them. Usually they go for it.
• Have them deed the property over to you, get it notarized and registered.
• I then look at my database of renters. Find the best qualified person wanting a rent to own.
• If the mortgage is behind $1500 I charge a down payment of whatever I feel like that day to the rent to own leaser. Say $3000. That way I pocket $1500. I justify this by telling my rent to own tenant that if they execute the purchase option at the end of their lease term I’ll take the amount off whatever price we agreed for the house. I also offer to take a certain percentage of every payment off the price of the house. This is good because they build equity as they rent.
• The catch is if they don’t execute the purchase option it starts all over again.
• 80 something percent of tenants don’t end up buying a rent to own. No idea why, it’s really a good deal for them. That’s just how the numbers work. They end up moving and I start the process all over again.
• On the lease I typically like to sign one for as long as the credit repair company says it will take to repair their credit. If it’s 2 years to repair we do a 2 year lease or 2.5 year lease.
• I like to find houses with low taxes. That typically means the owner has been in there for a number of years which means there will be plenty of equity.
• If a $100K house going into foreclosure only has a $50K debt service that means I can make a substantial amount of cash when I sell. Around $50K. Plus I’m making money in rent the entire time.
• You charge rent a tad higher than the cost of the mortgage payment.

So to conclude...
• You make money up front with the down payment.
• You make money in the middle by charging a couple hundred more for rent than the mortgage payment.
• You make money in the end by selling the home at a higher cost than is owed. If you found the right property with plenty of equity this is easy.
• If it never sells who cares, you’re getting a property, with tons of equity, with no money down, that some one else is paying for. Hell you can even wholesale or retail the damn thing if there is enough equity.
• My favorite part. In a rent to own situation you don’t play landlord. They are planning on buying the home. So if the hot water heater goes out or their dog chews up the carpet it’s up to them to replace it. So long as you screen your tenants well you don’t have to worry about them leaving you in a bad situation at the end of the rent to own lease. Some execute the option to buy, others move on.