Many potential real estate investors aren't sure how to get started. They don't have the money to go out and buy houses and they don't have the knowledge and contacts to pull the deals together yet. Because of this, they start out as bird dogs or wholesalers.
Bird Dogging, Not As Easy As It Looks
It takes some searching, some digging, some talking to potential sellers, learning their stories and gaining their confidence. Then negotiating an agreement that someone would be willing to pay you for. After that, there is building relationships with your market – rehabbers who can actually close on the place and will not cut you out of the deal. Credibility and trust are key elements on both sides of the deal along with understanding what price will get you the deal.
Wholesaling Is An Art In Itself
Wholesaling gives you some more security in that you actually have the property under an assignable contract that you sell to the investor. The subject of assignable contracts will be held for another day. The investors know what the deal is and can take it to closing if it meets their requirements. In this case you have to have a valid agreement and a deposit. It will cost you a little cash, but many owners of distressed properties will accept a hundred dollars.
Some may not take you seriously with that small a deposit. However, if that is a problem, perhaps it's not the deal for you – or you may need to polish your negotiating skills. As Ron LeGrand is fond of saying, “you can't lose a big check if you don't write a big check.”
What Makes A Deal?
Whether you are bird dogging or wholesaling, the elements of a good deal remain the same. Just becauses a property is advertised as a fixer or appears to be selling somewhat below market doesn't mean a rehabber will jump at the opportunity you are offering.
First of all, if a place is listed, even as a fixer, rehabbers are usally already aware of it. Second, those actively promoting a fixer upper, whether owner or agent, are usally thinking in terms of owner-occupants who will fix the place for themselves. For example, a house with an after repaired value (ARV) of $100,000 that needs about $20,000 in repairs will often be offered at between $70,000 and $75,000. This is not a bad deal for someone who wants to make the home their own... but for a rehabber, the numbers just don't work.
I get emails all the time offering properties with projected ARVs and estimated repair costs that show the place to be a wonderful opportunity. The reality is that some are and some are not. Here is where you can gain the confidence of your potential buyers by doing your homework and increasing the accuracy of your figures.
Starting with the ARV
We all tend to be optimistic about the deals we propose, but to get this right, you have to throw away your rose colored glasses. You will not get a good number from Zillow.
Take a tip from realtors and find 3 or 4 recent sales (not listings) of similar properties – in the same area. That means do not use properties on the other side of major boundaries, like municipalities or major highways. They may look similar but there are other factors that may not be obvious.
Look for homes with the same level of finish you are looking to accomplish. Here is where Zillow can be helpful as the pictures can tell you something about each property. You are not looking at the absolute price, but at the price per square foot. That is how you can compare 1400 sq ft homes with 1550 sq ft homes and make some sense of it. Then drop the ARV a few thousand as rehabbers may be looking for a quicker sale and not go for top dollar.
Add In Expenses
Next you have to estimate repairs. This will come easier with time and I've almost always found these estimates kind of a suggestion that didn't always come close to reality. Experienced rehabbers will do their own estimates, but the closer you are to reality, the more your numbers will be trusted in the future. Develop relationships with a couple of contractors and get a some real world estimates until you can come close yourself.
Now you know that the place could be worth and you know what it will take to fix it, you are set to start contacting investors through ads, the local REIA, or whatever method you use. Right? Wrong!
There are a few items to factor in to your proposal. First you will have to include the acquisition cost as well as the selling costs – if using an agent or not. Then there is the not insignificant carrying cost of the money borrowed for the project.
Then you can't forget the 10-15% for profit for your buyer. If this is not there, there is no reason for anyone to do the deal.
Once you have all these numbers, you can figure out what you can offer for the property – oh yes, there is one more thing: your profit! It may take a few times to get it right, but each time you will gain experience that will help you do better next time. As John Maxwell says, “sometimes you win, sometimes you learn”.
Beating The Pros
When you find a property that looks like a good deal, others may have found it as well so you have to act fast. In the heat of the moment you may want the deal so badly you push the numbers a little just to get the agreement. You will find it is not difficult to outbid the professional competition. The danger here is that you offer enough to get the deal, but you have just priced yourself into a position where there is not enough meat on the bone for your buyer – the place doesn't close and your credibility is damaged.
The second caveat is to sell directly to the rehabbers or landlords. You may find other wholesalers hungry for deals that will pick yours up only to try to assign them to other investors. Here again, this can lift the price to a point where the real buyers can't make money and the deal won't close.
In either case, instead of beating the pros, you will have beaten yourself.
Wholesaling Into The Future
Some people make a nice living wholesaling one property after another. However, if they don't figure out how to keep a house now and then, it just like a job where you have to keep working all the time coming up with deals rather than developing the ongoing residual income that means you don't have to keep turning the crank to keep the dollars flowing.