Why do so many people FAIL in real estate investing?
I’ll tell you: They don’t think outside the box.
They compete with other people for common real estate deals, maybe on the MLS, or for foreclosures, or for Zillow properties…
Who isn’t trying to buy cheap foreclosures?
That’s definitely one successful strategy, but that can’t be your only strategy.
So, I believe that some people also fail because they rely on conventional strategies like bank loans that require more cash and make you clear more hurdles to get started. Or they’re looking for a magic pill to make money with no work. They turn to investing models they don’t understand, like buying apartment buildings.
New investors who are short on money, resources and experience should go the entrepreneurial route of investing in real estate. They should be transaction engineers.
If you’re a real estate entrepreneur or a transaction engineer, you are a creator. When you’re an entrepreneur, you spot challenges and create new solutions that have value.
And you’re resourceful. You can buy low and sell high without any money. Because you’re creating value, you’re able to do deals.
When I got started in real estate at 26 years old, I had zero experience.
I found a problem: Cleveland had a significant number of foreclosures, pre-foreclosures and overleveraged properties.
My solution: I met with sellers, negotiated with banks to get properties at a discount, and then flipped properties to cash and retail buyers. That is a real estate transaction engineer.
SO WHAT’S AN INVESTOR?
A real estate investor is really somebody who invests their own money.
They have capital, and they invest in rehabs, multifamily units, private equity funds or a syndication of apartment buildings.
They’re looking to get a return on their investment.
WHOLESALING: THE ULTIMATE DEAL FOR TRANSACTION ENGINEERS
Is it really possible to get started from scratch without experience, money, credit, or risk?
It is possible, with wholesaling.
Wholesaling is getting a contract on a house and selling your contract for a fee. You’re not actually selling the house and you’re not marketing and selling the house. You’re marketing and selling your contract.
Here are the basic steps:
- Find a house at a discount
- Put the property under contract to buy it (but don’t actually buy it)
- Find a cash buyer to pay more than your contracted price
- Collect the difference or an assignment fee at closing
Before we go through these steps, let’s meet the players involved in this deal.
PLAYERS GONNA PLAY
First, you’ve got your sellers. Why would someone want to wholesale their property?
People are attracted to wholesale offers for a variety of reasons:
- deferred maintenance
- lost a job
- inherited a property they want to sell
Remember, you’re making them a cash offer for a problem property they’re just ready to get rid of. You’re offering to save them time and money by skipping the Realtor and any repairs they might have to make if they listed the house traditionally.
Second, you’ve got your buyers. These are the real estate investors. They might be rehabbers, landlords, or turnkey buyers. They’re looking to make a profit just like you. But unlike you, their profit will either be based on considerable time and money invested (rehabbing) or on a long-term investment (landlords).
If you find the right people, wholesaling is a win-win-win, and as the transactional engineer, you set all of that up.
HOW YOU ACTUALLY MAKE MONEY
There are 2 ways to close wholesale deals.
- There’s either an assignment contract where you sell your contract to someone else for a fee.
- Or you can do a back-to-back closing where the purchase and the sale take place on the same day.
With an assignment contract, you don’t buy the property. You transfer the deal to your cash buyer for a fee, and they close with the seller.
The assignment contract should list the property address and seller and explain the terms of your agreement: how much the cash buyer is paying you and when they are paying you. They can pay you right away or they can pay you through an escrow agent or closing attorney when they close on the property.
You and the cash buyer need to sign, and the seller needs to sign too, acknowledging that they now have a deal with the cash buyer.
Make sure you’ve got a lawyer to look at the assignment form you’re using, to make sure you’ve covered all your bases. It should include language that protects you from liability or obligation.
MEASURING ENGINEER SUCCESS
How much should your assignment fee bring in?
To me, real estate is like baseball runs, and it’s all about the amount you walk away with from a transaction. In wholesaling:
- Single = $5,000
- Double = $10,000
- Triple = $20,000
- Home Run = $40,000
- Grand Slam = $60,000
CLEARING THE AIR
Why would the seller allow you to assign your contract to a cash buyer for a fee? Why not work with the cash buyer directly?
First, when you signed the original purchase and sale agreement, you became a principal in the transaction. The original agreement has assignment language in it allowing you to flip your contract to somebody else for a fee.
Second, when the seller signs that original agreement, they’re under contract with you. They cannot back out of the contract, sell the property to somebody else or list the property with a real estate agent. You’ve got a legally binding contract.
Still not convinced a seller would ever go for this?
My friend, Joe, just did a wholesale deal for a $37,000 assignment fee. The seller did not care that Joe made a $37,000 profit. The seller just wanted the house sold, and Joe got the house sold.
Now, if you have any concerns that your seller is going to back out (even though legally they can’t), you can save yourself some headaches with a back-to-back closing. You can buy a property for $100,000 and then sell it the same day for $137,000, for example.
In that case you have 2 separate closing statements, and you do need the funds to buy the property (so you can own it from the time it takes to close the first deal to the time it takes to close the second). There’s a lot of private lenders who fund deals like this (this is called transactional funding). They will probably charge 2% plus a $500 closing fee.
Let’s do some quick math…
On a $115,000 purchase, 2% is $2,300, plus a $500 closing fee. If you’ve got a $37,000 assignment fee like Joe, $2,800 would be worth it to keep the deal and save some headaches with a back-to-back closing.
Okay, so that’s how you actually make the money…
But how do you set up the deals?
First, you need a list of buyers.
How do you find buyers with no money to spend on direct mail?
Think like a transaction engineer…
Take out a Craigslist ad and list a fake house that’s similar to one you would actually buy. You could list something like this:
4 bed, 2 bath, split level
Needs a lot of work: new roof, kitchen, carpet and paint
Seeking a cash buyer able to buy as-is
Will sell fast
To include a price for your listing, use a website like Realtor.com. Search the city or neighborhood you’re targeting, find the average price per square foot and list your property well below that.
Now the rehabbers will start to call—they see a house listed for half price and know they can flip it and make a profit. You ask for their contact information and BOOM, you’ve got a buyer lead…
Let them know that the property they called about isn’t available, but you’re doing similar deals in the area. Find out what kinds of properties they’re interested in, at what prices, and you’ll know how to match up your buyers with your deals.
Another strategy to find cash buyers is to Google your market for cash home buyers or real estate investors. Call them up to find out whether you might be able to work together.
Keep in mind that on the first page of your search results, you’re going to have a lot of ads and “institutional websites.” Keep going to find the individual investors you want.
FIND THOSE SELLERS
Once you’ve got a solid list of buyers, it’s time to find a property.
How do you find motivated sellers willing to sell below market value?
Use the “We buy houses, all cash” message. The real question becomes how many different places you can get this ad out to…
Here are some ideas:
- Online ads: Craigslist ads, Facebook ads and posts
- bandit signs
- newspaper ads, small local publications and newsletters
- direct mail letters and postcards
- T-shirts (You’d be baffled at how many leads we get because I wear a house flipper tee)
The message is essentially the same for all these media.
For direct mail, I find properties on Craigslist in the Houses for Rent section, or I use a list of recently filed eviction notices. I lead with “WE BUY HOUSES, CASH” and then tell the property owner that I buy properties in their area in any condition.
I personalize it by handwriting their property address and my phone number and name with a Sharpie, so they know I’m really interested.
LET ME MAKE YOU AN OFFER
When a seller calls about an ad, always start by getting their contact info, in case you get disconnected. You want:
- phone number
- property address
- The comp properties should have the same number of bedrooms and bathrooms (or very close)
- Square footage should be within 20%
- Search for properties sold in the past 6 months
- Search for properties on the same side of any major roads or railroad tracks
- Comps should be the same type of property: ranch, colonial, split-level
So when you get to the property, you should already know the ARV based on comps. Then when you’re in the house, do some quick ‘back-of-the-napkin math’ to add up the repairs. And then you can present the seller an offer on the spot.
Use this formula:
0.7 (ARV) – cost of repairs – assignment fee = your offer
But don’t just make that offer. You’ll need to negotiate.
Start by asking the seller what price they think is fair for an all-cash offer that closes within a week (and you cover the closing costs). When they give you that price, you should always ask if that’s the best they can do…
I’ve had sellers drop the price by $5K or even $50K when I ask that question.
Points to bring up in negotiations:
- Cash offer
- Quick close
- Closing costs
- Securing financing
- List of needed repairs
Once you’ve agreed on a price, get the property under contract and use an agreement with a walkthrough addendum so you can bring your partner or contractor through.
HAVE I GOT A DEAL FOR YOU
Now contact that list of buyers about this amazing deal…
Send them lots of photos and details. It’s well below market value, and you can walk your buyers through the house if they want.
Work out a deal with your buyer for more than you paid (that assignment fee you subtracted from your offer earlier). And BAM, you made a profit as a transactional engineer, just by paying for a little marketing and investing your time.
No cash, no credit, no loans, no risk.
You solve the seller’s problem, you get the buyer a great property at a discount and you get paid to put the deal together because you are a transaction engineer.
TIME TO ENGINEER
So if you’re willing to be resourceful and creative, work hard and follow a system, then being a real estate engineer is definitely for you.