I have posted a lot about wholesaling and how I think it should be done on this blog.  Many beginners seem attracted to it because it requires the least amount of capital and has very few moving parts.  In reality I think this is one of the hardest things a real estate investor can do.  You have to compete with people like me and buy the house cheaper than I can, so you can sell it to me and make a profit.  It is possible, but I have most of the benefits namely more money and more experience.

Now let me tell you a story about the niche Mary has found (I changed her name as I didn’t tell her I was writing this), she is a real estate agent and small investor.  One day I put one of my rentals in the MLS for real estate agents to help me rent it.  Not very many people do this, but I figured I would give it a shot.

A week later Mary called me and said she had a tenant she would like to show the property.  She showed it, the tenant wanted it and we scheduled a three way meeting.  All the paperwork got signed and we had three happy parties: the tenant loved the house; I was satisfied Mary delivered the tenant to me on a silver platter (they saw the property and liked it, they filled out an application, and they had a credit check and had proof of income); and Mary got paid.  We have a deal where I pay her between 2.5% and 3% of a one year lease, which is really a bargain (3% of $1,000/month is 12,000 x .03 = $360).

I stopped listing my properties in the MLS, but I still give Mary a list of all my properties and she has helped me rent five or six.  After about the third one I figured out what she does.  She takes my list and makes two or three signed and posts them near my house (not right beside my sign, but close enough).  She then meets the tenants she feels are qualified and does all the paperwork and emails it to me.  If I like them we do a meeting and sign paperwork.

Her model is great because there is not very much competition.  The start-up costs are minimal (just some signs) and the market is huge.   She also gets to make connections with many landlords and learn firsthand what tenants like and don’t like about every property.  The work can also easily be done “after hours” if you have a full-time job.

I think someone could easily generate $1,500 to $3,000/month doing this part-time and learning so much along the way.  You could very easily always have 20 to 30 signs up and just keep a list of tenants and properties rolling.  I know it’s not the most glamorous work but I think the odds of success are astronomically higher then wholesaling.

What do you think?

I am probably on 20 different local real estate wholesalers email list and it seems like the same thing happens over and over again.

Wholesaler A sends an email blast with a property that is advertised as the next greatest deal.  Usually it is beside train tracks and on a busy street and compared to non-location problems.  Fifteen minutes later wholesalers B-F send me a similar email with the same property 5-10k added to the price and a new logo on the top of their email.

That business model sucks!  To be honest I don’t even bother to open most of the emails I get from these people anymore.

Here is how I would do things if I was a full-time wholesaler.

1. Find 2 to 3 large buyers in a hot investment area within 30 minutes from where I live/work.  I will give some ideas on how I would do this at the end of the post.
2. Ask them about their favorite areas,  items that area deal breakers and any other feedback they have.
3. Now it is time to pursue that exact type of product: MLS, mailers, other wholesalers.
4. Every time you get a deal call them directly.  If they say no, ask them what they didn’t like about the property and what numbers the deal would work at for them.  Remember it is important to not be too greedy, if you can find deals that the investor can make money at they will be back again and again.

I think sometimes new wholesalers forget that the investor needs to make a profit if they are going to stay in business.  The guys I know that are most successful at it, almost never have to make more than three phone calls to unload a deal.  They know exactly what every buyer on their list is looking for.

Now if I needed to find a list of buyers there are three things that are pretty easy to do:

1. If you have MLS access, which you should if you are serious about real estate.  Do an MLS search in cities you are thinking of targeting for Closed Sales that had Financing Type: Cash over the last 3 minutes.  Sort it by price and check who took title on each one.  If you see common names those are probably active investors in the area.  Find their phone number (it’s not hard) or mail them if you can’t.
2. Trustee sale buyers have loads of cash and are always hungry for deals.  Hang out and approach the players after.
3. Go to your local Real Estate club and do some old fashioned networking.

So to sum it up: rather than passing Cinderella’s slipper around to many possible princesses why not find your princess up front measure her feet and go find her the perfect slipper?

House #48 was a small and average house on a big lot in a decent area of town, we originally bought it and planned to make it a rental house.  The lot seemed good on paper but in realty it wasn’t easily to expand the property or subdivide the property, so we decided to attempt to wholesale the house while it was in escrow.  The good news was the house needed very little work and was as close to turnkey as anything we buy.

We are a bit different than your average wholesalers.  As we are looking at purchasing properties we are focusing on two strategies: renting it or retailing it.  If we put too many houses under contract we start thinking about wholesaling.

For whatever reason (probably the reasons I mentioned above) I couldn’t get any investors very excited about this house.

At this point most wholesalers would cancel the contract and abandon the deal.  Because we do not want to damage the relationship with the REO company that sold us this deal we decided we would do a minor rehab and try to sell it.

The good news is we sold it just before the New Year, our profit ended up being about 4x what the wholesale profit would have been so it turned out to be a winner. This deal really had all of exit strategies in it: wholesaling didn’t work, retailing did and renting it for nice cash-flow was an option available to.

I just got back from a short vacation and decided to find some time to write this post from the airplane.

House #60 is another fire damaged house we bought, this one in LA County.  It is about 50 miles from us, so we called a couple investor friends and ended up selling this one to another investor.  It is a tiny house; just over 650 sq ft and I think the new owner is going to add a bedroom and a bathroom to make it a more functional 3 bedroom 2 bathroom house.

Closing this took forever, it had code violations and a big fine from the City and the bank who was selling it wanted the listing agent to try to negotiate the fines to something lower.  The bank has absolutely no leverage to convince the City to the lower the fine.  After the listing agent tried multiple times, the bank needed to bring it to upper management to get permission to pay the fine and that is what took the most time.

After closing this deal the day after we bought it, I am reminded how much I like wholesaling houses.  The pay days aren’t huge, but funding conditions, buyer’s credit scores and agent commissions are not my problem.  The whole Buyer brings cash to tables and closes easily.

I recently listed one of the houses we purchased on the MLS with no repairs, asking for a cash-only investor. Trying to wholesale real quick via the MLS.  Sure enough, I got a ton of phone calls the first couple days and some interesting things happened.

The lock-box combo is not in the agent remarks, they have to call or email to get it.  In the first 3 days I got 4 or 5 offers, only one of them had looked at the property.

• One was for exactly 50% of the purchase price, and was very template offer looking… hmm… I wonder how well this strategy works.
• One was 20% down, the Seller carrying the rest at 4% for 30 yrs.
• Another one was for $30,000 under list price, again they didn’t even look at it.

I also got a bunch of interesting emails.

Investors, if you are presenting this stuff to the bank you will never get any of these accepted.

Be sure to read all the notes and write very clean offers.  Include your proof of funds, articles of incorporation, copy of the earnest money deposit check and anything else the listing agent asks for.  You need to make a good impression on them to get the offer presented!

We closed our sale escrow on House #21 yesterday.  The time line when exactly as planned out in my previous post.  The investor who purchased the property is on of the largest in the area and buys a lot of properties, so hopefully we can sell him a couple more.

The profit margin on this deal was not huge, we made just under 10% of the sales price, but really did not do too much, we looked at the property twice and provided the funds for 7 days.

What else is going on?

I am a little behind on posting but we have two additional deals under contract now.  House #22 and House #23.  House #22 is going to be a rental house, it is another one of those deals with some upside (it is on a big 17,000 sq ft lot).  House #23 we are trying to wholesale right now, if not we will do a small rehab and sell it.  It really does not very much work, maybe about $5,000.

We are aggressively looking to buy more as well.  The market is still incredibly hot, tons of offers on everything.

House #15 turned out great, I am going to list it on the MLS right after I finished this post.  House #17 is coming along too, they are putting the granite in right now, carpet should go in on Tuesday and we should list it by Friday and be ready for the weekend traffic.

Things are going along smoothly, we should have 5-6 rentals, with hopefully all of them rented by the end of 2009.  That give us a good start on next years goals!

If you are into or looking to get into wholesaling you will want to know about transactional funding.  A bunch of third party companies have set themselves up to help investors get this process done.

Transaction funding is made for investors who would like to wholesale properties (for the most part to cash buyers).  The entire reason that transactional funders exist is because with REOs and short-sales is the bank does not let you assign your escrow to another buyer.  So this means you have to close your transaction and the buyer has to close their transaction with two separate sets of funds.

So most transactional lenders come in with the money for a 24 hr period to help you close your transaction and one day later the buyer comes in with their own funds to close their transaction.  In the industry, your purchase is known as A to B.  The seller is A and you are B.  All states it varies, but in California the A to B transaction needs to happen for a complete day and the B to C can happen 24 hrs later.

Here is an example transaction:

• You put an REO under contract for $100,000 it needs a lot of work, but you would like to wholesale the deal
• On the original contract it is put in your name AKA Build Bankroll Inc.
• Build Bankroll Inc provides an earnest money deposit for $10,000
• You market the property and find a cash buyer for $125,000
• You draw up a contract and open a second escrow with you as the seller (AKA Build Bankroll Inc) and your new buyer (AKA Rehab King)
  Note: most transactional funders require that you use the same escrow company
• For your purchase escrow you order a Title Insurance Binder, so you only pay for a limited amount of Title Insurance.
• You make contact with a Transactional Lender and they wire $90,000 + fees to your first escrow (you already have a 10,000 EMD)
• Your buyer (Rehab King) funds the second escrow with 125,000 + fees.
• Escrow A to B (Bank to Build Bankroll Inc) closes
• 24 hours later escrow B to C (Build Bankroll Inc to Rehab King closes)
• The escrow company disburses 90,000 + fees + transactional funding cost to the transactional lender and wires you the left over amount

The parties involved:

A: The Bank Selling the Property
B: Build Bankroll Inc (the person that has the REO under contract)
C: Rehab King (your wholesale buyer)

I really have made things much more confusing then they are but that is the detailed steps.

In my opinion if you have any connections who have decent cash reserves they are a much better source of funding.  Typical fees for a transactional lender are 2-3% of the funded amount plus $500 in fees.  The fees usually work on a sliding scale and have a minimum.  So in this deal you’d expect to pay 2% of 90,000 = $1,800 + $500 = $2,300 to borrow 90,000 for two days!  I’d much rather give that to someone I know then a 3rd party.  But it all depends on peoples comfort level with your operation.

Your profit is really effected by this:

100,000 purchase price
125,000 sales price
25,000 Gross Margin
-2,300 in transaction fees
-500 in purchase escrow fees
-600 in sales escrow fees (including a bit of title insurance)
-3,400 to make the deal happen

That is why you need quite a big margin if you are planning to wholesale a property.

As I mentioned earlier we went through our options on House #21 and came to the conclusion that we had many good options, but wholesaling it was the highest on the list.  We’ve bought eight houses in the last 6 weeks and really don’t want to have six retail properties all hit the market in a traditionally soft December/January.   Especially with the “foreclosure moratorium” ending soon (I will make another post on that to share my thoughts).

Here are the steps we took to wholesale the house:

1. Put it under contract
This house had a lot of offers and was listed way low.  We ended up getting it just over list price and we knew it was a decent deal.

2. Confirm Escrow is Open
In this market, I wanted to make sure our offer was for sure accepted before I started marketing it to people.  This would prevent them from trying to contact the listing agent or go around me.

3. Call a Couple Local Investors from my Buyers List

The longer I have been doing this, the more of the players in our market I have been meeting.  It seems like all the big guys know each other and have a good relationship.  We all use the same insurance agents, appraisers, etc.  So after making four phone calls and have a couple people look one of the people called and said he wholesaled it to an investor friend of his who wants to rent it out.

4. Open a Second Escrow (for the Sale)
We made a purchase agreement and sent it to my escrow officer.  The bank picks the escrow company for the purchase transaction, but because I am the seller, I can dictate who does escrow on the sales transaction.

5. Close Purchase Escrow
I got all my escrow instructions.  I made sure to buy a title insurance binder (it’s 10% additional fee). I have to close my escrow like a normal transaction.  I do have to use my funds to close this transaction and I cannot use the buyers funds.

6. Close Second Escrow
My purchase escrow is set to close tomorrow, so I made sure the buyers money is in the sales escrow.  I asked the escrow officer to use my title insurance binder from the purchase escrow, so it saves

7. Get the Check and be Done

When you submit an offer on any piece of Real Estate you will have to provide an Earnest Money Deposit on the property.  This demonstrates that you are willing to take action on purchasing the property and you actually have the funds.Your deposit is a commitment to purchase the property and after your agreed inspection periods are over you have to purchase the property or the seller will keep your funds as damages they’ve incurred for stopping marketing the property and holding costs.

Now the investor’s goal is to put as small of a deposit as possible and the seller would like the largest deposit as possible.

The Standard

From what I’ve seen the standard was $2,000 – $3,000 on properties under $100,000 and $5,000 on properties for sale over $100,000.  A 10% earnest money deposit will show a bank that you are serious about the process, but usually will not overcome a higher offer.  Realize this is a negotiation ploy and it really can show how serious you are without costing any extra money.  I know of a couple different investor who brought in an earnest money deposit at their full price, if that doesn’t show the bank you are a serious buyer, I don’t know what will.

The Process

Depending on your agent, you typically will not need to provide the actual check when you write the offer.  We just write out a check and scan a copy.  In California, the seller typically picks the escrow company.  So you would just write a check out with a bunch of spaces “                              Escrow”.  When your contract is accepted the idea is, you can write in the escrow companies name in the blank space, “West Coast       Escrow.”

The Accepted Offer

More often then not, the seller wants a cashier’s check versus a personal check.  So the original check will be thrown away and you will have to go to the bank and make a cashier’s check.  If you are bringing it directly to escrow always make a copy first and email or fax it to your agent so they can pass it on to the seller.  Sometimes they will take a personal check.

Why is my Agent telling me to write a check in his Company Name?

Some real estate agents sent up what is called a “trust account” for their clients.  They handle money for clients and will pass it directly to escrow.  In my experience this is becoming less and less common as there is a lot of liability that comes with handling this money.  It is totally legitimate to do this as a buyer and it is heavily regulated.  Most agents prefer not to deal with it, as it is one of the most common reason for them to lose their real estate license.

Some things not to do

• Do not ever write an earnest money deposit in for less than $1,000 dollars (especially to a bank)
  This shows that you are in-experienced and do not have a lot of cash.  You should offer a low price if you would not be willing to put a $1,000 deposit up on the property to get it.
• If you get an accepted contract, have the money!
  Real Estate agents can tell very quickly when someone is trying to buy time.  If you do not bring a cashier’s check to escrow promptly (usually within 2 business days of an accepted contract), you will be thrown out of escrow and ruin your reputation.
• Get a Professional Check Book
  There are a lot of fun check book designs out there.  Disney characters, the galaxy, etc.  But if you want to come off as a professional investor try to go with a professional check design.

Wholesaling Properties

If you wholesale properties.  ALWAYS make sure that your buyer’s earnest money deposit is bigger than the one that you put with your purchase escrow.  If the buyer does not perform you want to be able to keep their deposit at damages and not lose out.

So you’ve decided to get into wholesaling, flipping or the rental game.  Everyone has told you to get a strong support team ready to make your business a success.  Picking a good escrow company can make or break your business.

To get to the basics, an escrow company is the middleman in a real estate transaction that ensures the process goes smoothly.  They order title insurance, make sure all necessary paperwork is filled out, cordinate the loan and money, and make sure taxes get paid on the property.  Some State’s use attorneys instead of escrow companies.

There are thousands of escrow companies that all do the same thing and are very hungry for your business, but a good escrow company is hard to find.  They can be the difference between a deal closing or not.

What you are looking for:

• Experienced
  Real Estate can be a tricky business, especially if you are new, you want to make sure your team is experienced.  It is important to find an escrow officer that has 100′s of transactions under their belt and has seen many different types of transactions.  Every delay in a transaction costs you money!
  
  
• Constant Communication and Ease of Contact
  Most escrow officers I know are buried in paperwork.  If you ever go into their office they have boxes and boxes of pending transactions.  They are very busy and every phone call is “urgent.”  You want to make sure you end up getting someone who will respond to all communication promptly.  I have dealt with escrow officers who will only allow me to speak to them through their assistant, this is usually a bad sign.
• Technology Friendly
  I am on email all-day long, I like to receive my prelim, escrow documents, and any other communications electronically.  Some escrow offices don’t get it and don’t have this capability.  Usually, if you’re just looking for a basic update you want to be able to send a quick email and get an update.  So you’re looking for a company that embraces technology and will respond to emails in the same day.
• Investor Friendly
  You want to work with an escrow company who does business with other investors.  There are many things that can really help you along the way.  How to fill out tax forms from an investors perspective, how to ensure your buyers don’t back out, paperwork to protect you, etc.
• Affordable
  Escrow companies can charge a wide range of fees.  Paper Fee, Sub-Escrow Fee, Loan Tie In Fee, etc.  Typically if you promise further business or ask for these fees to be removed, they will be.  Escrow companies try to get away with what they can.  So be sure to always ask if they have any room in the price.  One company tried to charge an $800 escrow fee  for a $45,000 cash transaction.

The problem is in most REO transaction the selling party usually gets to choose the escrow company (although this is negotiable, banks are typically not flexible on this in my experience).

How to start a good relationship, if you can’t control who does the escrow.

• When a transaction starts, call and introduce yourself.  Your goal is to portray that you are an experienced investor, your goal is for the transaction to go quickly and smooth.  After I introduce myself, just as an excuse to call, I say, “I am here to help and want you to feel free to call or email if you need any paperwork or documents from me.  Is there anything you need at this time?”
• Develop a relationship and reputation.  Although, we have worked with a lot of different escrow companies (at the banks choosing).  We have worked with some multiple times.  By the second transaction, I know who to talk too and usually get a discount because they know I am not too difficult and will continue to provide them more business.
• Don’t be afraid to ask questions.  If there is something you don’t understand or need to make the transaction go smoothly don’t be afraid to ask.

On a closing note, if you do not have a relationship with an existing escrow company, the best place is to start is by talking to other investors.  Go to your local Real Estate Investment club, or post on a forum for other investors in your area, there are so many options you want to start in the right spot.