With the wealth of information available to the average cat today, it becomes increasingly difficult to determine where you should start in this business. In fact, the more you study, the more confused you can become. It has happened to me, and I’m sure it has happened to you. It’s information overload, plain and simple.

On the flip side, this is a great business. The benefits of getting your feet planted squarely on the ground will allow you to live a lifestyle others only dream of. The trick is getting started on the right path. So, what is the right path? Well, in my opinion, you should learn how to generate cash first!

Real Estate Is Like a Three Legged Stool

There are three ways to profit from investing in real estate. You can use real estate to generate cash, cash flow, or equity (wealth building). Cash is money in your hand today; cash flow is money over time; and equity is the pot of gold at the end of the rainbow. It’s future potential.

Which of these is the most valuable? It really depends on where you are with your investment program, doesn’t it? If you are just starting out, there isn’t any doubt in my mind that cash is the most important. Cash gives you options. You can improve your lifestyle, build your savings, accelerate your investment program, give to your favorite charity, go on vacations, and the list goes on and on. In fact, if you have been going after cash flow for a while, a shot of cash would probably feel good right about now!

The Mistake Most of Us Make

Truth be known, most of us make the same mistakes. When it comes to real estate investing, we buy a course and go out and start accumulating properties. We think we can garner a healthy cash flow while building equity for the future. We rock along until one day we wake up and realize we’re always broke. Sure, if we can just make it to the end of the rainbow, we’ll get our pot of gold. Or will we? What if something happens along the way? We go broke, or we stub our toe, or we die, or we go crazy (a very real possibility if it hasn’t already happened!). A lot of things can happen along the way.

A Dirty Little Secret

The thing the gurus never tell you is that it’s a hard row to hoe. Single family homes are a great investment vehicle…but they are a break even proposition at best. Sure you should buy with a positive cash flow. But how much is enough? Very few investors take into consideration all of the real expenses associated with real estate ownership. There’s taxes, maintenance, insurance, management, vacancies, capital improvements, debt service, etc. Cash flow can be allusive. The property will always eat more than you expect.

What’s the Answer?

Many people think the way to overcome this problem is by over-leveraging their properties. Buy it for $X, borrow $X+ and put the cash in your pocket; the property still has a positive cash flow, and you go on your merry way to do it again and again.

How much sense does that make? Debt is what causes people to go into bankruptcy. When your liabilities are greater than your assets, guess what? You are bankrupt! Broke! Wasted! The “nothing down” crowd has been preaching this investment strategy for years. But look at all of the bankruptcies they leave in there path. The funny thing is that once they get back on their feet, they make the same mistake again. They never figure it out.

Borrowed money is not profit. It’s a liability, plain and simple. Don’t be fooled into thinking otherwise. If you truly want to experience financial peace, work to eliminate debt in your life. Think about it for a moment. How good would it feel to be debt free? The answer is it feels real good!

Generate Cash First

Don’t misunderstand me. The “buy and hold” strategy has it’s place in your program. It’s a great wealth-building program. But it’s just not the place to start. You need to learn how to generate cash first! The easiest way to generate cash with real estate is through “buying and selling”. Plus, there are a whole bunch of other advantages you’ll gain along the way that will help you accelerate your wealth building program.

There are two ways to accomplish our mission. One is the “buy low/sell high” strategy. Simply put, this is where you go out and buy a property below market and resell it at market prices. The old standby. One of these days, I’m going to have the t-shirts made that say: “When All Of The Other Investment Strategies Fail–Buy Low and Sell High!”

Buy wholesale, sell retail. It’s been going on since the beginning of time. Rehab projects fall into this scenario, don’t they? What a great way to produce a healthy cash profit while doing something worthwhile for your community. The other strategy that most people don’t even know exists, is the “buy low/sell low” strategy.

This is where you find out what other investors (or rehabbers) in your marketplace want to buy, then you go out and get it for them. The profits on these deals are not as great as the retail strategies, but they can be done very fast! For this strategy to be successful, you have to know the market and the players. This isn’t as hard as you might think. You also need to know how to locate the bargains and tie them up with a Contract to Purchase.

Once you have the property under contract, you can sell your contract to one of the players for cash, sell the property to another player at a simultaneous closing, or sell the property to a Joint Venture Partner for a small profit and stay in for a piece of the bigger profits. Once you learn how to structure your offers and contracts, you’ll understand why I refer to this process as printing money, legally! These are the skills you need to develop to be successful. Learning these skills is fundamental to your real estate success.

Pulling It All Together

Learn how to generate cash first! This is a stand alone business all to itself. Then build your cash flow. A well selected property here. A well selected property there. Then concentrate on building wealth. This is a long term program. But remember, you have to stay financially fit to make it to the pot at the end of the rainbow. That’s why learning to generate cash first is so important.

Question:

“Every time I turn around I seem to read something in the newspaper or see something on the news about unscrupulous real estate “investors who are going to jail for illegal schemes involving flipping real estate. Is flipping real estate illegal?

Answer:

Great, great question. And believe me, it’s one I hear all the time. The concept of “Flipping Homes” is really one of symantics. “Flipping” is just another way of saying “buying, and then selling”. Let me be state very clearly that flipping real estate (also known as buying and selling a home) is not illegal in any way, shape or form. There is absolutely nothing wrong with buying a home cheap and then selling it for more then what you paid. Think about this: If I owned a car lot, I would be purchasing cars at one price (wholesale) and then reselling them at another price (retail) — and hopefully turning a nice profit, right? In essence, I would be “flipping” cars.

If I owned a Home Depot, I would be “flipping” everything from power drills to Christmas trees to my customers. What we’re talking about here is capitalism – the free market exchange of goods and services for valuable consideration. Our economy depends on it and it’s a normal way of life for all of us. Businesses “flip” goods and services to us that we, in turn, pay them for. The profit they receive is not unethical. So what about the “flipping” scandals we hear so much about in the media?

To put it simply, real estate flipping becomes illegal when loan fraud is involved. Typically this is because the resale relies on inflated appraisals, fake documents, sales to “straw” buyers who represent original sellers, or “phantom” second loans. There is absolutely nothing wrong with buying a home, investing in it (through repairs or just “riding” a good market’s appreciation), and selling the same real estate for whatever larger value someone is willing to pay. If your buyer wants to pay you substantially more than market value, and they have the means to pay you, then it’s their choice, plain and simple.

Flipping Playstations ®

Let’s look for a moment at the video gaming phenomenon. When the latest gaming system comes out, people will pay insane, crazy amounts of money just to get their hands on one the day it launches. When the Sony Playstation 3 ® was released in November 2006, the stores sold them for $600, give or take. That’s the retail value. But as is typical for the high-end gaming systems these days, the initial supply for the PS3 was far outweighed by it’s immediate demand, and only a handful of people actually got their hands on one the day it launched. Most people who were dying to get one were forced to wait until the next shipment.

However did you realize that a large number of those who were actually fortunate enough to get one weren’t even interested in keeping it? Instead they went right to the online auction arena and let the market do it’s thing. Did you hear about it? On launch day, when the stores sold the precious few game systems they had available for the “retail price” of $600, the buyers were simultaneously “flipping” thier systems on eBay and getting staggering return on their investment — anywhere from $3,000 to $10,000 from the hungry masses of gaming buyers.

Was this illegal? No. Immoral? Unethical? No. What were these systems really worth? Well the “appraisal” value (sticker price) was (and is) $600. But the market determined the value to be in the excessive four figures. Did the hungry eBay buyers know they were paying a price substantially higher than the sellers had just paid for the same system at thier local Wal Mart? Absolutely – and they didn’t care. At that moment, the value of having a game system of their own on launch day was more important to them than the difference between the $600 sticker price and what they were willing to pay online.

How Is Value Determined?

In truth, value is not determined by how much something costs to make or purchase initially, but by what an eager buyer is willing to pay for it right now in an honest, open marketplace. Getting back to the point of this, as I said, what people typically refer to as “illegal flipping” of real estate is actually just mortgage fraud. But the media has for some reason, in it’s glorious ignorance, latched onto the term “flipping” as the buzz word for describing these scams. This is a sad disservice to a world of honest, ethical real estate investors who “flip” for a living.

As a result the media has given real estate investors in general a bad name, because they aren’t focusing on the real problem. The real problem with “illegal flipping” is when investors, mortgage brokers, loan officers, appraisers, etc. get together to create (i.e. fabricate) a better picture of a buyer’s loan package to a lender than that which actually exists. They lie. They do things such as inflating appraisals, gifting down payment, drawing up false w-2′s, manufacturing pay stubs, writing credit letters, etc…
The people who do this often do (and should) go to prison.

However real estate investors who are engaged in the legitimate business of flipping houses (whether as “wholesalers” or “fix-and-flip” rehab investors) are actually playing a key (and under-appreciated) role in stimulating our economy. They shouldn’t unjustly be lumped into the category of “unethical” or “illegal” just because they invest in quick-turn real estate. The bottom line is, if you buy houses at a below-market value, sell them higher for a profit, and do so honestly, ethically and without committing loan fraud, then you are not doing anything illegal. You don’t have anything to worry about.

Frequently, I am approached by investors throughout the country who think they cannot invest where they live because it’s a hot market. Currently, I live in an area ranked as the third hottest market in the country and am still finding great deals. And not only do great deals exist, but they keep getting better!

So what am I doing differently? I’m focusing on doing fewer deals and selecting projects that will result in higher profit margins. Opportunities that will net in excess of $100,000 for rehabbing and at least $20,000 for wholesaling are most desirable. In the past, the average retail value of homes I purchased was about $75,000. Now I purchase homes in the $250,000 range or higher in order to achieve my desired margins.

To achieve these types of margins, I’ve begun pursuing the following types of deals:

Commercial Deals: Although buying, rehabbing and reselling commercial is not my top interest, high margins can be made by buying, improving and holding, or just wholesaling commercial deals. In hot markets there are always people looking for profitable commercial deals. If you don’t have the money to buy the commercial property yourself, consider wholesaling it to someone who has the money.

Land Deals: In hot markets, land is always a wise investment and is usually easier to sell than a home. This is primarily because there are many cash buyers waiting for land to build their dream home. In purchasing land, I look for properties that either have the potential for subdivision or have large parcels of land where a lot or two for new homes can be built or sold to a builder.

Obsolete Homes: In the 50’s, there were many homes built and a significant number were small, one bathroom ranchers. It was the American dream! Unfortunately, many people now believe ranchers are insufficient and worthless. This is a good thing for investors. In areas that are hot and have a number of these homes, investors are usually able to buy these ranchers for less than the value of the lot itself. In purchasing this type of home, I will either tear down the rancher and build a new one or build modern additions to make it more attractive to buyers. The key thing most buyers want is a minimum of two bathrooms. When I buy one of these homes slightly under or at market value, I can usually get about $2 back for every $1 in renovation and additions. If I buy a home for $200,000 and put $70,000 into it, getting $350,000 or more for the home isn’t uncommon. Another obsolete and hot item is a house on the water. Recently, I’ve been seeking small cottages on Baltimore’s waterfront (a.k.a. Chesapeake Bay) with the intent of tearing them down and putting up new homes. I’m able to occasionally buy an outdated cottage for $250,000, put a new home up for $200,000 and retail it for $600,000 or more.

Condos: Builders and buyers can’t build enough of them. Taking old apartment buildings and doing condo conversions is hotter than ever. Do a nice job and make them luxury condos, buyers will be lining up for them. Of course, give consideration to location because condos are more desirable in some areas than others. For example, the Manhattan market demands condos. Everyone wants one. However, many are outdated with old kitchens, antiquated bathrooms and horrendous decorations, especially the wallpaper. Although condos in this area frequently sell for over $1 million, they are small and renovations are only needed to the inside of the units. That’s the bonus for investors – no exterior renovations. An AWESOME renovation will cost about $30,000-$40,000 and sell for $150,000 more in many cases.

Pay Full Price and Still Make Quick Cash: There are always hot spots within hot markets. These are areas where people are lining up and waiting for homes to come available. There are more buyers than available inventory. People will make full price or higher offers the day listings come out, regardless of what the home looks like inside. They just want to get into the neighborhood. In pursuing these deals, I would do mailings in these hot neighborhoods and let people know that I’m looking to buy a home, am willing to pay them full price and can save them the realtor’s commission. I would sit back and patiently wait for the sellers to call. Because it’s a private sale, I would tie the homes up with very small deposits and then look to assign my contract to a retail buyer who is willing to pay more than I am to get into the neighborhood. Since no realtor is involved, I would negotiate a fair price with the sellers and get the benefit of the savings plus whatever the buyers are willing to bid over list price. When dealing in markets where homes sell for $400,000 or more, a $20,000 markup or more isn’t that big of a deal. When getting upwards of a million dollar home, $50,000-$100,000 is almost irrelevant to a motivated buyer.

The good news is this – there are opportunities everywhere, everyday. Think outside of the box and approach deals a little differently. With my focus on higher profit margins and the type of deals listed above, four deals now can net me $1 million or more. Before, I had to do about 100 deals to make that amount of money. For those of you who are ready, there is a ton of money to be made in high-end and hot markets. Don’t let a hot market stop you from doing deals – they’re actually easier to make money in than anywhere else.

Let me ask this one question that should be basic to every real estate investor: What is the key to being successful in real estate investing every month and every year? The answer lies in one simple but very powerful word:

Cashflow!!

If you have a sizeable real estate business that is not generating positive cash flow each month then you’ll soon be learning what Chapter 7 & Chapter 13 mean, or you can do something quick to fix it. By fixing it I am talking about having enough reserve capital and then some to weather the bad times, (or deals) and to make you significant cash right now while you build on your equities and the “home-run” deals being either rehabs or getting tenant/buyers qualified for loans on your subject-to deals for the big kahuna paydays. Now how exactly do you accomplish having a system you can put on auto-pilot that makes deposits into your bank account so you can spend from it month-in-month out…..the answer is:

Wholesaling Houses!

Hopefully you can understand by the few paragraphs above exactly what I’m talking about but if you can’t see it clearly then let me spell it out: wholesaling houses = cashflow! Just my personal opinion so take it for what it’s worth, but if you’re out there doing deals whether a novice or a pro you just need to have some wholesaling techniques in your arsenal. Let me give you some reasons why I back this up form my personal real estate business. A large part of my business focuses on finding properties with existing financing taking over payments…in other words Subject-To’s. To accomplish this you have two key components being deals available and qualified buyers. I spend considerable monies on marketing for both and I always either have more deals than buyers or more buyers than deals. In my world of wholesaling I profit from every venture opportunity that comes along. If I’m out of qualified buyers and have quality deals then I wholesale them to other investors and conversely if I have qualified buyers then I’m networked with other investors having deals and I get paid for bringing qualified buyers their way.

Some of the comments in the above listed paragraph may confuse or quite frankly blow away other previously conceived concepts of what exactly is wholesaling. If you think you’re just going to call up a Realtor to bring you no-brainer can’t-miss deals from an MLS listing that hundreds of other investors are looking at and you to wholesale it making thousands while they make a few hundred…….then get real! Sure you can find wholesale deals in MLS, and I do, but what about gaining access to the property to let your wholesale buyers see it? What about that earnest money of $500 or more that a Realtor is going to require? What if you are going to be able to close on the deal in the time frame of contract? What are you going to do if your wholesale buyer needs help with financing? My point listed above with Realtors is they are a great source for wholesale deals, but my friend that is just the “tip of the iceberg”! There are more opportunities out there with independent sellers than with MLS properties where hundreds of other investors are snatching up the deals the minute they hit the system. Unless you’re a Realtor tied to the pulse of the MLS system and realistically have an “inside” line to deals coming across then your ability to consistently wholesale deals is by no means impossible but rather limited.

Now that I’ve hopefully steered you into a mentality thinking of finding those deals we need to revisit the “why” of wholesaling houses and that is cash! With cash deposited in your bank account you can pay your bills and expenses just like the next person. So many times I will come into and counsel investors that drop their corporate job like a hot potato just knowing in their heart they have found their niche in real estate investing. While that may be so true, they will focus on rehabs taking months to complete for the big payday or gather some subject-to deals making a monthly spread but it is still a ways down the road before their buyer qualifies for that loan payoff making a five-figure payday. I am sure there are investors contrary to what I have stated above that right from the start they do what I call “hit the home-run deals” on those big paydays. For the other 99% of investors in the “real world” you first must solve your cash flow personal needs before progressing. Shall we say walk before you can run?

Why I think wholesaling will get you as an investor quicker there than any other means in real estate is in this example. With a wholesaling deal you should make on the average anywhere from $3,000-$5,000. That will equate to what would be upwards of needing 20-30 rent-income producing properties possibly on a monthly basis to cashflow to that amount and you just now made it off just one wholesale deal—-and that is if all paid their rent on time! What if you can (yes, you can!) multiply that to 5-8 deals or more a month? Now you have significant disposable income to take care of your personal needs, weather deals that may not be cashflowing, and let you focus on your real estate business without panic on deals such as rehabs that take a while to come to fruition. If there were only one all-encompassing manual on how to become a truly successfully real estate investor, then after the table of contents you would find the first chapter on cashflow! Cashflow literally is the keys to the kingdom in successful real estate investing. I hope you will use wholesaling houses to get you there cutting as much of the learning curve off as possible. Good hunting as luck has absolutely nothing to do with it.

There has been a lot of negative press and misinformation lately about double-closings. Many people have been indicted recently under what the press has labeled “Property Flipping Scams.” Misinformed lenders, real estate agents and title companies will tell you that double-closings are now illegal. In fact, they are nothing of the sort.

A double closing is simply two back-to-back closings wherein the proceeds from the second closing is used to fund the first closing. Both closings are done in escrow so that the “middleman” can buy and resell a property for profit without using any of his own cash. The middleman profits because he buys the property below market and resells it for market price. This process has been done tens of thousands of times over the last 100 years – legally, ethically and PROFITABLY!

The so-called “illegal property-flipping schemes” work as follows: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are insured by the Federal Housing Authority (FHA), the government authorities have investigated this practice and arrested many of the parties involved.

Despite the negative press, neither flipping nor double-closings are illegal. The activities described above simply amount to loan fraud, nothing more. Newspapers have inappropriately reported the activity as illegal “property flipping,” rather than simply “loan fraud.” So, whenever you hear a real estate agent or mortgage broker say, “flipping is illegal”, you know they are misinformed. The misunderstanding of the flipping business has not been without consequence. Many title and escrow companies simply will not do a double-closing. Fortunately, there’s many that still do double closings, but they are also keeping a close eye on potential fraud (as they should).

Some lenders have placed “seasoning” requirements on the seller’s ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer’s loan. This may be a problem if you bought a property cheap and are reselling it quickly for a profit (the good, old American way!). This should not be confused with LAW – it is simply an underwriting guideline for some lenders. Of course, guidelines are just that – by going up the chain of command, you can generally get approval from loan underwriting by showing the property is being resold for a higher price because either it was purchased in a distress situation (e.g., foreclosure) or that substantial repairs were made. Keep good records of your repairs to show to the lender.

If the buyer is getting an FHA insured loan, there is no way around the “seasoning” issue. FHA regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days, NO EXCEPTIONS. This generally should not be a problem in a fix-and-flip situation, since it will likely take you 90 days by the time you acquire, rehab and sell. But, if you are planning on buying the property and reselling it in a double-closing, the end-buyer CANNOT go with an FHA loan.

Bronchick’s Rule #14: Always Remain in Control of Your Deals!

A smart investor should stay on top of the process and anticipate these issues. If you are buying a property and reselling it quickly, particularly in a double closing situation, you must anticipate this problem and deal with it. Let the buyer, his real estate agent and his lender know that there may be a seasoning issue. If you stay in control of the loan process and steer your buyers to a mortgage company that doesn’t have a hang-up with double-closings, then seasoning won’t become an issue. Generally speaking, only FHA and subprime lenders have the “seasoning hang up” – FNMA underwriting guidelines do not prohibit funding a purchase money loan where the seller has not owned the property for a minimum period of time.

If you do get into a last-minute jam in a double-closing situation, there is a solution, which is called a “reverse assignment”. You simply assign your contract with the end-buyer back to the owner and step out of the deal. Your “consideration” for doing so, is the profit you would have otherwise made. This consideration can be documented in writing and secured by a lien on the owner’s property to be paid to you at closing.

There has been a lot of talk lately about flipping properties. Folks are swarming to real estate seminars in hopes of finding the golden egg; the one that will make them rich on their first deal so they can live on a mountaintop in Hawaii. Guru’s tell you how easy it is and convince you to buy their programs that will teach you how they did it. As a guru myself, I have to defend both sides. Can you get rich investing in real estate? Absolutely! Is it easy? Actually, it is. They key to success lies in the individual. Are you motivated? Are you willing to invest time to learn a new business or are you going to give up after just a few attempts? Do you like dealing with people? Do you truly want to help homeowners in distress or are you just looking for a quick buck? Do you have a negative attitude and look for reasons why something won’t work? Are you willing to work hard or are you simply looking for a get-rich-quick scheme?

These are a few of the questions you need to realistically ask yourself. I have taught many seminars in the past 10 years. There is always someone who comes up to me telling me how they have tried everything and nothing worked. Typically, the person is so negative, it’s no wonder nothing works. Folks, you can find a million excuses as to why you can’t be successful. If the truth be told and you really took a good look at who you are, it’s most likely you. I truly believe that anyone with a real desire and a good system to follow can be successful. The key is to follow a system that works. Many gurus teaching today are teaching you concepts that worked 10 years ago. It’s been so long since they actually closed a real estate transaction, they are unaware of the changes in the market.

I began teaching because I had a strong desire to help others have financial freedom; it’s definitely a calling. I remember the days when I mailed the phone bill to the electric company and the electric bill to the phone company just to buy time. I’ve had my phone, electric, and water cut off at one time or another. I have let the bills slide so I could buy food. I’ve had to park my car down the street so it wouldn’t get repossessed. So how does a former waitress become a millionaire real estate investor? By sheer determination. I truly believe that if you have a strong enough desire to be successful in this business, you will! So, if real estate investing is so easy, why doesn’t everyone do it? I believe it is a lack of exposure. I teach folks how to wholesale or flip properties. Every time I teach, I ask folks in the audience how many of them know what wholesaling is. Usually about 10 percent of audience members raise their hands. This means that 90 percent of the people in the audience have not been exposed to the concept. I want to expose you to the greatest way to get rich investing in real estate: Wholesaling.

Why do some call it flipping or quick turn, while others use the term wholesaling? It depends on what you heard first. Insiders use the word wholesaling. Let’s make that step one to success: using proper terminology. Wholesaling is a simple concept that has been around since the days of Adam and Eve. One person has something to sell and another wants to buy. A wholesaler puts these two people together. You’ll get paid to be the middle man. Let’s look at it in simpler terms: When you buy groceries you are buying them for more than the store paid for them. The store is the middle man. They buy groceries for less and sell them to you for more. You are going to do the same thing only with real estate. You’re going to find homeowners in distress and put them together with rehabbers. Rehabbers are investors who specifically buy houses to fix up and sell retail. They are always looking for good deals. If you can supply them with a steady stream of properties, they will keep you very busy.

Seems simple enough doesn’t it? It truly is if you’ll do it right. So how does one “do it right?” Follow these steps and you’ll be on your way to a hefty paycheck: First, you must find homeowners in distress. There are many ways to advertise what you do: Run ads in the paper that state, “I buy houses cash”; place business card size ads in school newsletters; call local churches and charities to let them know that you are a real estate investor who helps folks that are behind on mortgage payments; place “I buy houses” signs on street corners; wear hats and T-shirts stating what you do; call homeowners listed in the public records who have filed for divorce, bankruptcy, or foreclosure, landlords who have recently evicted tenants, folks who have not paid real estate taxes, and people going through probate; place magnetic signs on your car; go door knocking; and much more.

There are many reasons homeowners find themselves in distress: Job loss, illness, downsizing, job relocation, divorce, death, pay cuts, and more. Just searching for foreclosures limits your business. I have bought many houses from people who were transferred, unable to sell the property before the move, and couldn’t afford to make two mortgage payments. Even though the payments were current, the situation was headed for distress. Don’t limit your thinking. Once you find a homeowner willing to work with you, go to contract. Get a real estate sales contract from the local board of realtors or an office supply store. Fill it out making yourself the buyer. Give the homeowners a $10 dollar deposit to bind the contract. Yes, homeowners will accept $10. I have never had anyone tell me no. Once the contract is signed, get busy finding another investor (a rehabber) who will buy the property wholesale.

To find an unlimited supply of rehabbers, run an ad in the local paper that states you have houses in foreclosure. When they call, get their contact information and keep it in a database. Each time you get a property under contract, contact the investors on your list. If the property is priced right, it will sell. Another great source for rehabbers is to attend local REIA (real estate investor association) group meetings. These are monthly meetings attended by real estate investors, mortgage brokers, real estate agents, and others specifically looking to work with real estate investors. Once you find a rehabber, simply assign the sales contract to him or her and this person will close on the transaction in your place. You’ll get paid an assignment fee for putting the deal together. The closing will take place at a title company or an attorney’s office. The rehabber can arrange the entire closing. All you have to do is show up and collect your check.

So I’m sitting at Starbucks this week just typing away (not very fast, mind you; I only use two fingers total) when my piece of crap iphone that doesn’t work ever starts ringing…

“rrrrrrrriiiiinnngg…”

Me: “Yeah.”

Intruder: “Yo! Preston! It’s me, Dave – your favorite student! I just flipped a house for a $15,000 assignment fee. I happened to be in your neighborhood so I thought I’d call you and say ‘thank you for making me rich’ for the thousandth time in my life!”

Me: “I’m at Starbucks on Howard Ave. Stop on by and tell me about it.”

I love it when my students close deals because I learn something new every single time. In this particular case it was more of a reminder than anything though. And I thought it might be helpful to you to pass it along, just in case you’re not doing this already.

First of all, the seller in this case was a landlord who had received a postcard from Dave literally more than a year ago. This doesn’t surprise Dave at all because at the top of all his postcards he puts the words “Save This Card!” Apparently he’s accustomed to people doing what he tells them to do. I dig that about Dave.

Dave uses an answering service that literally fills out his leads sheets for him. So when he calls a seller back, he already has the comps in front of him and can negotiate on the phone if the situation warrants it.

Question You’re Asking Yourself: When does the situation warrant it?

Answer I’m Answering Yourself: When the seller’s asking price is relatively close to something you’d be willing to offer based on the ARV you’ve estimated from the comps.

If the seller’s asking price is way off from where you want to be, simply fax them an offer. That way when they start cursing, you don’t have to actually hear it. Then maybe fax them another offer once every 30 days thereafter, and reduce the offer amount every single time (put a line through the offer price and write a new lower one in place of it and initial it. We don’t do that latter part, but it just came to me, and frankly, it sounds like a genius idea. I’ll test it and get back to you).

Back to the story…

Dave pulls the comps in the MLS (cuz he’s a realtor for some weird reason) and determines the value is around $228,000. He calls the seller and asks how much he wants. The seller says “$80,000.” Dave faints.

When Dave “comes to,” he tells the seller he’ll call him back. He then has an imaginary conversation with his non-existent business partner.

He calls the seller back and lets him know he spoke to his business partner (he leaves out the “imaginary” part) who has told him they can only do $70,000, but (and here’s the moral of the story)…

We will pay all your closing costs.

Now, here’s the thing with closing costs – people think they’re way more than they actually are. The seller probably felt that considering we were paying all closing costs, he was still getting close to his asking price. In reality, we’re talking about maybe a thousand bucks or so.

So he said “ok.”

Dave marketed the deal at $85,000 net (“net” meaning – the new buyer is responsible for all closing costs), and, in his words, his “phone rang off the hook like it was 2006.” LOL I loved 2006. Didn’t you? Selling houses was like passing out free bricks of gold to people who loooooove bricks of gold a lot. I’m not sure who that is.

Dave could have made more money on that deal. But Dave doesn’t care. Because now a lot of buyers in our market consider Dave a genuine wholesaler with really good deals (unlike all the other wannabees). And they’ll pay special attention to any new properties he gets in. The value of this can not be overstated.

I highly suggest you aspire to be like Dave. He has the right stuff. How could he not, with a coach like me???

Make it happen.

My Father always reminds me that nothing helps a Salesman’s attitude more than making a sale. It doesn’t have to be a home run… any sale will do! The same holds true for Real Estate. Nothing positively impacts a Real Estate Entrepreneur’s attitude more directly than making a sale. And the quickest way to make a sale in Real Estate… is wholesaling!

Dear Friend,

Real Estate truly is an equal opportunity employer. There aren’t any forms or applications to fill out. No interviews. No time clock. In fact… there really aren’t any educational requirements at all. You can learn as you go..

Becoming successful in Real Estate Investing is an evolutionary process. Through solving problems… we become more educated in this business. The more solutions we develop… the more educated we become. The more educated we become… the more success we enjoy. Solving one set of problems leads us to another set of problems. Thus… we evolve.

The funny thing about this process is… we are slow to utilize the solutions until we encounter the problem. The solutions are floating around us constantly… yet we don’t see them because we have no immediate need. Once the need or problem finally manifests itself… we will run to all ends of the earth for the solution… when all along… the answer was in our own back yard.

Which brings us to our topic of discussion… Cashing-In On The Wholesale Real Estate Market. It’s part of the evolutionary process of a Real Estate Entrepreneur. It offers solutions to a whole bunch of problems you either have… or will encounter. It’s a tremendous tool that unfortunately most will never discover… or more unfortunately… ever utilize. And it’s available to everyone. Read on to find out how you can put this powerful tool to work for you…

What Is The Wholesale Real Estate Market?

The Wholesale Real Estate Market is what I like to refer to as the Buy Low – Sell Low market. It’s where you go out and control a piece of Real Estate (house) under some set of price and terms that renders it more valuable to another investor. This investor could be in the Buy And Hold business… the Rehab And Retail business… the Rent To Own business… or in the Wholesale business.

You are buying below market and selling below market… quickly picking up a spread in the process. This spread could be $500… $2,000… $10,000… or more. Not to shabby considering that these deals can be done in very short periods of time… and often without any of your own money invested. We’ll talk more about this later… but first let’s examine something we’re all more familiar with…

Automobiles

Most of us are familiar with the automobile industry. We have to be. Owning and learning how to drive a car is essential in most parts of our country today. Automobiles are big business. Inside this industry you have the manufacturers… the distributors… the dealers… etc.

The Manufacturer builds and sells cars at one price. The Distributors buys the cars from the Manufacturer and sells them at another price. The Dealers buy the cars from the Distributors and sell them to the end consumer at their final retail price.

Everybody knows that each of these links in the chain must make money… or the system would collapse. You could say that the Distributors and the Dealers are wholesale buyers… although at different levels. Because of the capital intense nature of the new car business… this is somewhat of a closed system. You have to buy your way in… if you can get in at all.

The Used Car side of the game is a little different. You can become a Used Car Dealer on a shoestring. A Used Car Dealer acquires his inventory from several different sources. He buys at auction… he buys trade-ins from New Car Dealers… he buys from the general public… and he buys from other Used Car Dealers. Successful Used Car Dealers have an unbelievable network of wholesale buyers and sellers. Pricing at this level is ultimately driven by the retail market… what an end consumer would be willing to pay.

Let me tell you a little story to further explain this market. I haven’t bought a New Car in almost 20 years. I like the Used Car market for several reasons. First of all, I can save a tremendous amount of money by purchasing a 2 or 3 year old vehicle that looks and drives like new. In fact, all cars are Used Cars as soon as the muffler passes the curb. Secondly, I like dealing with Used Car Dealers. I learn something new from them every time I buy or sell.

A couple of years ago I decided it was time to upgrade my vehicle. I was driving a 1989 Chevy Caprice Classic. A baby blue four-door with good rubber… high mileage and slight hail damaged (no insurance). I wanted to buy a Suburban for my wife to haul the kids around. So I called my favorite Used Car Dealer… “Red” Smith. “Red” said “If you’ve got something to trade…come on down… I’ve got just what you’re looking for!” “Red” knew that to make a deal with me… or anyone else for that matter… we’d have to be looking eye-to-eye. Plus… he was qualifying me. If I was serious (motivated) about buying a car from him… I’d have to get my little butt on down there.

So… I did.

Guess what? When I got there… they didn’t have a Suburban on the lot. “Red” asked me if I had other transportation… which I did. He asked me how much I would take for the Chevy… cash money… on the spot. He had a buyer on the phone… and was ready to make a deal. “One spot left on the truck leaving tonight. Sell the trade-in now… and we’ll find you just what you’re looking for later.”

I love this kind of action. Pure business. Deal making by the minute. Well… I didn’t sell my car that day. We did agree on a trade-in price that I was willing to accept on the purchase of a Suburban. Over the next couple of weeks I was called back down to the lot 3 or 4 more times to check out the latest phantom Suburban. “Red” was running me through the ringer… but I was taking notes. I spent quite a little time in “Red’s” office waiting on someone who was bringing one of the phantom Suburbans over for me to look at. During that time I witnessed “Red” buy and sell several vehicles at the speed of light. Some of them he looked at… some he never even saw. He conducted a lot of business on the phone. And I do mean a lot of business!

Anyway… we finally made a deal. “Red” was persistent… and I held steady. I got what I was looking for… at what I considered a wholesale price. “Red” made money on my trade-in and on the Suburban. He never owned either one of them. You see “Red” wasn’t trying to hit a home run. He was trying to make a little money off a lot of different deals. He wasn’t greedy. He knew that there was more than one deal.

The Same Market Exists For Houses!

Wholesaling houses and wholesaling cars have a lot in common. In fact… you could learn a whole lot by applying these same methods. The thing that makes wholesaling work at any level is the speed at which business can be conducted. The margins are smaller than if you did the necessary work… and took the corresponding risk… to bring your product to the retail market.

In wholesaling… it’s important to remember… you’re not trying to hit a home run. It’s base hit… base hit… base hit. You can’t get greedy. It’s imperative that you leave room for your buyer to make a profit. In fact… to keep your market viable… your buyer must make a profit. You must become the source of profitable transactions.

Conversely… when you’re buying… you must provide benefits to the seller also. When buying wholesale… you have to be prepared to do business. The biggest benefit you can provide is peace of mind. You can provide this benefit by making offers quickly… following up in a timely manner… taking care of the details… and closing fast! Remember… when you are buying property wholesale or sub-wholesale… price is a secondary issue. You have to provide superior service.

The Top Ten Reasons
Why You Should Add Wholesaling To Your Business!

* You are finding more deals than you can physically, emotionally or financially buy.
* You are buying more deals than you can physically, emotionally or financially support.
* You don’t have another source of income to support your lifestyle.
* You don’t have any money… or a readily available source of money.
* You want to make money with Real Estate but you don’t want the hassles of tenants.
* Your acquisition program is right on track but a shot of cash would feel good.
* You want to accelerate your acquisition program.
* You want to improve your lifestyle.
* You are tired of dealing with the banks.
* You are tired of being broke all of the time.
* Baby needs a new pair of shoes.

Here’s How The Game Is Played…

O.K… Your phone rings. It’s someone who wants to sell you their home. You qualify them over the phone and determine that you should go and meet with them. During your meeting they agree to sell you their home at a deep discount for cash. You whip out your trusty Real Estate Contract (you do have one… don’t you?) and sign the deal up.

Now what?

Well… just as you have done a good job of prospecting for Sellers… you’ve also done a good job of prospecting for Wholesale Buyers. You’ve established good working relationships with other investors who are interested in buying houses below market. You have quizzed them about their buying criteria and ability to close fast. The table is set.

You pick up the phone and start calling. “Hey Joe! Fast Eddy here. Want to buy a house you can make some money on? (yes) Can you close quick for cash? (yes) Good! I’ve got just what you’re looking for… but you’ll have to move fast. When can I show it to you? The sooner the better? Great! I’ll be buy to pick you up in 30 minutes. I’ll buy you lunch while we’re out.”

Joe likes the house. He agrees to buy it for $20,000 cash. Your contract price is $17,500 cash. Your profit is $2,500 cash. You buy lunch and take the rest of the day off. Not bad!

Prospecting For Wholesale Buyers

This part is not as hard as you might think. Chances are you already know other investors who are interested in buying. They are your friends… business associates… competitors… confidants… etc. They are either currently buying… or would like to be buying.

Talk to these people. Find out what they are looking for (buying criteria). What would they buy? What wouldn’t the buy? Can they buy for cash? Do they have good banking relations? Can they close quickly if they found the perfect deal? What have they bought in the past? And here’s the most important question of all…

Are they going to be hung-up on how much money you’re making… if you can get them exactly what they want? Basically… you’re asking them if you can do business together. Believe it or not… there are some people you can’t do business with. Discover this early… and move on to someone else. There are plenty of investors who will appreciate you helping them locate properties. These are the ones you want to do business with.

If you don’t know other investor already… that’s O.K. There are two good ways of locating Wholesale Buyers:

1. Join your local Real Estate Investment Club. Most cities have such a club. Ask around. Creative Real Estate Magazine 619-756-1441 ($72 per year. Ask about specials) maintains a Free Listing of all of the clubs in the country with contact names, phone numbers and meeting times. If you don’t have such a club in your town… consider forming one. They are a good way to share information and get to know each other. This is a great way to get to know other investors… as well as… find out who you can and cannot do business with.

2. Run an ad in your local paper. What should it say? How about… Handyman Special, Cheap, Cash, 969-6969… or Fixer-upper, Must sell fast for cash, 969-6969… or Way Below Market, Must sell fast, Cash Only, 969-6969. You get the idea. Put an ad in the paper that you would respond to… if you were prospecting for bargains. Leaving Town, Must Sell Fast, Bargain Price, 969-6969. Well, you could be leaving town on vacation if you could sell this house for a tidy little profit to another investor.

Don’t wait until you’ve found a property to wholesale to locate a buyer. Start prospecting for wholesale buyers right away. Wholesaling works because you can know… with some degree of certainty… that a property can be sold fast before you even agree to buy it. Building relationships with wholesale buyers accelerates this process.

Protecting Your Position

Once you have a house tied up with a Contract to Purchase or Option to Purchase… your first consideration should be protecting your position. If you are concerned about the Seller dealing off the bottom of the deck… that is… selling to someone else during the term of your contract… consider putting your position of record at the County Recorder of Deeds office.

There a several ways to do this… you could make your contract recordable… but then the whole world would know under what price and terms you are purchasing. This could give away your negotiating position. Filing a Memorandum or Affidavit stating you have a Contract to Purchase or Option to Purchase… along with the legal description of the property… should be adequate to put the public on notice of your interest in the property.

This… in effect… clouds the title as to any other purchaser. You would have to be dealt with in some manner (cash?) in order for the Seller to deliver good and marketable title. This is an inexpensive way to protect yourself and can be done on a self-help basis.

Probably the best way to protect yourself is by being up-front and honest… completely above board… staying in communication with the Seller… doing what you said you would do… and closing quickly. The longer you drag out a transaction… the more fertile the grounds become for problems to arise.

I’m not trying to scare you here. It’s just something you should be aware of. I have never had a problem with this. Knock on wood. (Ouch!) I like to deal with Sellers who have a problem I can solve… and who appreciate me solving it. I rely on my sixth sense gut reaction a whole lot. It’s not very scientific but it works! If a deal doesn’t feel right, I back off and work on something else. I don’t need the hassles and neither do you. Avoiding problems rates up there with accessing opportunities with me.

Bu… Bu… Bu… But! What About The Closing?

O.K. Here’s where your skills as a transaction engineer will pay off for you in a big way. Let’s say you’ve done everything you’re suppose to do. Found a motivated seller… reached an agreement to purchase the property… put it under Contract to Purchase… located a Wholesale Buyer… struck a deal… and now your ready to close. What do?

This is where working with a knowledgeable Closing Attorney or Escrow Company is essential. But, I’m getting ahead of myself. Let’s look at your options first.

Option #1: You could assign your contract to your wholesale buyer and let them close. Cash money and they step into your shoes. In theory this sounds good. But, you are giving up a certain degree of control. Not my first choice… but a viable alternative.

Option #2: You could close on your contract and at some point in the future… close with your wholesale buyer. This requires the ability to close. But, if you don’t have the resources available to close this becomes an impossibility. I will use this option only when there is a timing problem with the resale… and… I wouldn’t mind owning the property. Still, not my favorite method.

Option #3: You could close the purchase and sale simultaneously. There are several methods of doing this. You can close with the Seller then with the Buyer. Two closing statements… two deeds. You could reverse this process and close with the Buyer first. You could have the Seller deed the property directly to your Buyer thus staying out of the chain of title completely… and have two closing statements… one from the Seller to you… and one from you to the Buyer. You could have everybody sitting at the same table… or you could separate the parties by time and/or space.

I like option #3 because it doesn’t require me to have the ability to close. I don’t have to tap into my resources for financing. And why should I. It’s a waste of everybody’s time since the Buyer is going to have to arrange financing anyway. I also like the direct deeding approach. There is absolutely no need for you to be in the chain of title. It can only lead to liability problems, and it simply isn’t necessary. I have closed many transactions where the Seller and the ultimate Buyer were sitting at the same table, but I prefer to keep them separated.

The truth of the matter is: Nobody needs to be there at all! This could all be done through the mail… with all of the documents going back to the closing attorney for disbursement of funds. It’s your responsibility to direct this process. Do it any way you feel comfortable. Insure your success by using a Closing Attorney or Escrow Agent who can get the job done with the least amount of problems.

Do’s and Don’ts

Do incorporate wholesaling into your present business. Don’t be greedy. Do prospect continuously for Wholesale Buyers. Don’t waste time with people you cannot do business with. Do become a source of profitable transactions. Don’t let your lack of capital keep you out of the game. You can play without it. Do business with a Closing Attorney or Escrow Company who can close your transactions simultaneously without hassles or creating problems. Don’t try to hit a home run on every deal. Go for the base hit.

Wholesaling is a great business. If you haven’t been involved in this market, why not give it a try. It’s a great way to raise cash quickly. And best of all, it’s available to everyone.

Best of Real Estate Success!

Scott Britton

Question: Steve, when flipping houses, how do you approach the need to adapt your real estate investing business to a changing market?

Answer: Markets go up and markets go down. And many people feel you need to make major adjustments to your flipping homes business as markets change. Whether your market is sizzling hot or is very slow, you’re still investing in real estate based off the same formula. There’s a reason why I use those same formulas. They’re there to protect me, to help me manage my risk regardless of market conditions and ensure I’m profitable as often as possible.

I’ve been through both up and down markets, and my experience has taught me that if you’re using the right formulas for flipping houses, your business will most often need only minor (if any) tweaking based on the market. Now at the time I’m writing this, my own market (Baltimore area) has just come off an extreme “up” wave, but is now cooling off a bit. I may be backing off of the formula just a little bit. So it’s a slight tweak; but it’s nothing major.

When the market was hot, I was reluctant to start paying more for properties like many others did. At one point, I did start paying a little bit more, but it was really very miniscule. I didn’t make major adjustments and start paying 5% more for properties just to be able to have a deal. I may have been willing to pay a percent or two more than what my standard flipping homes formula told me I could pay to pick up a deal.

Otherwise I Just Stick To My Formula

Now as I said, even though things are cooling a bit now, in recent years the values in my Baltimore market have gone way up. Rentals have also gone way up. I started out in this market where rentals were averaging about $550 to $600 per month. Well that same rental is now probably $1,200 to $1,500 and up. So you might have to make small adjustments if you’re dealing with that dramatic of a change.

My Standard Formula For Buying A House To Fix And Flip Is:

After Repaired Value (ARV), times 70%, minus estimated repairs = the most I can pay. This is a standard formula many investors use. It’s not original or magical. It just works more often than not.Now when I’m buying a house to flip wholesale, keep in mind that I will have to back my intended wholesale profit off that number as well. The investor I’m selling to is likely to be using a formula very similar to mine, and he expects and deserves a good deal.

From a real estate flipping point of view, as long as you’re sticking to a good formula, you should be buying low enough to be profitable. The formula allows for adjustments in the market to keep you safe. So if you stick to the formulas that work, those that are proven, those that are time tested, then the fluxing market really shouldn’t affect you all that much.

I always have question asked of me , such as, I’ve recently started going to meetings of my local Property Owner’s Association, and I think they’re great. The problem is, there’s so much information that I don’t know what to pay attention to! Every month, there’s another speaker with another opinion on the “best” strategy for this or that. I’m overwhelmed, and can’t seem to get out and actually do anything. Please recommend a course of study that will help a new investor make a nice, simple deal.

Here’s my answer. I’ll go you one better than that; I’ll tell you the absolute best strategy for buying and selling property…or would that be less than helpful?

New investors who attend real estate association meetings often come away with the same “paralysis of analysis” that you describe. There’s so much information available, and so much of it appears to be contradictory (buy foreclosures…don’t bother with foreclosures…buy to hold…buy and sell) that one wonders how anyone ever figures it all out. And adding to the problem, every successful investor is willing to defend to the death their strategy as the best strategy. Although they’re trying to be helpful, they often add to the confusion experienced by newbies trying to make sense of it all. In my experience, new investors that don’t start making offers in the first 2 to 3 months never get around to doing it at all. The fear of doing deals only fades with the actual doing of deals; no amount of “book-larnin” will ever give you the confidence you want. So stop trying to learn everything, and focus on what you need to make the first offers. Those things are:

1) Some idea of what you want your real estate to do for you. Know this, and you’ll have a good idea of the exit strategy and the type, condition, areas, and price range of properties you should be looking at. Want quick cash? You’ll need to wholesale properties. Looking at anything other than 1-family junkers is a waste of time. Eliminate other properties and from your thinking and move on.

2) A working knowledge of how your one exit strategy works. Building on the last example, once you know that wholesale deals are sold to cash buyers for 60%-70% of as-is value, you know a) how to calculate an offer and b) that you need to start finding buyers now.

3) Two or three strategies for finding the types of properties you want. Whatever your chosen strategy, finding the good deals will consume most of your time and energy. So try 2-3 methods all at once for a few weeks. Discard those that fail and amplify those that work, but always use more than one way at a time.

4) The ability to evaluate the properties you’re viewing. In the case of junkers, you’ll need to know how to find the after-repaired value and the cost of the repairs. Don’t worry about figuring out what the property will rent for; it’s not important to your plan. Conversely, if your plan is to buy and hold multis, you’ll need to learn how to calculate the return on investment.

5) A team and a contract that will keep you out of trouble. Why do you need to know how to do a title search when there are folks who do it for a living? Sure, it might be good to know later, but it isn’t crucial for you to know right now. And if you have a well-written purchase contract that allows you to get out of a bad deal before it closes and an experienced mentor that will help you through your first few deals, how can you lose?

There. Now instead of a billion things to learn, you have 5. Now get out there and make some deals.