Since initially writing my best-selling home study course on wholesaling / house flipping, I get an ongoing stream of e-mails from people asking me a lot of the same questions. Many of them are from nervous would-be house flipping investors who are understandably anxious about making those first few real-live offers. The idea of signing their name to a contract is petrifying, and the images of what they might be doing wrong are all too vivid to the newbie’s imagination.

A lot of these emails go a little something like this one:

“Dear Steve,
I recently looked at 20 homes for sale in my area. After inspecting the houses, I decided to make 2 offers, but in each case the seller’s Realtor just laughed at me. I mean, they really laughed hard! I’m not getting any offers accepted and I’m becoming very discouraged. I don’t think that we have deals like you do where I live. Can you help me? It just seems like most homes in my area sell for the full asking price or more.
-Discouraged Newbie”

Looking at the facts in this email, its obvious to me that “Discouraged Newbie” is making at least one — maybe even two mistakes I see so common to new investors.

1. Not targeting motivated sellers, and/or
2. Not making enough offers.

The Elusive Motivated Seller

In my neck of the woods (Baltimore, MD area), most homes tend sell for their full asking price and above as well. It wasn’t that way when I first got started investing, but it’s been a hot market for a good while now. And while it can be a good deal easier for me to sell a house than many people, I find that many people in my area complain about not being able to find a good deal anymore. With the market so hot, even a fixer-upper can be sold at-or-near full value. So why would a seller want ot deal with me, an investor?

Sounds like a picture similar to the one “Discouraged Newbie” just pained, right?

Understand this: The only difference between me and “Discouraged Newbie” is that I concentrate on the sellers who are motivated to sell. I mean they have a real reasonto sell, not just “want” to sell. And this reason is big and weighty enough to make them willing to sell to me for notably less than full price. Typically, these are banks or individuals who have a vacant property which needs work. I stress the word “vacant” for two reasons:

1. Vacant properties are nothing but trouble for the owners, and
2. 99% of the properties I have bought over the past three and a half years have been vacant.

Now maybe you’ve heard all this before. Maybe you know you’re supposed to only deal with motivated sellers. But the problem is that you can’t seem to lay eyes on one. I frequently help people in our flipping homes online newsgroup who feel this way.
Here’s the secret: They’re out there — yes, even if you’re in a hot market like mine. You just haven’t found them yet.
How do you find them?

1. Be strategic, aggressive and effective. Have a specific and proven plan for your marketing/deal-hunting approach. And stick to your plan.

2. Keep looking. A big part of it is a numbers game. Many newbies give up just one or two steps shy of the big deal they thought they would never find.

Handling Rejection

Even though I focus on motivated sellers, most of them I speak to aren’t typically motivated enough to actually accept my offer.
Get this — if I make 30 offers, experience has taught me my chances are high that in 27-29 of them the seller is going to say “No,” or someone else is going to offer more. That’s right; I strike out much more often than having a seller say, “Yes,” to my offer.
But I’m not concerned about all of the, “No’s.” I accept them as part of the process and forge ahead, knowing that if I make enough offers someone is eventually going to say “Yes,” — particularly if my offers are targeted toward sellers who have some degree of motivation. It’s truly a numbers game. Any salesman worth his salt will tell you that — and that’s just what you’re doing (trying to “sell” someone on the idea that you’re the best solution for their house problem).

How To Keep Your Deal Funnel Full

In this business you cannot make money without inventory. It is extremely important that you always keep your pipeline of deals and potential deals full. And the way to do that is to constantly make offers. Many people come and tell me that they look at homes all the time but never buy anything. They say they find motivated sellers but none of their deals ever goes through. My next question to them is, “How many times have you put an offer on paper?” They are usually able to counter their answer on one hand.

In order to buy properties, you must make offers. He who makes the offers gets the deals. Sounds simple, right? Yet it’s surprising how many new investors I see time and time again who are really struggling to overcome this mental hurdle. Personally, I average 40+ offers per month, sometimes many more. Over the course of one weekend, I made about 40 and bought 9 houses on Monday. To this day, this stands as one of my most productive offering sprees, netting about 1 out of every 4 properties (each was sold separately, by the way, not as part of a package).

And you know what? I never would have bought all of those homes if I hadn’t made those 40 offers. I would rarely, if ever, buy anything if I only made one or two offers a month. Have you ever made 40 offers in a weekend before? Seriously, you should try it. It’s intense. It’s a learning experience. You need some rest afterward. But didn you hear the part about me buying 9 houses! Hello???

When Should You Make Offers? Quick Answer: Always.

That’s right. Every time. Every single time you consider a house that even remotely smells of potential seller-motivation. When I look at 20 homes I make 20 offers, not just 2. In fact, sometimes I make 30 offers when I look at 20 homes. I make offers even on the homes I couldn’t get out to see. If I’m targeting the right properties (i.e., those with sellers who may be motivated), odds are in my favor there will be several of those 20 sellers with enough motivation to seriously consider my offer.

What I don’t try to do is select who those 2 or 3 sellers might be. Experience has taught me the chances of me picking the right ones are fairly slim. And why should I? Why take that chance? My low offers will fish out the sellers motivated enough to respond and thereby tell me where I should invest my time following up. Too many wholesalers try to pick the motivated sellers from a group by themselves when making offers is the easiest way to find out. I make offers on every single home that interests me if I even suspect the seller might be motivated.

Some I inspect; some I don’t. Some are priced ridiculously high; others are priced ridiculously low. Some are in great areas; some are in bad areas. Regardless of location, condition or price, there is a number that works for every home and that is what I offer.
Get this: On occasions, I’ve actually asked sellers to PAY ME to take their homes! Why? Simple: because no other number worked for me. Sure, most of these offers are rejected (just like most of my other offers). Even on the weekend that I bought 9 homes, most (31 of 40) of my offers were rejected. In general, though, some of my offers are accepted, and those are the only ones that count.

Your Assignment
(And You’re A Wimp If You Don’t)

Here’s my personal challenge to you:

Resolve that you’re going on an offer binge. Pick a weekend to sniff out possible deals (i.e. potential seller motivation) and resolve you’re going to match my “40 offer extravaganza”! Or go to two of your friends and tell them that you’re committing to making at least one written offer every day for the next 30 days. Come on, even if you can’t do the weekend thing, you can handle one little offer per day, right? And tell your buddies that they have to confront you at the end of 30 days, and forcefully collect $250 each from you if you’ve not kept your solemn promise!

Trust me. Do it, and see what happens. You’ll see what comes to the surface. Deals — and probably more than you bargained for.
Ok, I’m being a little cute with this. But I’m also being serious. I hope revealing my “numbers game” to you will inspire you to quit whining about the lack of deals in your area and get out there and start making more offers.

If you make it your goal to make one good offer a day, then the deals will come. Trust me. If your offers are at the right price, then you will sell properties and make a nice profit. Do your homework, get your questions answered, and overcome your fears. Then make it your goal to average an offer a day because, as we all know, “An offer a day keeps the bill collectors away!”

One of the most critical steps for a new investor is finding a competent real estate agent who understands your needs as an investor and will work hard for you. This article attempts to address that need.

Understanding the Agent

In most cases, you will have to train a Realtor to work for you. Real estate agents are generally good at what they do, but most of them do not deal with investors and our methods are foreign to them. This does not make them bad people, nor does it make them stupid. Typically, an agent makes more money dealing with pretty houses and people with good credit, so this is the area where they become experts. If you can find an open-minded agent and teach them about what you do, then you can put together a mutually beneficial relationship. But first you have to respect the agent’s perspective.

An agent gets their license and starts selling real estate to make a living. They aren’t doing it for charity. They only get paid if someone buys a home and settles on it. A lot of work goes into a putting a deal together. Agents have been burned time and time again by investors who do not produce. Many so-called investors have real estate agents scour through listings, make appointments to see houses, show them around town, get them back into houses a second time, and never make an offer. Many investors who do make offers produce offers which are so ridiculous that if the agent knew this up front, then they probably would have never agreed to work with the investor. Then there are investors who get offers accepted but never settle on the deal. So the agent, who has about 30-40 hours worth of work into a transaction, will never get paid for their time. How many of you would want to go to work for a week and then not get paid?

What to Expect from Your Agent

You need to recognize the fact that you are going to be looking at many houses and buying few. You don’t need the agent to drive you all around town, pull up comps on every house you are going to see, or present offers on which you can’t follow through. This is a waste of their time and yours. The only thing that I expect from my agents is to provide me with listings and submit my offers. Occasionally I will ask them to show me a home or pull comps for me if I can’t find anything on my own. With few exceptions, you need nothing from your agent but for them to give you listings and submit your offers.

How to Find an Agent

When interviewing Realtors, you need to have a good idea of what you expect from them so that you can explain to them exactly what you need. They need to know exactly what their role is going to be if they are working for you. I simply tell new agents the following:

“I’m looking for a new real estate agent to help me, someone who can provide me with lists of fixer uppers and foreclosures on a daily basis. It won’t be necessary for you to run me around town to see all of the houses. Occasionally, I may need to get inside of a home, but not very often. I may also need comps once in a while, but mostly I’ll just expect you to submit my offers for which I will provide all of the terms up front. I will probably make about 20 offers per ______. My offers will be low and most will be turned down, but I usually get one or two. Since you won’t have to work to hard for these sales, would you be interested in working with me?” Most Realtors will say yes. The ones who usually decline are those who are mega producers and already busy enough.

It is not difficult to find a real estate agent, however it can be difficult to find one that you like who will also work with you. The first thing I suggest is for you to look for someone whose location is convenient for you. You will have to see them regularly and you don’t want to be traveling out of your way all of the time.

Be Honest with Your Agent

When dealing with a new real estate agent, be sure to be totally honest with them. If you have never done a deal before, you shouldn’t walk into their office and tell them that you are a successful investor who does 5-10 deals per month. First, this is lying, and second, your inexperience is bound to show through and you are sure to lose all credibility with the agent and anyone that they know. A real estate agent will be more inclined to work with you and be happy about it if they know everything about your situation up front. If you enlist their services through deception and they discover shortly thereafter that you have never done a deal, you will probably never hear from them again. Overall, real estate agents possess a good heart like anyone else, and they like to see people succeed. Moreover, they would like to be a part of your success story, so be honest with them and you will see how much further it will take you.

How to Work Well with Your Agent

The key to working well with an agent is for you to respect their time. Real estate agents are just like you and me. They do what they do to make money. Their time is money. If you have an agent run you all around town to look at houses, spend hours preparing contracts, hours on the phone with other agents, hours pulling comps (we will discuss comparable sales later in the course) and hours pulling listings but you don’t buy a home, then the agent loses. They get nothing for all the time that they spent in good faith, hoping that you will buy a property. You need to be aware of this and respectful of it. Most investors who go to a real estate agent are beginners/wannabes. They never buy a home, yet the real estate agent invested a lot of time and effort into them. As a result, on the whole real estate agents have little success with investors and therefore tend to stay away from them. You have to be different. Be considerate of your agent’s time and produce.

Real Life Experience

I have never had a problem with finding real estate agents to work with. I can walk into any real estate agency, and find an agent to work with me. I sit down with the person on floor duty and ask them a couple of questions about their experience. I ask them if they are opposed to working with investors and I listen to their response. I then go into my pitch. I tell them that I am an investor and that I buy 3-5 houses per month. I ask if they would be interested in handling that for me. I always get a yes to that question. I then give them something else to get excited about. I tell them that I do not expect them to take me out to show me houses- their faces usually light up. Next I tell them what I do expect of them. I want listings on a regular basis and I want them to make all of my offers. I let them know that I will usually make about 30-50 offers per month in order to get 3-5 accepted. I ask them if that will be a problem.

That usually is not something they like to hear, but they realize that they don’t have to do anything else so they agree to it. I tell them that the reason I only get about 10% of my offers accepted is because I offer very low. I let them know that most will be turned down, but some will be accepted and those are the ones that we want. I also explain some of the things that I have learned when it comes to dealing with banks. Most banks pay real estate agents a minimum commission (as opposed to a percentage), so if you are making low offers your agent can still expect to make decent money. This is another plus, they like to hear that you want them to make money. Bring it up often- tell them that you value their time and you won’t waste it. Be considerate and they will be loyal.

You buy a property, you flip it, you profit. Does this require a real estate license? In most cases, the answer is “no”. Real estate brokerage is an activity regulated by states on their own terms, thus each state defines which activities require a license. There is a lot of vagueness and ambiguity in some of the state licensing codes, as well as “gray areas”, which complicate the matter. Furthermore, if you vary the techniques and your business practices beyond the scope of what I teach in my course, it is not always clear how the state authorities might view your practices. Therefore, this discussion is limited to the simple activity of buying and flipping as follows:

1. Sign a contract with a seller, assign it to a third party

2. Sign a contract with a seller, sign another one with a third party, then double close

The large majority of states use the “for another” language in their state licensing statutes. The “for another” language means the law provides a laundry list of activities that require a license if you do it “for another.”

A good example is the Ohio Statute:

§ 4735.01 Definitions. As used in this chapter:

(A) “Real estate broker” includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration does any of the following:

The code then goes on to list all types of activity, such as buying, selling, offerings, leasing, negotiating, etc. This type of statute would clearly exempt you from doing any of the listed activity so long as you were doing it on your own behalf. The following court case clearly delineates the difference between acting on your own behalf and acting as a broker.

In Xarin Real Estate v. Gamboa, 715 S.W. 80 (TX 1986), an investor named Xarin entered into a purchase contract with the owner, Gamboa, then assigned his purchase contract to a third party, Baker. When the deal blew up, Baker sued Xarin claiming, among other things, that Xarin was illegally acting as a real estate broker without a license.

The court ruled that, “No evidence exists to show that Xarin was acting for anyone but itself when it sold its interest to Baker. Xarin was shown on the sales contract to be only the purchaser and was not shown in any agency capacity… There is also no evidence that Xarin acted for Baker when Xarin acquired its interest in the property from the Gamboa’s. Generally, to establish that one person has acted for another in an normal agency relationship, there must be an agreement between two persons and one must exercise some control over the other.”

Two important points are worth noting here. First, the court acknowledged that Xarin had “an interest in the property” when it signed a purchase contract with Gamboa. As we will discuss later, having “an interest” in real estate allows you to sell your interest, which is specifically exempt from many state licensing laws. Second, the court made an important point that that the Xarin did not have a deal with Baker in place when it made the deal with the owner of the property. This is important because the reverse can also be true; if you make a deal with a buyer first, then find him a property, a good argument can be made that activity is brokering on behalf of the buyer.

Other states that do not use the “for another” language clearly identify specific exemptions in their licensing statutes. A good example is the South Carolina statute, which reads:

“This chapter does not apply to:

The sale, lease, or rental of real estate by an unlicensed owner of real estate who owns any interest in the real estate if the interest being sold, leased, or rented is identical to the owner’s legal interest”

However, you must have an interest in the property before you sell it. In general, a contract to purchase property gives the buyer an equitable interest in the land. 27A Am. Jur. 2d Equitable Conversion § 10. Thus, if you have an interest in the property, you are basically exempt from the licensing regulations in these states.

A few states limit the real estate activity of any persons, even if you are acting on your own behalf. SD, MN, WI, MI, MD & MN all have limitations on the number and frequency of real estate transactions you can do before you will need a real estate license. For example, Michigan law limits you to 4 transactions per year, although it is not clear whether using multiple corporate entities will be a workaround.

There’s few, if any, reported cases of people being prosecuted anywhere in the country for not having a real estate license. The issue of licensing is more relevant in the enforcement of your profit. For example, if you assign your contract prior to closing and expect the buyer to pay you at closing, he may stiff you and argue “you don’t have a license”.

The bottom line is that if you don’t act like a real estate broker, the state agencies that license brokers will leave you alone. If you use the licensing exemptions to skirt the licensing laws, you will likely hear from the state licensing agencies. It is important that you make it very clear to all parties in the transaction that you are not a broker and are acting on your own behalf.

This question came in the other day so I wanted to cover it. If you are trying to buy wholesale property or sell a wholesale property and the purchase price is coming from a conventional lender how does that work? A conventional lender is not going to be happy with a wholesale deal. They don’t recognize the assignment of contract because they want the seller of record and borrower to be on the same contract.

In an assignment for instance, if you are the wholesaler, you’re the one that is actually on contract with the seller and what you are doing is assigning your rights to a buyer. A conventional lender doesn’t recognize that. They will also not finance in a wholesale fee. Let’s say you are the buyer and you want to purchase a wholesale property and you go to a conventional lender. The lender won’t recognize the contract and won’t finance the assignment fee. So what can you do? You have to get around it legally.

Let’s do this from an example that you are the wholesaler. I think that will be the easiest way to walk through this deal. Let’s assume that you are the wholesaler. And you’ve got a property under contract with a seller and it is a great deal. The first thing you want to do is filie an affidavit, memorandum of purchase and sale agreement. It’s a one page document that you sign and you have your signature notarized that says that you are affirming that you do have a valid purchase and sales agreement on the property and that you are ready, willing and able to close.

Anyone else should beware and not take any action on that house because you have this valid purchase and sales agreement. Take that to the county records department wherever legal notices are filed on properties and have that paper filed. It will cost you $10 or $15. What it basically does is put a cloud on the title and stops anybody else from being able to purchase the property without first getting it released from you. It’s a great way to protect your wholesale deal in the first place.

Let’s put it to work in this situation, your buyer comes to you and the only kind of purchase loan they can get is from a conventional lender. Normally you’d just have to walk away from this because there is no way they could do it. There is a way to structure this deal so they could get the loan on the property. Remember the bank is requiring that the seller of record, which is your current seller, and the borrower, which is your investor buyer are together on the same purchase and sales agreement. What you are going to do is go back and write up a brand new purchase and sales agreement between your seller and your buyer at the new price. Let’s say you purchased the property at $150,000 you’re going to make $10,000 on it so the new price is $160,000. You’ll explain to your seller that you are partnering up with somebody and that you are going to use that extra money to do repairs necessary on the property. Get them to write up the new contract between the seller and the buyer at $160,000.

Your conventional lender’s requirement is now taken care of. The seller of record and the borrower are on the same purchase and sales agreement. But that left you out of the deal correct? Well down in the stipulations section you’ll write down that the seller is going to pay you or whatever entity you are in a fee of $10,000 to release your interest in the property. They are going to pay you $10,000, that’s your deal. Some may ask that now that the buyer and seller know each other, couldn’t they go behind my back and draw up a brand new deal all together? Well, yes they could but don’t forget that you really have a valid interest in the property.

Remember that affidavit that you filed that is a cloud on file. If they try and go behind your back you can stop it because they have to get your release in order to do the deal. You are still in control. The lender then is going to approve the loan. And then go to closing and the house will sell now for $160,000. The seller is going to pay you $10,000.

Is there anything illegal? Here is what attorneys have told me in the past. The test as to whether it was legal or not:

* Was it all fully disclosed to the bank?

* Did the transaction, as it occurred in reality, accurately be documented in the paperwork?

* Did we disclose everything to the lender?

Yes, we disclosed that the buyer was going to buy the property at $160,000 from the seller and that the seller was going to pay us $10,000 to release our interest in the property. The buyer did buy the property from the seller for $160,000 and the seller really did pay us $10,000 to release our interests. Did we have a bonafied interest? Yes we did. When the closing agent does a title search they will find our interest in the property which was the affidavit. All of it was legal. What we disclosed in the transaction and the paperwork was representing exactly the way the transaction occurred in reality. There was no bank fraud in there.

That is what everybody is concerned about. Well the bank knew everything and they will approve of the seller paying you. There is no problem with that even if they don’t like it when the borrower gets money back. You are a third party to this transaction and they are going to see that and are going to be very happy with letting you get your assignment fee out of the deal. As long as you are not calling it an assignment fee but a fee to release your interest in the property. That’s the easiest way to set a wholesale purchase up so that a conventional lender will work with you.

Q: I live in a small city (population 100,000ish) and a number of agents I’ve talked to say that wholesaling won’t work here. Specifically, they tell me that the market is so strong that properties just don’t sell for pennies on the dollar, and that there are just a few investors in town who snatch up all the really good deals. Advice? – DJ, Beaumont, Tx.

A: Yes. Stop listening to real estate agents. You are taking to heart the word of professionals who…

1) don’t understand what you’re trying to do,

2) have a vested interest in convincing you to offer as much as possible, and

3) don’t “get” real estate investors at all.

It may be true that the market in your area is strong: it has been in most of the country for several years now. But the thing driving that strong market is first time and move-up home buyers, and those home buyers are not in the market for the kind of ugly, smelly houses you’re looking for. Sellers who own these junker properties and can’t afford to fix them are, for the most part, left out of the buying frenzy. And believe me, there are plenty of sellers like this in a city of 100,000.

Your first step is to find an agent who is willing to show you the cheapest, ugliest houses in the MLS on a regular basis. But your second step is to implement some ways to find properties that aren’t listed. Calling or writing to preforeclosures, estates, owners of vacant properties, and so on are all ways to generate leads that these agents don’t even know about. There are many examples of letters and postcards to use in your wholesaling manual, or just make up your own with the message that you can pay cash, close quickly, and don’t care about the condition.

As for the contention that there are “just a few investors in town”, I’d like to place a wager on that. I once read a statistic that said that about 3.5% of the population owns at least one rental property. So in Beaumont, there should be about 3,000 potential buyers for your good deals. And if there are only 10, who cares? If you have good deals, all of them will be happy to pay you take them off your hands. If you have a local investment association, now would be a good time to attend a meeting and talk to some potential buyers. If not, try getting the names of some of these investors and taking them to lunch. I think you’ll find them very receptive to the idea of you finding great deals for them.

Incidentally, I believe that the day of the uncooperative agent is about to come to an end. Housing sales are down about 3% this month, and higher interest rates plus increase unemployment are pointing toward a recession. This is actually good news for real estate investors, because a lack of homeowners in the market equals more deals for us. And when agents are no longer able to make the “easy” sales to qualified homeowners, they’ll either get educated about how to deal with investors or they’ll get out of the business.

This is a critical article to read if you have a strong desire to be a real estate investor, but do not have any savings or income to operate on a conventional playing field. Remember that to get a loan from a lender, all you need is cash OR credit. Thus, if you have some money in the bank, or a 401(k) with some money, lenders will loan you money even with poor to marginal credit. If you have excellent credit, you can get a loan with no money in the bank. Thus, you only need credit OR cash to get loans. Remember that after your first deal, you will have filled that requirement, as you will have cash. (Don’t blow that first $30,000 in a BMW!) The hard part is learning how to do that first deal, and we teach you multiple ways to attack that problem that avoid making embarrassing or confusing offers.

If you have neither credit nor cash, and still want to operate on a conventional playing field where you get loans for properties and pay all cash with no “crazy” no money down TV seminar type offers, I have great news for you — Hard money lenders. Most hard money lenders could care less about you or your credit. They look to the property as their security. If you don’t pay on the loan, they know that they can turn around and sell the property for enough to get their money out. We go into more details on this in the full course. We will give you a system to track these lenders down in your town in our Full Course, will loan based on the property. If you strike a good deal, they will loan 65% of the value of the property in renovated condition.

Thus, if you find a home that is worth $100,000 fixed up, and you can buy it for $60,000, the lender will give you 65% of the fixed up value of the home, or $65,000. $60,000 of that will get you into the property for no money down, and the extra $5,000 can be used for closing costs and/or repairs. You can then flip this property to another investor for cash, or rehab it yourself for maximum profits. The great thing about these loans is that you can typically close within 7 days. The only drawback is higher fees, but let’s face it, a few extra points on the loan to close is still cheaper than having a partner.

I started with nothing and leveraged credit cards to get into my first house, so starting with nothing is something that I know about personally.

A point on flipping: We have received questions from students as to whether or not flipping is illegal. It is not. What IS illegal is taking a property, getting false appraisals through corrupt appraisers, and over-financing the property with corrupt lenders. Once the property has had tons of cash pulled out, the corrupt group would then walk away and pocket the money. The lender would be left holding the bag. That is not what we are about. Owning a property for a short amount of time and reselling is completely legal, and the basis on which this economy is built. There is nothing wrong with owning something for a brief period, using your skills to find a buyer, and reselling that property. People do this every day in the stock market. Car dealers do it every day with cars that they buy and immediately wholesale. The word flipping has attached to the illegal activities that you have probably read about in your local papers, but owning for a short time, is not and never has been illegal.

The only problem that you will have is convincing the appraiser that the property you bought last week for $100,000 is now worth $130,000. In a worst case scenario, your buyer’s lender may require several appraisals to verify the increased value.

A great fear that people who are venturing into the Wholesaling business have is whether or not they are going to be able to sell the homes that they put under contract. “Find the Deals and the Money will Come” is a popular phrase amongst investors. But when you have never done a wholesale deal, it is a very difficult phrase to grasp and to put faith into. Consequently some Wholesalers refuse to get started until they have the buyers and the money lined up. Then they want to know how to put together a wholesale buyers list without anything to sell.

The first thing a Wholesaler should consider when building a Buyers List is how he or she is going to get a wide array of buyers. By this I mean, you want to have low-end property landlords, high-end property landlords, multi unit buyers, contractor/rehabbers, newbies, seasoned cash buyers etc… You should have someone lined up for every scenario of property. It does not do you any good to have a list of seasoned cash buyers who all like high end rehabs if you are not able to locate properties that suit their criteria. What are you going to do with all of the other opportunities that you find?

How do you put your list together? Start out by running ads in the local classifieds. I started out by running ads such as the following:

Fixer Uppers- Deep Discounts- Financing Available XXX-555-1214.

An ad like this will get the phone ringing. Then talk to the investors who called about their experiences, where they like to invest, how they pay for their homes, what their exit plans are, and so on. I always want to know the investor I am dealing with. I did not want to talk about property because I had nothing to offer. When our discussion finished, I told them that I did not have anything available for them at the moment, but I would call them when I found something that suited their needs.

As I built up my buyers list, I had a potential buyer for every property that I put under contract. I never bought in the war zones when I first started Wholesaling; I did not know to whom I would sell them. However, once I found a few buyers who were experienced in the war zones and who were interested in buying more if I found the right deal, I started making offers on war zone properties as I learned about them. NOTE: I did so, only because I had buyers lined up to take them from me.

“Bread and butter” properties are never a problem to move if you get a good deal. A majority of your buyers will be interested in most of the properties that you find in these neighborhoods. They are typically very easy to sell.

YOU DON’T NEED ALL CASH BUYERS!

By locating hard-money lenders in your area, you can turn newbies and contractors into your best buyers. Bring the deals that need a lot of work to a contractor, get them the loan to do the deal, and they will keep coming back. Show newbies how to get their first deal done, line them up with the property and the money, and most likely you will have earned a customer for life.

I talk about Contractors and Newbies as your best buyers simply because this is where I have had my most success. A hard-money lender, a good deal, and a newbie that needs your guidance is a payday just waiting for you to put it together.

Another very successful method that I have used to find buyers is to call “for sale” ads; particularly ads that say “newly renovated”. In most cases this will be an investor who has just purchased a home and fixed it up. I call the ad and ask the seller if he or she is an investor. If so, I begin the same rapport as if he or she called on one of my ads. The fact that he or she has a home that is newly renovated, lets you know that you have a real buyer to ad to your list for the area that he or she is selling in.

I frequently teach my students that they can learn more from the “for sale” ads then they can anywhere else. If you study the ads and get to know the players in your area, then you can see the trends and the areas they invest in. If you investigate further you can find out what they pay for homes and what they sell them for.

There are buyers everywhere, in every market. You just need to dig them up, and with a little effort you can have The Ultimate Wholesale Buyers List.

For years, hot-shot speculators made huge profits flipping condos in Florida and Vegas before they were even constructed. All the while, the naysayers in the ivory towers of Wall Street and academia warned of a “housing bubble” that was sure to burst as all bubbles do. When Fed chairman Alan Greenspan said that national real estate market was “frothy,” the writing was really on the wall, and anyone with half a brain could see that we were in for a “cooling” of the housing market, at best. And yet still, speculators continued to profit, and the real estate bull market marched on…

But the bulls aren’t marching now. Greenspan handed his matador’s cape to the new Fed chairman, Ben Bernanke, who continued the policy of interest rate hikes designed to deflate housing. No longer accelerating at a break-neck pace, home prices have flattened like a pancake in many markets, and new the condo speculators who got in late are in for a world of hurt. Clearly, the housing “boom” is over in many parts of the Country. But contrary to the media hype, this is great news for flippers!

Flipping vs. Speculating

It should be made clear that there is a difference between flipping and speculating. While speculators may be a sub-set of flippers, they are, at best, the amateurs of the real estate investing family. Flippers who have consistent success are more conservative and have a fundamental approach to real estate investing. While it may not be as exciting as speculating, the rewards of more conservative flipping are nearly as generous, and they are paired with far less risk.

The biggest difference between flipping and speculating is that flipping works in any market, whereas speculating only works in certain places at certain times. Las Vegas from 2002 to 2004 was a great time and place to be a speculator, but if you were still in the market in 2006, chances are you got burned by more than the hot desert sun. Basically, speculating often works on the “greater fool” thesis – that you can always find a greater fool than yourself to take a property off your hands in the expectation that he will be able to find yet a greater fool. Eventually, someone is left holding the bag and that’s when the party is over.

Flipping, by contrast, relies on fundamentals. The idea is not to catch a shooting star in a rapidly appreciating market. Rather, the plan is to find undervalued properties, rehab them, present them in an attractive manner, and sell them for a reasonable profit. Not only is a rising market not a requirement of flipping success, it may even be a mild detriment! After all, it is a bit harder to find bargain properties in booming areas. Sure, it can still be done, but the point is that even falling markets are prime for flipping since the holding period is often too short for the value of the property to decline beyond the deep discount at which it is purchased. Assuming that you add value through rehabbing, you almost can’t lose!

Exit Strategies – Always Have a Plan B

While speculators often rely on the “greater fool” strategy, flippers tend to have one of two exit plans: 1) Quickly flip the title to another investor, or 2) Rehab and sell the property at the retail level. While the lion’s share of the profits go to the retailer, a quick wholesale deal can free up your cash (and energy) for the next deal. But what if neither strategy works? What if the market really crashes and the buyers disappear? Is all lost? Of course not!

For complex economic reasons, the rental property market does not always correlate with the housing market. In fact, they are often countercyclical. Although most flippers aren’t terribly interested in being landlords, generating rental income from a botched deal is a solid backup plan. Better yet, you can usually refinance the property after rehabbing it to get all of your money out. From that point forward, the bulk of your rental income will be pure profit, and when the market improves, you can make the sale. Even better, you can offer your tenants a lease with an option to buy, which is attractive to many young families looking for their first home.

The media portrays real estate flippers as the investment world’s answer to Wild West gunslingers, but in reality, nothing could be further from the truth. Compare the “worst case” rental income scenario of real estate flipping with the “worst case” Enron scenario of stock market investing. There really is no comparison! If you take a fundamental approach to real estate rehabbing and flipping, your risk is limited and your profits are virtually limitless. It really is the best of all worlds.

By definition, a real estate investor puts up some money and “invests” it into real estate deals. As a real estate “entrepreneur,” I prefer to avoid tying up any of MY money in my investments. In fact, I prefer to collect some of my profits on the same day I buy a house. That way I don’t have to be in a hurry a sell. Then I have money to further my real estate education, pay my operating costs, invest in systems to grow my business… and write myself a paycheck! Now, I’m willing to wait for my profit on the back end. And I’ll even consider “investing” small amounts into a house like a small down payment plus money for holding and touching up the property. Ideally though, I’ll want to quickly get my money back out when the house once it’s occupied by a buyer or tenant buyer. There are many different approaches to real estate investing. And I certainly don’t have the perfect plan. Your approach will depend on your own personal desires and skill set. But to put my “collect cash when buying” strategies into context, I’ll briefly describe my real estate business…

I buy mostly single family homes. I rarely buy houses listed with real estate agents unless it’s an all cash deal. I prefer to be negotiating directly with the owner. I don’t use my good credit or banks to finance my purchases. Typically I acquire homes taking them “subject to” the existing mortgage using a land trust or agreement for deed. That means I get no bank qualifying owner financing. For cash deals, I use hard money lenders or private lenders. To buy directly from sellers, I use a number of low-cost marketing methods to get them to call me (see “How to Get Motivated Sellers Calling You”), getting them to ASK ME to buy their house. I prefer using marketing systems which are easy to implement and easy to repeat. I don’t call sellers. For each of the 7 to 15 calls I receive, I’ll find one seller who is flexible and motivated enough to allow me to buy creatively, or at a price and terms that works for both of us. You won’t get that type of closing ratio calling ads in the paper.

Working 20 hours a week with a small staff, I buy and occupy 3 or 4 houses a month. If I cannot make at least $20,000 net profit, it’s just not a deal. If the seller has lots of equity, they typically take it back in a note due upon the “refinance” of the home. The refinancing occurs when my buyer or tenant buyer gets their new loan. That’s between one and 36 months down the road. Most common is 2 to 3 years. But some of the 57 properties I own today were bought over 5 years ago and have appreciated nicely. After I buy a house I put it on the market with a flexible seller financing. That includes doing “wraparound” owner financing or selling on a “rent-to-own.” I don’t list my homes with agents or rely on my buyer getting a bank loan to close. By offering terms, I make the home more desirable and more valuable. I get it occupied fast and under contract for top dollar, even in a slow market. I can also sell a house “as is” if it needs some work offering my “trade sweat for equity” program. Many buyers like that opportunity… and I can eliminate some of the frustration or costs that are common with dealing with contractors.

I avoid dealing with renters and all the landlording challenges that come with that. Instead, the homes I still own are occupied by tenant buyers who have paid me a non-refundable “purchase deposit” to buy at a later date. They can earn a modest credit toward buying the home for each “on time” rental payment plus they agree to take care of all repairs and maintenance. Since they are planning to buy, they typically are interested in taking care of the property… even doing major improvements which are also non-refundable in the event they do not close. Think about it. If you don’t tie up your own money for very long when you buy, or you actually collect some cash when you buy, what’s the limit to the number of houses you can buy each month? And if you avoid landlording headaches by selling with owner financing or “rent until close” terms, what’s the hurry to cash out? Most of the homes I buy require little or no money down. I still find investors to this day who say that that is not possible. That amazes me. On my best deals, I actually get cash when buying.

So here are my top 5 ways to put cash in your pocket when you buy a house…

1. Over Borrow with No Bank Qualifying when Paying All Cash

Most of the houses I buy are “subject to” the existing mortgage. That’s because most sellers owe more than I’d be willing to pay cash. So I tell them, “You owe more on the house than I can pay cash as an investor. I get a high return on my cash. It wouldn’t make much sense to pull my cash out of other investments to buy your house at the price you say you need. The only way I could come close to your price would be to take over the existing loan and relieve you of the debt. Would you even consider that… if I can get you an acceptable price?” Other times they have enough equity. What if the seller insists on all cash? Most of the houses I buy all cash need a lot of repairs, or are owed by a bank, or both. That’s for my market. Prices here range from $50,000 to $300,000 with an average $165,000. When you buy in the very low price ranges, then you may be doing more cash deals. For me, only one out of 10 houses I buy require a lot of cash.

I get my cash from hard money lenders and private lenders. You can listen instantly online to a free audio presentation I did on how to raise cash for your deal. In a nutshell, I pay 9 to 13% interest. And then I pay 0 to 10 points. I have credit lines that would cost me less, but they have limits. I like having unlimited funds to buy houses and keeping my credit or credit lines open for emergencies. I consider the cost of these funds when I construct my offers so I’ll make a huge profit regardless of the interest or points I pay. My “collateral” lenders don’t look at my credit report, only the value of the property being used as security. I can borrow 65%-70% of the property’s value with no qualifying. In fact, if I cannot borrow enough to buy and fix the house without qualifying, the it may not be a great buy… and there are better deals to out there.

Example:

So, a seller of a $100,000 house needs cash, I may offer $61,237 cash, an amount plucked out of the air (near 60% and looks like I really crunched the numbers). I then borrow $70,000 and pay 5 points, costing me $3,500 and netting $66,500 in cash to close. I walk away from the closing table with over $5,000 in my pocket on the day I buy the house. Recently, just so there’d be no confusion on a transaction, I called Beth (my closing agent at the title company) and let her know I’d be getting money at closing as the buyer. She responded, “Richard, that’s no surprise. It would be more unusual if you brought me a check to closing.” Can you find a ton of deals like this all the time which you can buy so cheap? No. But they are out there and you’ll find them now and then if you’re “in the game.”

2. Over Borrow with No Bank Qualifying when Buying with Owner Financing

When I started my real estate business in 1996, I couldn’t find enough cash deals to keep me busy. I still can’t… cash deals that is. That’s why I developed a number of ways to buy all types of houses, using creative financing. And this is my favorite. When I find a motivated seller with lots of equity, there’s a good chance I’ll use this strategy to get them a higher price than an “all cash” offer.

Case Study:

I had a seller who agreed to sell a free and clear property for $107,000 if I gave him $30,000 down. He’d carry $77,000 at 7% interest, or about $700 a month for 15 years. It needed $20,000 in repairs and would resell for $169,500 with owner financing after it’s fixed up.

I borrowed the $30,000 down plus $20,000 in repairs plus an extra $20,000 for a total of $70,000 from a private lender. My lender got a first lien and the seller got a second lien. The seller also agreed to subordinate (stay in second position) to any new first loan on the property in the future. The terms of the first were 13% and 5 points with a 3 year balloon. Payments worked out to about $760 a month. The total monthly with the first and second mortgages totaled $1,460. Market rent was $1,395. I’d have a small negative cash flow but I’d walk away from the closing with $36,500 in cash which included my rehab money of $20,000 (less a couple thousand for closing costs.) I put the house on the market for “$169,500 fixed up, make offer as is. Owner can finance.” After 2 weeks I did not have a buyer so I began fixing up and spent $5,000 before finding my buyer. They agreed to buy for $160,000 on an “agreement for deed” if they could do the rest of the work as their down payment before moving in. They agreed to pay $1,300 a month and refinance within 2 years. To me it was like getting $15,000 down because that’s what I would’ve paid to finish the house. Some “real estate investment educators” say don’t over borrow. But I only owe $147,000 and I am collecting on a $160,000 note. I still have $13,000 coming to me.

3.) Over Borrow with No Bank Qualifying, Buy with owner Financing and Substitute other Equity as Collateral

Case Study:

On a recent postcard campaign (see “The Ultimate Direct Mail System for Buying Houses”) I bought five houses in six weeks. On the 5th house, the seller only owed $18,000 on a nice $170,000 house. He did not need all his cash but he insisted on getting $63,000 at closing. The $18,000 he owed would be paid off out of that. He also insisted on 6% interest on the money he carried back in a note. And he insisted on a price no less than $153,000. He’s getting 90% of retail value. That’s quite a fair price, isn’t it? Here’s what I could’ve done. Borrow $70,000 at 11% and 8 points, 15 year amortization with 3 year balloon. Loan would cover cash to seller, lender points and closing costs. My payments would be about $800 a month, leaving enough extra positive cash flow from rental income to give the seller a monthly payment on his equity. At a price of $153,000, he would have a second mortgage for $90,000. I’d owe $160,000 on a house to be sold for $179,500 with terms.

But here’s what I did instead. I borrowed $123,000 from my private lender. Payments are about market rent, or $1,400. I gave seller his $63,000 cash, but I walked away at closing with $60,000 less closing costs. The seller agreed to have his $90,000 secured with five different second mortgages on five different houses… the five houses I just bought from the postcard campaign… including his. If I only used his house in the deal, I’d owe $213,000 and be upside down. So I offered his price for $153,000 with $63,000 down. I gave him 5 second mortgages each with no payments and a five year balloon. I agreed to the 6% interest but it would accumulate for 5 years with no payments. His $90,000 would grow to $121,000 by the time I paid him off. In essence, I was able to tap into the profits I just created in these 5 houses… equity at the high-end of each house’s “loan-to-value”… plus I got it at 6% interest, no bank qualifying, minimal closing costs, no discounting of my equity and no payments and I had him grant me the right to substitute equal or better collateral in case I resold any of those homes over the next five years! What would you do with an extra $60,000 in cash?

4. Close Only when you Find your Buyer

If you’ve noticed in slow down in your housing market, or found it’s taking longer to get your houses occupied, then be more cautious and buy better. In fact, you can buy with no risk when you find the right type of house and motivated seller…

Example:

“I appreciate the fact that you’ll sell me your house for what’s owed plus $1,000 in moving money, but with the way things have been going, I cannot commit to taking over your loan until I line up my occupant. Your house has too much owed against it. Now, I do have a program to help homebuyers get into a house when they need some time before getting a bank loan. And 60% of the general public is in that position. This gives me a strong marketing advantage when I buy houses. I can offer to finance my buyer myself or rent the home until they close later. Therefore, I’ll agree to buy your house if you can give me some time to find a buyer. Once I do, I’ll give you your $1,000 and start making the loan payments, getting that debt off your back.”

When they agree, I advertise the house with “Owner financing” or “No bank qualifying” or “Rent-to-own.” We get at least 3-5% down from a tenant buyer as a non-refundable purchase deposit. This works the same as option consideration on a lease option. If I’m selling for $179,500 then I’ll get at least $5,000 plus the 1st month’s rent. Then I can complete my deal with the seller, and enjoy the difference ($4,000) immediately. Be careful to use this only if the seller doesn’t care what you sell it for, or when they have already vacated the home. Sometimes I’ll have the seller show the house for me! You can also use this strategy if the seller’s payments are in default, and use the buyer’s money to cure the default.

5. Require the Seller to Pay you when Buying the House

An important lesson here. For years I did not do this. I think it’s critical to always tell the seller what you are willing to do, even if (in your mind) it’s unlikely they would ever accept your offer. You’ll never know all their underlying motivation, so don’t make decisions for them. When you’re not excited about the deal, consider what price or terms would get you excited.

Case Study:

I had a couple call of my marketing. They owed $147,000 and wanted to sell for what they owed. I did comps and determined it was worth $147,000 and I could sell for $157,000 with easy terms. At the time I needed a minimum $20,000 spread between my buy price and my sell price. These days it’s $30,000 or 10%. I told them they owed too much, and thanks for calling, but there was nothing I could do. They called me back one year later after listing it for $159,500. It didn’t sell because it was overpriced to be sold retail but priced to cover commissions and closing costs. When they called the second time it was still the same situation. But this time I said “The only way I can buy your house is to take over your loan and have you come up with $10,000 in cash at closing. Are you in a position to do that?”

Apparently they were going to raise the cash anyway to get the house sold through another agent at a lower price. The house was now vacant and they were getting desperate. They got a signature loan not secured by the house and brought $10,000 to closing one week later. Three weeks later I found a buyer with $13,000 to put down. When occupied, I had already collected $23,000 of my $20,000 spread! I knew I’d have to bring some money to closing once my new buyer refinanced down the road. But that was OK. I could have paid down the mortgage by $3,000 but decided to keep the cash.

6. (Bonus Strategy!) Simultaneously Buy and Sell for Cash

Need cash to get started in real estate investing… or pay some bills? Find a deal and sell it the same day you buy it. No cash needed, no holding costs and no landlording. This is called flipping and yes, it’s legal. There are several ways to do this. I use this strategy only when a seller must have all cash, but more cash than I can raise using a hard money or private lender. When you sell a house for cash or new loan for full value, this is called retailing. I hate retailing. I prefer to be offering a great price or great terms. I need a marketing advantage to resell. Otherwise I’m not interested in the deal. I can still offer terms to a buyer who is getting a new loan by taking up to all my profit in a second mortgage. I’d be willing to do this rather than lose the deal.

Recently a seller called me. Sometimes I get so many leads I don’t have time to call back everyone, as in this case. He called several times which forced me to respond. This is a lazy way of prescreening leads… but to works! His house had gone to foreclosure. In my state, he had a couple months to redeem the house by coming up with the foreclosure sale price in cash. I agreed to buy his interest (get the deed) and then look for a new buyer. I made no guarantees. He had nothing to lose. If successful, I’d get the first $10,000 in profit and then we’d split any profit over that. He agreed. He was about to get nothing.

I placed a sign in the yard, ran a classified ad and added the house to our website. I said “owner can finance” since I’d take my profit in a note. Bottom line: neighbor bought the house with a new loan, did not ask me to carry a note so we got cashed out. I made $18,000 and the seller got $8,000. My only risk was the cost of marketing and a little time. I also created the equity by getting the second lien holder to take a huge discount. The bank was happy to get $4,000 for their $40,000 mortgage because they were about to be wiped out after the redemption period. I forgot to ask the first mortgage holder to discount!

Remember, there’s no limit to the number of houses you can “invest in” when you buy and get cash at the same time.

Q: I live in a market that’s so hot that houses go on the market and get a close-to-full-price offer in less than a week. I can’t buy properties here for less than full value, and no one is willing to carry terms, since there are thousands of qualified buyers looking for houses. Do I just wait for the market to slow down, or what? S.R, Philadelphia

A: We all live in the market you describe, and have for a long time. The National Association of Realtors has been reporting record-setting sales for three years; mortgage money is plentiful; anyone who wants to work is fully employed in the tightest labor market this century. These factors add up to enormous competition among potential homeowners for properties in nearly every price range. Competition drives up prices, and a “seller’s market” results.
Yet, at the same time, real estate investors are buying properties for pennies on the dollar, negotiating low money-down seller financing, and generally prospering along with everybody else. Why are others making deals when you aren’t? I’d like to suggest that a large part of the reason might be that you’re looking at the wrong properties, and don’t have enough strategies in play for finding the right ones.

Obviously, a seller who has a nice-looking house in a decent neighborhood and months to sell is not going to agree to your 70% offer or carry sweet financing terms. Why should they? Your competition for this type of property—the homeowner wannabe—is ALWAYS going to outbid you, because they buy for different reasons (school system, aesthetics, love of the zip code) than you do. These sellers are always the most readily identifiable, since they generally list with agents, or at least put a “For Sale by Owner” sign in the yard. However, the obvious sellers are not the ones that the professional real estate investor in this type of market looks to deal with. Despite the good economic times, and despite the fact that many properties are selling for 100% or more of asking price within 30 days, there are still sellers out there with problems that make it impossible to sell quickly (or at least quickly enough to meet the seller’s needs!) or for full price. It’s these sellers that you need to work with, because, in solving their problems, you will be able to make a profit from their properties.

Don’t expect to find these folks through the multiple listing service. While the MLS is still my favorite way to find junker properties to flip, anything in half-decent shape is being aggressively marketed by agents to homeowner and investor clients. Instead, run ads. Distribute flyers. Write letters to people who have estate properties. Find ways to reach these sellers and let them know that you can help them. My last 4 deals involved 2 estates, a divorce, and a frustrated landlord, and were purchased via a loan assumption, a land contract, and two cash offers at 60% of value. Three of the 4 came from calls on an ad in the paper; the fourth was a referral from another investor. Investors in my market— even those with years of experience—have complained to me about the same situation you describe. Yet they’re still making deals. So maybe it’s a little tougher to find cooperative sellers than it was 10 years ago; as in every business, you just adapt your methods to the market. And by the way, things are slowing down. Interest rates are up, mortgage brokers are laying off salespeople, foreclosure rates are accelerating, and every major lender is opening a “short sale” department to negotiate lower payoffs on defaulted mortgages. There—that’s all the hint I’m giving you. Now get out there and make some deals!