The $50,000 Wholesale Deal & Creative Wholesaling

[Clay Manship]

So, a couple of weeks ago I closed one of my favorite wholesale transactions of my career. No, it wasn't the biggest, but it had to be the best--because it combined my years of knowledge and learning each piece of the real estate game and how to speak the language. And it all had to do with thinking outside the box, and understanding the different intricacies of each piece of the game, and how they interacted within the real estate puzzle.

Here is the short of it--my team put a package of 9 properties under contract for $300,000. Yes, you can actually do that in Indianapolis. I know a local investor here in town who owns lots of property in the neighborhood, so I reached out to him to see if he had any appetite for some new properties. He indicated he did, and we negotiated a price for $350,000. Woo hoo! I just made $50,000. But then, he regretted to inform me that the day before, he had just dumped tons of money into the local sheriff's sale and could not take on any more properties at the moment. He was down to his last $10,000 in cash. Great...so this deal is dead, right? WRONG!

"COULD not, or WOULD not?"

I asked him what his hold back was. He said he didn't have the $350,000 in cash because he had invested it all at the foreclosure auction. So, I asked him--"what if I could FIND you the money to do these deals...would you buy them then?" he responded that not only would he, but he would PAY ME to do it. So, I was off to track down some money on his behalf.

So, I approached a private lender of mine who had some idle cash that I have not been able to put to work for a month or so (don't ask!) and told him that I had found this great deal for him to lend on. It was a deal where I could bought it myself, but would rather take the quick infusion of cash. My lender knows what I do very well, so he understood the model and where I was coming from. Because I got these properties at such a good discount (the 9 pack was being bought for $350,000, but was worth about $600,000 after rehab...so about 70% LTV) my lender was comfortable lending this buyer the money.

BUT WAIT!

My private lender had also gone to the same sheriff sale auction, and now only had ~$330,000 to lend. With my buyer only having $10,000, and my lender only having ~$330,000, we were now so close! We had $340,000 of the agreed upon $350,000 needed to close this deal. So, my options were this: 1) take a $10,000 price reduction to get the thing sold, or 2) get even more creative on where to make the money appear from. I chose Option 2.

So, I approached the buyer again, who is a serious investor here in the Indy market. I told him the situation, and that the lender was only willing to give $330,000 of the $350,000 needed. So we needed an additional $10,000. I then offered a "cash out refinance" against one of my buyer's free and clear properties. In essence, loaned him the $10,000 he needed, and secured it against one of his assets. So, for a house that is worth ~$50,000, I now hold a first-lien position on that house, and he is paying off the $10,000 I "lent" him over the course of 5 years. BUT, here's the caveat: I never wrote him a check, or took money out of my own pocket...I simply financed out $10,000 of the $50,000 fee that I was making on this deal, and that was reflected in the settlement statement. So instead of walking from the closing table with a $50,000 check, it was now a $40,000 check--with a series of monthly payments coming to me over the next 5 years. I just had to make the money come out where it appeared to not exist.

So, here was the total profit breakdown of my wholesale transaction:

Wholesale Fee: $40,000

Loan Brokerage Fee ($6,600) -- this was 2% of the loan balance, $330,000

Refinance Loan: $10,000, payable over 5 years, fully amortizing, at 8% interest. (this works out to a total payout of $12,165.60 over the course of 5 years)

TOTAL PROFIT: $58,765.60

So, the moral to the story is--always be thinking of new and creative ways to add value to your clients. It is a real estate cliche, but those who are most successful in the business truly are PROBLEM SOLVERS first. My buyer had a problem--he had run out of cash, but still wanted to buy. I provided VALUE via a SOLUTION--I found the properties, and I found the money.

Where focus goes, energy flows, so I encourage my team and my partners to FOCUS on providing value to others'  businesses. So I wanted to share this story with the BP Community in hopes that you all may do the same.

Happy Investing!