New to wholesaling... Contracts?

Question

I'm new to real estate investing completely. I've been an insurance agent for almost 7 years and I'm in TX. I'd like to build some cashflow to get into some other investment strategies. I believe wholesaling makes sense as being self-employed, it's that much harder to get a traditional loan in our current economic climate.

I'm building a website with a capture form for both potential investors and those wanting to sell their homes. I intend to do some online advertising and start to build my network of investors. I currently have a few clients that are investors which will help a little.

I assume driving and looking for FSBO signs is a good way to find properties, as well as CL, BP, and eBay. However, it seems to me that building the investor list should be my primary goal.

Any tips or feedback would be appreciated. I'm fairly business-savvy, so I'm not going to over-analyze this process. I plan to get a house under contract within the next 2 weeks.

I'm also curious where I might find the required paperwork and what the exact flow of the process is in relation to involving the title company, when to make a deposit, etc.

I also noticed someone posting that they typically put $500 to $1,000 down in earnest money but it doesn't come out of pocket. An explanation here would be appreciated.

Thanks in advance and sorry for the length of my first post.

Jeffery Bigsby · Answer

I know its kind of old but this is a great thread, learned a lot from it.  I have a question though.  What happens if you still can't sell the property after the 90 days that the hard money lender requires?  Do you come under massive debt or does the hard money lender take the property from you?

NA Beauvais · Answer

A strong Buyers list is a must!  You can have a great deal and still don't move in the time frame you thought you would.  Buyers are being more conservative with there money so you need to make sure you have solid buyers that you know can and will close or you will find your self with a extra mortgage.
Sell It Before you Buy It!

Curt Davis · Answer

Joshua,

I had times when I had to use my hard money lenders money to close on the property. Make sure you disclose to the lender what you are trying to do. The lender I have does not have does not have a problem with this but still wants to be paid back within 90 days so in this case make sure you can refinance the home. I am just trying to give you worst case situation.

Erick Gause · Answer

Yes it controls the property and yes you will lose the earnest money if you fail to close. As Curt said above you should never go into a contract without first having the money or ability to close the property if you can not sell it. Backing out of contracts is legal, however it is not ethical and you will burn bridges instead of making business relationships.

My above post was in regards to you running into a wholesaler  when trying to sell your property therefore Curts comment was incorrectly targeted this way (credible).

I as well can only give you our opinions on the subject. I have been a full time investor for over 10 years and have seen Homvestor franchises (3 of them) and others fall in my area due to what they perceived was working one year (over 100 properties sold) then fail the next year.

Remember you always have to be adapting and constantly looking at new avenues and methods based on current and upcoming market conditions if you want to be consistently making money each year.

For example, today's market is more focused on the ability to get, market and sell REO, and other lender held properties instead of private owners. 2 years ago private owners were the best way to get great deals on properties, now there is so much inventory on bank owned properties that there are new investors and Realtor taking advantage of this. They will die off after 2 years when it goes back to privately held deals because they will lack the experience on getting and marketing to these private sellers. Personally I have done both through the cycles in the 90's and the 2004 rise up and and do more bank owned and bulk sales now then last year.

Joshua H · Answer

Erik and Curt. I'm in agreement that backing out of contracts is a bad way to do business and can sour a relationship and a create a bad reputation fast.
            
            If the numbers make sense on the deal, I know a couple of guys that handle hard money loans, and it seems if something fell through with a buyer, I could go the hard money route until a buyer was found. 
            
            The hard money lenders I know base it all on the property (no financials, credit, etc.)... as long as there is a survey, the property is under contract, they will loan up to 70% ARV. Any deal that warrants a wholesale will be under the 70% mark.

Matt Rosen · Answer

Thats a great point Josh.

Doesnt the earnest money of lets say $10 control the property just as much as $1k? Or is it the trust factor with the seller that your building really the point?

If for whatever reason you cant flip the property in the time allowed, you lose the earnest money, is that correct?

Curt Davis · Answer

Joshua,

regardless to what others say, the most important thing is to have a solid buyers list of qualified buyers and you need to know what their criteria is. Also, you never want to put a property under contract if you do not have the money to close on it. You never want to burn relationships. Everyone thinks it is ok to lock up properties and if it is so good it will just sell itself, that is false. Also those people think they are always going to have an exit clause, this is not true if you are buying from a bank. Wholeselling a property is a great way to make fast cash but if you are going to get advice from someone doing this, make sure thay are credible. Here is what I would focus on if I were you ( but I am not you )

1. Build a strong buyers list. Go to the local reia's to help build your list and also use other forms of marketing.

2. Make sure you have the cash to close if it does not sell. If the deal is actually that good but you cant sell it then you should be able to close on it and continue to try and sell it. Make sure you get a 30 day close or longer.

These are a few very important things to think about. Again, this is just my opinion but my company sold 167 properties in 2008 and I sold 72 of them so I sorta have an idea of what is going on.

Joshua H · Answer

Great info! Now, if you tie up a contract for lets say $10... Can you ask the buyer for more to make sure he/she's serious?

Granted, I have no problems with doing $1,000, but if someone will lock it up for less, why not.

Also, what about escape clauses. I've seen people talking about a partner clause and inspection clause. If you pull out, do you get the earnest money back?

Erick Gause · Answer

Yes Most sellers are unaware of real estate and real estate contracts. I have done contracts for as little as $10 with earnest money, however I usuallu use at least $1k for 2 reasons.
1) The seller feels more comfortable with some risking a "1k" then $10
2) If wholesaling then I want the end buyer to make sure he is really buying and closing, so the $1k is a good number, anything lower and everyone will tie up your contract and may never close

If you do not know the farm area then the free ways are zillowdotcom adn your local property appraisers web site, then will have a section or button for current sales. Another way is to partner or befriend a real estate agent and use them for the comps.

My current method is using realquestdotcom, sitexdotcom (pay sites) and then zillow. I then average all three avg comp numbers for an end comp number
for instance one says the property is worth 
100k another 110k and another 94k (my actual value number is now 101k for the property. With the current market conditions I then take another 10% off to help control dropping prices and other unseen issues. So now I feel comfortable the property's ARV to be at least 90-91k
On the pay sites call up and ask for a two day trial, most will let you have it.

Zillow is underestimated by most in the market, but if you look at how they figure the value  (use over 60 different fluctuating values, including foreclosures, fsbos etc.) then it really is a great free tool to start with

Jon Holdman · Answer

I believe in Texas that county records do not reflect the sales price.  So, you'll need to get data from an agent.

Best way to know ARV is to pick a farm area and look at as many houses as you can.  Like 50-100, inside and out.  Find the dividing lines, find out what matters and what doesn't.  Once you know the area, you'll easily be able to come up with prices.

You need ALL the comps.  Agents and appraisers tend to just look at a few, and that can produce a skewed result.