Buying in Herds: A better way

Recently I was out driving through a neighborhood over here on the west side of Houston, and I spotted a sign in a front yard -- it was in some sense just a big oversized bandit sign, larger than most, but the messaging stood out from the rest:  

We buy houses.  No Assignments, No B.S.

What, what?  No assignments at all?  

OK, so clearly these guys are 'actual investors' then, cash buyers in the true sense, and not just some local bandit sign wholesaler.

This intrigued me enough that I actually called the number.  A super personable lady called back, and we talked for a bit.  Clearly she had a rather dim view of the standard wholesaling model, which relies on a really good buyers list.  No matter how good a buyers list might be, there is never any guarantee that a willing buyer will turn up. And for her, and those in her group, that just isn't an acceptable way of going about your business.

Now, this is not an attack on wholesaling -- any reasonable wholesaler with any degree of integrity will explain this to the seller.  Not all wholesalers are created equal, certainly, and there are plenty that do it the right way, with transparency and integrity.

And there are a lot of wholesalers that really don't.  They get a proof of funds letter from a hard money lender, and build a buyers list and just hope it works.  Less experienced wholesalers (and some that have plenty of experience) run into trouble when the ARV ('after repair values') look inflated, and the renovation/repair costs look a little understated.  Serious investors find wholesalers they can trust, and they work with them because they add value.

The seller, however, is not a seasoned real estate investor and they might not be fully dialed in to what questions they need to be asking of the person that is putting their house under contract. And as a result, a fair amount of them are finding that their house isn't really sold, and they are back to square one trying to find a buyer -- sometimes this time delay can really cause undue damage to a seller, that has done nothing to deserve this treatment.

So this messaging, and this conversation, really caught my attention.

Do I want to go into wholesaling?  And if so, how should I be doing this in a manner that is line with basic principles of integrity? 

Should I be out there putting houses under contract that I am not 100% sure that I can actually buy?  Sure I can get hard money, I have done it before.  But really, am I actually in my heart planning to buy that $450,000 ARV house for $225,000,when I know full well it will take $80,000 to $90,000 to renovate it?  Is that a deal that I am really willing to do?  Probably not, but there are plenty out there are looking for that deal.  How do handle this?

So it became clear that I needed to make some real core-values decisions about any and all wholesaling activities going forward.

* Don't contract it if you aren't able to buy and planning to actually do something with it.

* If you got a deal that fits the bill for another investor, bring him/her along to look at it with you.  Get the numbers right between the two of you, and THEN figure out the contract with the seller.

* Worry less about people 'going around you' to steal a deal, and worry more about the partners you are working with.  Find the good ones and fire the rest.

Yes certainly you still want to protect yourself with a good option period to make sure that you have your costs right. Allow yourself some days to get in there, get an inspection if you need it, and get your contractor bids lined out.  That $40K renovation might turn out to be a $60K renovation as new defects are to come to light.  As long as you are really honestly and objectively working through your renovation numbers before making an offer, that is going to happen, but you should be working hard to minimize those cases when you have to exercise your option to terminate, and not making it standard operating procedure.

I have decided that I will now run in herds with other investors.  

Allow me to clarify what that means:

* To run around portraying myself as a season pro, having done just one flip, is just not acting responsibility, I think most readers here would agree.  I've already decided that managing contractors is not my forte (see my previous blog post) and so even if I do intend to participate actively in another deal, it just makes good sense to be working with somebody else that has proven process already in place.  

* If nothing else, I am getting the benefit of a second set of eyes. Things that stick out to me as major costs/obstacles might not be a major concern to my fellow investor, and vice versa.  One guy picks up on something the other guy misses.  Two heads are better than one.  What happens, having done this now a couple times, is the actual offer presented to the seller has been subjected to more rigor, and is more likely to conform to reality when the project actually kicks off. 

* From time to time I find deals that my buddies are looking for.  I invite them to come along with me to the initial appointment with the seller, with the understanding that we'll work the numbers together, and they will be the end buyer, if they so choose.  No email blasts, no hype, no silliness. 

* We work out the compensation/fee after we've seen the property -- you might work this as a bird-dog fee, or it might be an assignment.  Depends on what you are able to do, and what your investor partner is comfortable doing.  If we can make the numbers work, we submit an offer.

* As an investor, you are involved in any and all discussions from the start.  Full transparency with the seller, and there isn't any back and forth, trying to renegotiate a deal with a seller after a contract is already in place.  All that happens before any offers are made.

* This builds credibility which you can leverage during your visit.  Even an accomplished investor is still just one buyer in a big market, and nobody can buy everything.  There is no shame in that.  When you are talking to a seller that is looking at half-dozen offers in additional to yours, you can hopefully distinguish yourself as a 'real buyer'.  Make it super evident that you have shown up here with an actual investor that is shopping in this area, and has actually done flips and/or hold rental property not far away (or wherever it is), and plant the seed that maybe not everybody else presenting offers will be able to say that.

* This builds credibility that can also be leveraged in your online marketing as social proof. Create videos of the two of you walking through a job in process, or talking to a contactor or inspector on site.  Make them actual properties that are owned by you or one of your herd-mates.  They don't have to be perfect -- probably better if they aren't.  You are going to social proof and credibility here, not trying to be HGTV.

In a sense you are pooling your credibility resources, as a buyers club, the same way you would pool marketing dollars. No marketing channel is going to effective if you are unable to appear credible.  Yeah sure I have flipped a house -- one house -- and that probably sets me apart from the majority of the wholesalers out there.  But if are motivated to sell, do you want to sell to JUST ME, or do you want to sell to me and/or one my dozen buddies, all of whom have owned or flipped multiple properties?

Lots of mentors and gurus out there teach this, really, so it is nothing new.  Start with your buyers list.  Get that right, and work backwards.  I've even seen this called reverse wholesaling.  

Well, that is one term for it, but to me, it's really just being responsible.

So go out there and be a wholesaler, but be a good one, and really add value.  Find solutions for sellers.  But let's agree that we don't need to disrupt the marketplace by acting without integrity and misleading sellers.

Make sure you are running in a well-funded herd, and good things will happen.