Wholesaling: Basics & a Legal Update

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Wholesaling: Basics & a Legal Update

For those new to Real Estate Investing (REI), a good way to break into the business is via wholesaling. Simply put, a REI Wholesaler (REIW) buys low and sells high = a profitable wholesale flip (NOT a fix/flip). From the get go, you need to learn the ropes of this business, as much as you can, before attempting your first deal. One of the best resources for such information can be found at local REI clubs. There are scores of them around the country. Attend meetings. Ask questions. Meet others with similar interests. The internet contains thousands of articles on the subject. WARNING: REI can be a complicated business. Learn as much as you can before jumping into it. It is very easy for newbies to lose money in this industry. Consult appropriate counsel (legal, accounting, real estate) before undertaking any real estate investment. NOTE: One of the best ways to reduce your own financial risk is to use OPM: Other People’s Money. See below for info on Transactional Funding (TF or back-to-back escrows or double closings), which is one source of OPM for you to consider using for wholesale flips.

 

Target Market: DMF Homeowners

 

A favorite target market for REIWers are financially troubled homeowners who can no longer afford to stay in their home and can best be described as DMF: Distressed, Motivated and Flexible; they may have only weeks or a month or two to resolve the problem confronting them due to a pre-foreclosure filing. If they wait too long, any equity they had in the house could be lost for good; further, their FICO score will probably take a severe hit, putting a black mark on their credit score that can last for years.

Besides pre-foreclosures, other “off market” DMF and non-DMF (REIW) opportunities include: landlords who are sick of the four “Ts” (tenants, toilets, trash and termites), probate, trust/estate sales, property tax liens, IRS tax liens, state income tax liens, insurance company sales (fire damaged properties), government condemned dwellings, online property auctions, etc.

 

How to Find DMF Homeowners

 

1. Investor-Friendly Realtors. Send a letter to local real estate professionals. Inform them that you are looking for DMF homeowners, and if they help you, there is good chance they can potentially earn double commissions (front and back on the same transaction). Also tell them that you are planning on doing more deals over time, and you will use them as your realtor every time you get a chance.

 

2. Dialing/Driving for Dollars.  Undertake a daily search of Craigslist and newspaper ads. Key phrases to look for include: motivated sellers, needs TLC, vacant, distressed, owner financing, FSBO, etc. Call them up and tell them that you are a ready cash buyer, you purchase properties at a discount to FMV, and that you are prepared to move very quickly. Be prepared to make a LOT of phone calls. Also, drive through nearby neighborhoods and look for run-down houses, vacant homes, etc. Write down the addresses and send them a letter asking if they are interested in selling their property.

 

UPDATE: Be sure you are up to speed with the latest changes in laws and business practices that impact wholesalers. One state (Illinois) has outlawed unlicensed wholesalers, i.e. those who acquire a property via an assignment; they must either get a RE license or use TF in order to own the property before selling it to another party. Also, a growing list of title insurers no longer allow same day double closes. Look for more and more states and title companies to tighten up their rules, regs and laws as time goes on as regards the licensing of wholesalers and double escrow time frames. Forewarned is forearmed.

 

Wholesaling: How To

 

A. Negotiate with the DMF Homeowner. Find out what has gone wrong with their finances. Listen to what they say. If they really are at the end of their financial rope, and there is realistically no way for them to keep their home, what you can offer is what is known generally as a “cash-for-keys, deed-in-lieu” proposition. The homeowner agrees to deed their home over to you for a certain amount of money.

 

B. Get the property “under contract” (RE purchase agreement) with the DMF homeowner (seller).

 

C. Get the property “under contract” (RE selling agreement) with a cash buyer (rehabber, homeowner or another wholesaler to whom you “co-wholesale” the property).

 

D. If you lack cash for the full purchase price of the DMF property, then you will need to find a funding source to finance the deal. However, few hard money lenders are eager to fund straight wholesale “flip” deals. Other money sources can include friends, relatives, co-workers, your 401k, etc.

 

F. TF option. If a wholesaler lacks the cash to a acquire a property, they can use TF to buy it from the seller (via escrow No. 1), wait anywhere from a few days to a week or two (to satisfy title insurance company rules), then sell the property they now own to a cash buyer via escrow No 2.

 

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