Wholesale Investing - an Introduction for Kansas City Real Estate Investors

I get many calls from people who have recently read a book or attended a seminar and they have decided to be real estate investors. I received on just last week that I swear the guy just heard a commercial on the radio as he was driving down the road; somehow he found my number and dialed it up as he was on his way to where ever he was going.

He wanted to know where he could buy a good deal, and if I could help him find them. He planned on buying several and flipping them for quick cash, and could I help him with that. The more he asked questions, the more I realized he either wanted me to teach him how to be a wholesale investor on the phone in 5 minutes or he wanted me to do everything for him for a real estate commission as a Realtor.

So this article is for the gentleman who called me the Monday after Christmas.

First of all if you are going to buy and flip a house for quick cash, you need to do a bit of homework up front. A Realtor is not going to be able to necessarily tell you what a good deal would be that you can buy and then sell for quick cash. If the Realtor has that knowledge more than likely they will be buying and flipping and making the quick cash themselves rather than working for a paltry 3% commission that they have to then split with their broker.

Second, you can learn how to be a wholesale investor in a short 5 to 10 minute phone call. And if you are going to try to learn something from someone in such a short call, please make it from a place where you can take notes, not driving down the road where you have a strong possibility of driving up a tree or running over a little old lady.

To learn how to wholesale houses you need a little bit of education. Myself, I have gone through several different training programs from Scott Rister, Larry Goins, Kathy Kennebrook, and Than Merrill to name a few. I have taken the best from each of these programs as well as stuff I have learned first hand from some of the bigger wholesale companies in the Kansas City market such as observing HomeVestors and the old Ridgemoor Company. And I have also learned from experience in the past 10 years. So sorry to say, it can’t be condensed into a short phone call, but I will give you a brief intro.

There are several steps you need to take:

1. Educate yourself on the area & the properties
2. Educate yourself on estimating repairs
3. Figure out how much to offer
4. Find the money
5. Find the right title company or attorney
6. Build a list of buyers
7. Develop a team of service providers
8. Create YOUR plan to find deals
9. The start doing deals.

First of all if you are going to be buying and selling houses in a particular area it would be worth your time to do a little homework. I would start by developing a relationship with a Realtor or an appraiser and get them to email you live links to everything listed, pending, sold, expired, etc in the MLS system for the past year in the given area. If they can convert this to PDF as well so you can save it as a reference to look back at later, this will give you a really good idea of accurate values of properties in your area. Also take time to look at the live links they send and review the interior photos so you know what the “typical” house looks like on the inside.

Secondly you need to have a way to accurately estimate repairs on a home. If repairs are totally new to you, you might want to hire a contractor or an inspector to walk through several fixer upper houses that are typical for your area and show you the all the items that need repaired, what they look like, and a rough estimate of what it would cost to repair. Do this two or three times and you will be able to come up with a rough estimate of repairs needed on a give house.

As a wholesaler, you may end up selling the fixer upper wholesales with a recommended contractor, so you may be able to develop a relationship with a good contractor in your area who will actually go do a repair bid for you that you can use in marketing the property with the hopes that the person who buys your wholesale property will use the contractor’s services to make the needed repairs.

After you know how to figure out what houses are worth through the neighborhood values and the needed repairs, you are now in a position to start figuring out what you will offer. As most wholesale investors sell to other investors, you can roughly figure that the average investor buyer will pay up to 70% of the After Repair Value less Repairs.

So if the “typical” house sells for $100,000 and it needs $30,000 in repairs, the average investor would pay $100,000 x 70% or $70,000 less $30,000 in repairs. Or they would pay about $40,000 for the house. The number you will need to verify in your area is the 70%. In some areas, like mine here in Kansas City, in areas where there are high numbers of foreclosures, you might find that the 70% factor might be 60% or 50%, so figure this out before you start making offers.

So once you know what the typical investor will pay for a house, then you are all set on your Third task of figuring out what to offer. Just take the number we figured above that the investor will pay, subtract out your profit and maybe just a bit more for a cushion and you have a number to target for your purchase price.

But before you start actually making offers, your fourth step is to find your money. I know, many of you are saying that if I am wholesaling houses I am going to assign the property or double close, what do I need money for?

So let’s step back a minute and define what assign or double close means.

With an assignment, you get a property under contract to buy a house at a particular price. Then you get a contract with someone who wants to pay you a fee to take your place at closing.

An example might be that you have 123 Main St under contract to purchase at $25,000 with Suzie Seller and Larry Landlord who is willing to pay up to $28,000 for the property. You have a purchase contract with Suzie Seller to buy at $25,000 and hen Larry Landlord signs an assignment that says he will pay you $3,000 at closing for the right to close in your place and pay Suzie Seller $25,000. In this transaction on the HUD, both Suzie Seller and Larry Landlord will know that you Willie Wholesaler are making $3,000

Where the need to have money comes in would be when Larry Landlord backs out the day before closing and you have to either close on the property or extend the contract with Suzie Seller.

With a double close you have the same house at 123 Main St under contract to purchase at $25,000 with Suzie Seller. You find Larry Landlord who is really excited and ready to buy at $35,000 because the property is rented for $750 a month. But because you don’t really want Suzie and Larry finding out that you are making $10,000 in the middle as the wholesaler, you want to Double Close. So you have two contracts: one for you to buy from Suzie Seller and one for you to sell to Larry Landlord. You, Suzie, and Larry all close on the same day and the funds that Larry brings to closing to buy pays Suzie for your purchase with about $10,000 left over for you as profit.

But again, what if Suzie has to sell on that particular day or she will back out of the contract with you and sell to someone else. Further Larry wants to buy the house, but can’t quite get his funding put together until a few days after you are supposed to close. If you don’t have the funding ready to go, you loose out on doing the deal and making $10,000.

So you need to pay particular attention to step number 4: Finding the Funding. You also need to find the funding, because many times your buyers might need help in financing the purchase. If you have funding lined up that your buyer can use, you may be able to turn lookie lou phone calls in to actual buyers. So spend a large portion of your time calling lenders at your Investor Club, your networking groups, and out of your local phone books to line up some funding. I would try to find one or two of each of the following:

1. FHA Lender for those few houses that could be sold directly to the general public.
2. Hard Money Lender that would be willing to lend you funds for a few days to a few weeks.
3. Mortgage or Bank Lender who will lend you the funds for a longer term for those houses you might need to buy and do a few minor repairs and sell in a few months.
4. Private Lenders should be your main focus because these will be your best source for cheaper funding if you need to buy a property. Private Lending will be a topic for another article on another day.

As you call and talk to all of these lenders, tell them what you are doing, what kind of funding you might need or that your buyers might need, and if they can’t help you ask them for referrals to other lenders who might be able to help you.

You have one more homework step before you are ready to deal with buyers and sellers and that is number six, finding the right title company. If you don’t have a title company that is willing and able to double close for you or to close an assignment contract, then you will be very hard pressed to do deals. It is much better to have this title company lined up in advance than trying to find one to put a deal together for you quickly at the last minute.

Further your title company needs to be investor and for sale by owner friendly. Many companies in our area charge an extra fee if there are no realtors involved and that could eat into your profits. You also want a title company that is good at solving problems. If you wholesale more than one or two houses a year, you will run into some major title issues sooner rather than later that need to be dealt with.

Now you are ready to start the fun part of wholesaling. Building your buyers list. I would start at your local REIA and if possible using the old fashioned phone. If at all possible get a list of the members and start calling them and asking them a few basic questions:

1. Do you buy houses?
2. Do you have 5 minutes to talk?
3. Where do you buy?
4. What do you look for in a house?
5. Price range?
6. How many a year?
7. What is your end use? (Rehab flip, section 8 rental, lease to own)
8. If I have a good deal how fast can you close?
9. How do I get a good deal in front of you?
10. Get their name and contact information.

I have tried email and found that it just does now work. You can send out 1000 emails and you will more than likely get a 2 or 3 people respond back. Use the above information to build a contact database online and devise a way to email out your deals as you get them.

I would also invest some time in calling all the “I Buy Houses” ads in the newspaper as well as the for rent by owner ads. Then I would learn how to market houses through your local REIA group both at meetings and online and find some national online outlets for marketing properties. The best online place I have found is craigslist.com.

On your buyer’s list you want to add everyone who says they would like to be notified of properties, but I would also try to build a special buyers list of people that are cash buyers and could close in less than a week if you find them a good deal. As you do deals, add to this special list the people who do buy houses. I would contact this special list first and give them a 24-hour head start before sending out the property to your full list.

Along the way in getting this far you have probably talked to a lot of people: contractors, inspectors, lenders, realtors, property manager, etc. Be sure to keep all of them in a database of service providers so when your buyer’s ask, and they will, you have some key contact to share with them.

Now at step number 8 you need to figure out how you are going to find deals. If you look at all the training programs out there, this is where they devote the majority of their time in training you.
They talk about what a motivated seller is and what they do to find that very motivated seller:
· Larry Goins mainly hires buyers to sit and call For Sale and For Rent by owners in the newspaper.
· Scott Rister likes to mail a series of letters and postcards to out of stat owners, code violation lists, and owners in eviction court among others. He is focusing mailing on rental properties and junkers.
· Kathy Kennebrook also likes the direct mail approach also and mails to out of state owners on higher end homes, homes in probate, and nicer areas.
· Than Merrill program takes a multi approach from direct mail to people in foreclosure, to bandit signs, to buying leads.

There are virtually 100’s of ways to find motivated sellers and getting them to call you. For example as I am writing this paragraph above, Larry Goins has an autodialer to call up people who have given him their contact information in some way and this autodialer just called me to promote his latest training. You could set up an autodialer with a message on how you buy houses and set it up to call all the for sale and for rent buy owners and direct them back to your web site for more information.

Take a little time and review all the articles and teleseminars online devoted to wholesaling and finding motivated sellers and you will get a very good idea of things you can use to find the deals. Then pick three or four methods based on the money you have to devote to finding deals and implement them. Don’t get discouraged if a deal does not fall in your lap.

It could take 2 to 3 months or more to get the right deal in front of you. This may be because your marketing plan or your finding plan needs to be learned and you need to practice a bit. Also many times a person may not call you the first time you contact them or they see your sign. They may need to “hear” from you through a sign, letter, phone call, email, web site several times before they get up the courage to call you.

Now this last part in getting the sellers to contact you is probably the most important. You need to have a phone number (local if you are working inner city), a web site, and an email to provide them several ways to find you and learn more. And be sure that if you get a phone call or an email to contact them back as soon as possible, because if they are ready to sell today and you don’t call them back, they will find another potential buyer or a realtor and go with them. Once they raise their hand and say, please help me with my problem, you have about a 12 hour window if that to get back with them before they either change their minds or go with someone else.

Now you have all the basics you need to decide if you want to wholesale houses. I would still recommend doing a little more homework with a book from the book store, information from online or a training course or two. My team and I bought and sold about 23 house in 2008 and 17 in 2007 on a part time basis and we have been working on perfecting the first 8 steps since the year 2000. We have attended many training events and purchased several training courses and talked to other active wholesale investors in order to tweak our system and we continue to make improvements. Take the time to utilize the free or low cost training offered by your local Real Estate Investor Association and don’t be afraid to ask questions on those online networking boards.

As you can see you can’t do it all in a 10-minute phone call and a Realtor is not going to be able to do it for you. So far with this brief overview I see we are up to about 3 pages. So set aside some time and start working on the steps.

About the Author: Kim Tucker is an Investor and Real Estate Broker in the Kansas City Market. Along with her husband Don, they have been investing in Kansas City Real Estate since 1999. You can find more about Kim online by visiting her blog at http://www.tuckeroneproperties.com/or you can reach her by phone at 816-523-4400. Currently in 2009 the Tuckers are buying and wholesaling a house or two each month and focusing their efforts currently on building their real estate brokerage http://www.realtyresourcekc.com/that caters to the Kansas City Real Estate Investor.