On my very first Webinar in the Elite Start series our very first question was – “How did you fund your very first wholesale deal?”
And while we will be talking about Funding Deals in a webinar in a few weeks I wanted to share this as a case study . . . at least what I can remember.
So here goes.
Don and I started investing in real estate in early 2000 and shortly there after I became a real estate agent for many reasons. I did my first “wholesale” deal in 2005. Until attending a real estate convention and hearing a speaker talk about wholesaling, I didn’t even know what it was. However, when I look back I would have to say that some of my wholesale deals were actually done before that, I just didn’t know how to wholesale, so I did them a different way.
You see, motivated sellers would call us about selling us their house. But if it didn’t fit our parameters of a deal to buy, rehab and then resell, we never even considered buying it and selling it to someone else. No I had a real estate license and I just listed it and sold it for a commission.
At that time in 2004 and 2005 we were working with low end houses that were bought by the average investor for $20,000, rehabbed for about $20,000 to $30,000, and then sold to either a landlord or an owner occupant for around $80,000.
Quite often I would get houses coming to me from motivated sellers and other investors and it never even occurred to me to buy it or option it and then wholesale it. Because I was a Realtor and worked with the largest REO agent team in town (Real Estate Owned – Bank Owned Properties), I had an extensive buyer’s list and could sell just about anything in no time flat. So I often would list a house and sell it in few weeks for an extra $1000 to $1500.
But back to my true first “wholesale” deal.
I attended an even in late 2004 in Florida and out of that event came the business plan for MAREI and a course on wholesaling houses from Scott Rister. I read the two main notebooks that came with the course on the airplane on the way home. Then I read them again when I got home, this time taking notes.
First Step was to set up a website and get a trackable 800 number. So I set up kcmoHomeBuyer.com as a free website using WordPress.com and I purchased a trackable phone number through some phone service. The trackable number was a mistake as no one would call it, but I digress.
Second Step was to print up some postcards with the message that I buy houses and then to have a nice mail mergable letter with a similar message.
Third Step was to buy a list of absentee owners. So I went online, found a service and bought a list of 1000 names and addresses.
Next Step was to send a letter to all the addresses. Which I mail merged probably about 100 of the names and send out 100 letters. My plan was to send 100 a week for 10 weeks.
But we sent out the first 100 letter’s and nothing happened. I was bummed and defeated and while I didn’t decide that wholesaling didn’t work, I didn’t get any reward from the first mailing, so I didn’t work really hard to get the 2nd mailing and the 3rd mailing out. In fact, life got in the way and the shinny object of other things to do in this industry, so I kind of forgot about the whole wholesale thing until 6 months later when I cleaned my office and wondered what to do with all these boxes of postcards.
I had some free time, I was cleaning the office remember. So I dug out the wholesaling course and decided to try again. I had the postcards, I had the letter and I had the list of 1000 names. I started at the beginning with the first letter again, to the same 100 people I had sent to before. In my mind I was starting over, but for these 100 people, it was my second letter to them and something amazing happened.
The phone rang and we got about 10 phone calls from sellers who wanted to talk to us. I think maybe 3 or 4 were potential deals. The best call was from some lady that had a rental property. She only wanted $15,000, so I was really excited, only $15,000, we could buy that with our Line of Credit. We kept talking, she had not been to this rental property for over 10 years and she had just got a notice in the mail from the city about non-functioning cars in the yard and she was tired of dealing with it. She made arrangements to have the tenant let us in.
The plot thickened. The rent was about $250 a month, about $200 under value for the house, the area and the time and well, there was a reason for that . . nothing was fixed ever, unless the tenant did it. And because I sold houses in the area on a regular basis, we knew we could sell a house like this one for $19,000 to $25,000. We talked the lady down to $12,000 on the phone before we went to look at the house and if memory serves, we got her down another $2,000 after looking at the house and settled on $10,000.
We did the whole purchase contract, and went to closing and bought the house. We had not yet learned about options or assigning contracts. So we bought the house with funds from the Line of Credit, which at that time we were able to develop from a letter we received in the mail from a credit card company, they don’t really offer these much any more. However, this could very easily have been bought and sold by our Self Directed IRA or we could have borrowed the $10,000 from a private lender, or even double closed it, however at that time, we just didn’t know about any of those things.
We closed on a Friday morning. We put a for sale sign in the yard Friday afternoon and went away for the weekend. Over the weekend we had a call from a guy rehabbing a house a couple of doors down, what did we want for the house. I believe we were asking $25,000 and on Monday morning while our crew was cleaning out the house, he looked at it, made an offer of $21,000, cash.
We wrote up the contract, sent it to the title company and a week or so later we closed it. I believe after interest on the line of credit and fees to buy it and to sell it, we made about $8,000 net.
We could have done so much with this property if we had been using other strategies.
- Self Directed IRA Investing: We could have bought and wholesaled it with our Self Directed IRA and made that $8,000 profit tax deferred, today with a Roth IRA, we could have made the investment tax free.
- Buy and Hold: We could have bought it, rehabbed it with our line of credit and then refinanced it to a permanent loan and held it for a rental and cash flowed very well and by this time owned a rental free and clear, however it was not an area where we wanted to hold property.
- Subject To: The lady selling the house still owed $6,000 on a mortgage and her problem was the house, she still liked the $250 a month coming in. We could have probably negotiated with her to buy it for $10,000 subject to her existing financing and paid her $4,000 down and $250 a month until the full $10,000 was paid off and then flipped it and paid her off in 30 days, or rehabbed it and then rented it out.
- Seller Financing: We could have purchased it for $10,000 and then seller financed it to our investor buyer for $25,000 and he would have made us payments over time.
We are going to be talking about strategies on Webinar #2 of our Elite Start Series and how to fund deals on Webinar #4 in April. Find out about the full Elite Start Package and join us for all the webinars over the next few months.