Free Real Estate Investing Course
Megan and Zeke’s Finding Wholesale Buyers
By Megan & Zeke Zucaro
Megan and Zeke’s Finding Wholesale Buyers 1
Wholesaling Finding Buyers
When doing wholesale deals, there are specific concerns and issues for
which you must be prepared.
Some of these concerns and issues are:
• Legal Trapdoors
• Volume Business
• Buyer’s Objections
• Seller’s Objections
• Estimating Repair Values
• Funding Sources/Strategies
• Marketing Property Quickly
• Market Protection
Legal Trapdoors
Illegal fix and flip. Buying and reselling a property for a higher price
without making any improvements to the property. Can be overcome
with the ―and/or assigns‖ clause in the contract.
Volume Business
To make money you must continue finding and selling your ownership
interest.
Buyer’s Objections
Walk away. Find another buyer. Buyers are easy to find.
Seller’s Objections
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Find their pain point or why they are selling. Use this and property
condition to negotiate the price and terms. Don’t pick on property or
personal issues. Estimating Repair Values
Use resources in the beginning, but you must learn to do this yourself
to properly do your evaluation; otherwise, find a partner that can do
the estimating for you.
Funding sources/Strategies
Necessary to:
1. allow you to purchase all good deals.
2. shorten the selling cycle.
Marketing Property Quickly
The quicker you sell, the more money you make with less expense.
Market Protection
Buy low/ sell low- market changes are not really relevant. If market
drops too much, you can always sell retail.
Illegal flipping and wholesaling
Basically, illegal flipping is inflating a price of property without doing
anything in a short period of time. In other words, you buy the
property, market it at a premium price to another party, who then
markets it at a premium price to another party. All the time the same
property is selling for a higher price, but nothing is being done to
increase value. There is generally a time limit to the sales, to allow for
appreciation, but that is different in each market and state.
This is illegal and something most state Attorney Generals are
watching for - it is usually a felony.
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Wholesaling is buying below market and selling below market, but doing
nothing to improve the property. This does not inflate the price of the
property. It allows the finder of the property to profit, and the next
buyer of the property enough room to make a profit through fixing or
rehabbing the property.
Banking Regulations
In most states, the Banking Commission oversees most entities of real
estate transactions including escrow companies, lenders, and
appraisers. They may also oversee the Department of Real Estate.
This commission creates and enforces rules that have the same power
as laws (Agency Law).
This commission also oversees appraisers and has rules (laws) that
govern and control appraisers and fines them for ―illegal‖ or non-
supported appraisals. This is an attempt to halt illegal flipping. Some
regulations may also apply to the investor who knowingly or unknowingly
(if a professional) violates law or it’s intent. Again, Wholesalers buy and
sell below market.
Commissions taken
Taking money for selling something you do not own. This is usually a
felony in
most states unless you are licensed by the state’s real estate
authority. This is a common mistake that most beginning investors and
greedy investors make. It usually occurs as follows:
―Hey Don, I found this good deal but I can’t do it. If you give me
$5,000.00 I will tell you who and where it is.‖
Typically someone just took an illegal commission and has committed a
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felony in every state in the USA. This is usually a Class 4 to Class 6
felony depending on each state’s statutes and Real Estate Department.
Most states are actively investigating and searching for these events.
Anyone can report it anonymously, even if they were not party to the
deal. This is sometimes called the Realtor Protection Law.
Anyone found guilty of this is barred from doing all real estate
transactions in the state and any other state with shared rights.
Objections important to your business.
1. No financing available- use your hard money lender.
2. Too much work- get a definition, can it be argued? Longer closes
cost you money.
3. Wrong value- what do they think and why.
4. Wrong area of town- ok, see you later.
These points important to a potential deal.
Seller is telling you what’s important to them. Get them to define what
is most important to them and why. These give you basic bargaining
points and sellers will usually tell you about the property at the same
time.
When the price is right and the seller is in right state of mind, it is
time to commit. Remember, the person who talks price first usually
loses. When you and the seller are close, tell the seller you will buy for
$x cash today if they are ready to sign.
You want buyers to look at your deal. If they are arguing your
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estimate, they are looking. If their numbers actually differ, yours were
always an estimate. Also your estimate should be a range to protect
you.
It is important for you to stick to the mid-range numbers and allow the
customer to use the top ones.
If the buyer is challenging your numbers, they are looking. Stay to
midrange so buyer can convince themselves it’s worth the move. That
sells. Be realistic with your numbers. If you have to make a guess, make
it a reasonable guess and try not to make guessing the norm.
―Catch-Up Owed Dollars‖
Pay back to stop foreclosure. Usually need your cash, cannot usually get
a loan for this.
How done?
Get amount from bank or law firm, deliver certified funds where
directed.
Will need authorization to disclose.
Why used?
Easiest way to stop foreclosure is seller (borrower) is willing and
cooperative.
Becomes a subject-to deal.
Typical challenge.
Protecting yourself and property ownership. Changes in ownership may
cause
bank to call the note due and payable.
Seller Carry Back
When the seller takes a loan position so the buyer doesn’t have to come
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up with the money.
How done?
Seller basically takes a note that is junior to all other property notes.
They file paperwork, and you make a payment to them.
Why used?
Usually in a buyer’s market to help buyer purchase property and seller
to get
―more‖ money.
Typical challenge.
Convincing the seller. Usually set up a 3rd party to collect payments.
Wraps
Similar to above, but original loan is encompassed by a new loan for new
sales price.
How done?
Original loan stays in place. And then buyer gets new loan for
difference between purchase price and old loan. This new loan payment
includes both loans usually.
Why used?
Common in commercial property. But it is good because buyer makes 1
payment and seller is sure 3rd party will pay original loan.
Typical challenge.
1. Convincing the original lender (if necessary).
2. Finding a new lender who will wrap.
3. Usually ARM loans.
The issues involved with a buyer funding strategy are that lenders do
not like or support seller financing, ownership of property cannot be
changed, and there are usually seller concerns and objections.
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How buyer funding works and why you would want to use it.
Buyer funding is used in subject-to or and/or assigns transactions.
Also known as a simultaneous close. All three parties show up at the
closing. The person you are buying the house from, you, and the person
you are selling the house to. You sit in the
middle of this transaction. All of your funding for this transaction is
done using your buyer's money (buyer funding), so you have no out-of-
pocket expenses in the deal.
A ―simultaneous closing‖ is not the same as the ―and/or assigns‖
practice.
How interest rates are set with private money.
By wishes of lender. Rate cannot be higher than state usury rate.
Normally today is around 18%. Always calculated as a daily rate.
Usury Interest
Legally defined maximum interest rate someone can charge. Each state
sets their own in the state statutes.
Legal Rate
Actual interest charged. Usually called APR, this is the actual cost of
using money including all points and interest paid calculated as a %
against money borrowed.
Simple interest and compound interest and how they are different.
Simple- compounded daily on principle only. Compound- calculated at
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stated intervals on principle plus interest plus fees.
Prime Rate
Interest you pay is in one way or another based on this rate. It is
really that rate of interest that banks pay to borrow funds. Loans will
usually say x% over prime.
Using private money or OPM (Other People’s Money) for buying
property.
1. Does not count against your credit.
2. Usually secured solely by purchased real estate.
3. Quicker approval time and faster money.
4. Better payment terms.
This is how the interest rate is calculated in hard-money lending:
Interest rate divided by days in a year
Take this times principle= daily rate
$100,000*.0001=$50/day *90 days= $4,500
Take daily rate * number of days= interest owed
Other places could you find sources of hard-money lenders:
Mortgage brokers, bankers. Local investors associations, realtors.
GLOSSARY OF TERMS
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Addendum — Terms or conditions added to a contract to specifically
call attention to them.
Usually comes at the end of the contract.
Appreciation — The increase in the value of a property due to changes
in market conditions, inflation or other causes.
Assignment of Sale (Agreement for Sale) — Sometimes called a land
contract or contract for deed. This is a one document property
purchase over time using the current owner’s financing, but putting the
title in the buyer’s name.
Blockbusting — Specifically defined action in the Fair Housing Act that
is considered discrimination against any protected class. This is using
fear for profit, in other words telling neighbors that undesirable
persons are moving in to convince them to sell.
ATF — Alcohol Tobacco and Firearms department.
BoN (By Owner Network) — Service usually offered to the above
seller.
Capital Loss — Loss on capital assets; those assets that have value
over the years and must be depreciated on a schedule provided by the
IRS.
Carry Back — Monies owed to the seller after purchase of their
property. Used to help the buyer come up with down payment.
Frequently done in a buyers market or on commercial purchases.
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Cash Flow — The amount of cash from an income-producing property
left after the expenses and debt have been deducted.
Collateral — Property provided to secure a debt or loan.
Comfort Animals — Doctor prescribed treatment for a medical
disorder. These are NOT ANIMALS and therefore no extra deposit
can be charged, nor can residency be denied.
Comps (Comparables) — Method of looking at other home sales in your
area to establish your homes value.
Contract Sale — Normal property sale using a standard real estate
contract with the closing date at some ―reasonable‖ time in the future.
Credit Check — Method of finding parties FICO score used to assess
their credit risk.
DEA — Drug Enforcement Agency.
Depreciation — A decline in the value of a property due to changes in
market conditions, deflation or other causes.
Detainer — Usually asking the court to take action against one party.
A common detainer used in Real Estate is a Forcible Detainer asking
the court to remove a tenant from your property via the eviction
process.
Distraint — Actions one party may take to protect their interest. An
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example is the Distraint Provision in the LTA, allowing a landlord to
seize personal property to cover money a tenant owes them.
Disclosures — Legal issues that must be given to the buyer of real
property prior to the purchase. Failure to disclose material
(important) issues can cancel the contract or force the seller to pay
the buyer. An important example is mold.
Essential Services — Services considered necessary for living.
Sometimes called health related services, e.g. AC, Heat, Electric,
Water, Sewer, etc.
Escrow — Process of creating necessary paperwork for a person to
purchase a home.
Eviction — Process of removing a tenant from a property
Fair Credit Reporting Act — Laws enacted to protect consumers from
incorrect information or wrongful loan denial.
FEMA — Federal Emergency Management Agency.
FHA — Federal Housing Authority.
FICO Score — Value used to judge you credit worthiness or risk based
on your past use of credit.
FOTS — Feet on the Street.
FSBO (For Sale By Owner) — When a home owner attempts to sell
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their property outside of the traditional Realtor® network.
HELOC (Home Equity Line of Credit) — Loan to take money out of
your house but use it when you want and on your time table.
HOA — Home Owners Association.
HUD Sales — Houses sold by HUD via sealed bid auctions.
INS — Immigration and Naturalization Service.
Lease Option — Method of selling a property overtime utilizing a lease
and an option document. Also sometimes used to refer to a Sandwich
Lease, where you the investor leases a property then sub-leases it to
another party.
LTA — Landlord Tenant Act.
Mechanic’s Liens — Lien filed by licensed contractor or one of their
services against a homeowner for work done on their property.
MLS (Multi-Listing Service) — Tool used by Realtors® to find and sell
property.
Option — Ability to choose to purchase at a later date.
OPM — Other People’s Money.
Ordinance — Usually applies to a rule passed by a local government,
Agency or Home Owners Association (HOA). These are sometimes
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referred to as City Code.
Ordinary Loss — Loss from running a business. Usually referred to as
expenses. This loss can be completely depreciated in the year it occurs.
PIs (Private investigators) — Persons hired usually to find a person.
Redlining — Another action defined as discrimination in the Fair
Housing Act. This usually applies to business and is defined as not
providing services to specific areas. For example an insurance company
decides it will not insure property north of Oak, but south of Church
and east of main, but west of 4th Ave.
REO (Real Estate Owned) — Real Estate a Bank owns either through
the foreclosure process or by purchase.
Sandwich Lease — Lease type where the owner leases the property to
you and you in turn, sub-lease the property to another buyer within the
terms of your lease.
Security Deposit — Funds provided by a tenant to secure a rental
property. Usually fixed at 1.5 times a months rent. This money does
not belong the Landlord, but rather the tenant and is held by the
landlord against future damages.
SFR (Single Family Residence) — Usually a property with a single home
up to a four- plex.
Steering — Practice prohibited by the fair housing act and considered
to be discrimination. This practice involves directing a protected group
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to live in one area.
Trust Account — Account used to store someone else’s funds until
they are needed. Usually used to describe the account a Realtor or
Landlord stores earnest money or security deposit.
VA (Veterans Administration) — Usually refers to loans provided to
Military Veterans as a benefit of military service.
VA Sales — Property sold by Veterans Administration in sealed bid
auctions.
Wrap — Method of stacking one mortgage on another. Uses the
Subject-To clause and is more commonly done on commercial loans.
Writ of Restitution — Court order to collect what is due you – usually
monetary.
WOM — Word of Mouth.
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