The Pros and Cons of Real Estate Wholesaling

When you have a property under contract, you have a marketable interest in that property: the contract. You can sell that contract in most states, but you can't sell the property until you own it. Talk to your lawyer.

I designed this infographic of the wholesale cycle way in the future. Too bad I don’t have it now.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-21.

Many "experts" recommend real estate wholesaling as a quick, inexpensive, and easy way into the business. While it may be the lease expensive way to start out, wholesaling isn't all that easy. For a complete explanation of what wholesaling is, see "What Is Real Estate Wholesaling?"

Pros

You can raise money fairly quickly.

Because you use very little of your own money and you collect on your investment quickly, it is possible to raise money very quickly. The amount of money you can raise depends primarily on your skill as a negotiator. How cheaply can you put the property under contract? How little of your money can you tie up in the process?

Risk is lower than renovating or buy and hold.

Again, because you use very little of your own money, you risk very little of your own money. But there are other risks.

Cons

It is not without risk.

Wholesaling can be very close to practicing real estate agency. You have to be very careful of your practices and wording to avoid this risk. Further, you will probably have at least a little of your own money at risk. And you risk your credibility with your peers if you don't perform a fair amount of due diligence before marketing your contract.

It takes a significant amount of effort.

Wholesaling requires more effort than just about any other kind of real estate investing and sales. It is a full-time marketing gig with very little repeat business. No seller will ever sell you more than one house. How would that sound? "Hey, Lee. You bought my house when it was being foreclosed on a few years ago. Guess what?"

You have to be willing to invest in marketing.

Because wholesaling is lead-driven, you have to generate a lot of leads for every deal that comes along. This part really isn't any different than other parts of the investing game, but it is something you have to be aware of. That means you have to be prepared to spend money and effort to generate those leads.

You can't do it on the MLS.

I see a lot of novice wholesalers trying to re-market a house they found on the Multiple Listing Service (MLS)—or from one of the big real estate sales websites like Realtor.com. The honest truth is, if it's on MLS, it's probably a very thin deal—usually too thin—for any investor already. By the time you add in a wholesaling fee, it probably isn't a deal any longer—if it ever was.

The point of this post isn't to try to scare you away from wholesaling. I want you to wholesale. We buy a good chunk of our deals from wholesalers. My business would be much smaller without reputable, reliable wholesalers.

The point is for you to understand what wholesaling is, what you're getting yourself into. You can make good money wholesaling, if you work at it and maintain good relationships with your buyers. But you will get much more out of it if you understand the needs of the people you buy from and figure out how to satisfy those needs.

The Win-Win Works

Proof of a Win-Win!!

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-01.

Independent proof of a win-win came through my Facebook feed today. The screen shot to the right is from the Realtor® who represents the buyers of the Blue Ridge property.

Love having my buyers come out on top in this crazy sellers market.

Those with a scarcity mindset might interpret McKinsey’s statement to mean that we sold too low. We didn’t. Even after negotiating with the buyer to establish a fair price, the house sold at the high end of the comparables. This is one of the best examples of a win-win scenario I’ve encountered to date.

We made money—just not as much as we might have had we not learned some valuable lessons about working with contractors. We can keep the lights on, pay the contractors, repay the loan to purchase the property, and put a little in our pockets.

I’m also very glad the buyers got a good deal. “People first.” I hope they will be really happy in the house.

Lakeland Closes

We closed on the purchase of this lovely house today.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-03-30.

We closed on the purchase of our second Hermit House redevelopment property today. It is a lovely two-story house in Pt. Venture.

The Lakeland house currently has a view of the lake only from one window in the master bathroom. In fact, you have to stand in the tub to see the lake. We hope to rectify that situation by adding a second-story deck that will be accessible from new doors out of the upstairs living area and a stair case from the existing backyard deck.

Our exit strategy for the property is currently in flux. We have several options, but all will remain on hold for the short term because Carol and Russell will rent the house for the short term. They sold their primary residence but haven’t found another suitable property. Investors tend to move a lot.

This house is an excellent example of a win-win. The previous owners needed to sell the house to move on with their lives. A previous attempt to sell at full market had failed. We were able to put cash in their pockets and enable them to pursue their life goals. And simply buying this house improves our balance sheet.

This is my favorite kind of deal: everybody wins.

How the Win-Win Creates Wealth

Larry, Lee, Sue Ann, and Valerie at an event in Houston. If you live life with a service mentality, everyone you meet is your partner.

Sometimes despite best intentions, rehabilitating your house turns out to be more than you are up for. We can help.Dominic’s company found a very sad house in one of the best neighborhoods in Temple, but it was too far north for them to manage the redevelopment. So they sold the contract to Hermit Haus and made a tidy profit on the deal!

This post originally appeared on the Hermit Haus Redevelopment website on 2016-03-16.

We at Hermit Haus Redevelopment focus on finding situations where everybody wins. I’m often asked how that can work. “Doesn’t somebody have to lose out?”

The answer is that not everybody measures their success in financial terms. When my mom died, Dad just wanted out of a house with too many memories. When he sold it for 70% of what it was worth in its as-is state, he was ecstatic to be free of it. He could put money in his pocket and start living life on his own terms.

Here’s how a group of people can work together to improve a neighborhood, create wealth, and build a situation where everybody benefits:

• I will admit that I wasn’t involved in the original transaction. So I don’t know what the original seller’s motivation was, but I’m going to assume their best interest was served by selling a house that was too much for them to renovate for sale. Maybe, like my dad, they were happy to sell the house for more than they paid for it, even if it wasn’t what it would have been worth if they worked to rehabilitate it.
• Another redeveloper Larry met at the Houston Summit last month is financing the project in return for two points (2% of the money he’s lending) plus 12% APR on the note.
• I put the project together, will manage the finances and be responsible for the mortgage, and will front most of the renovation budget not covered in the initial mortgage. In return, Hermit Haus will retain half of the profit at sale.
• Larry’s contractor friend will do most, if not all, of the work—or rather, his company will. He will retain a fair profit on what currently stands at a $70K redevelopment budget while his employees benefit from a living wage.
• Larry’s company is responsible for managing the day-to-day operations of the redevelopment project. It keeps the other half of the profits at sale.
• The neighborhood where the house is located gets a nice home where there is currently an eyesore that isn’t currently habitable. Everyone’s property values should increase as a result of this project.

Number Three

Temple (magenta circle) is pretty far north of Hermit Haus’s focus area (magenta glob).
 

Here is the house with the pile of ashes featured.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-03-11.

My mentor Phill Grove always says, “Your Net Worth equals your NetWork.” Here’s an example.

A few days ago, I got a call from Dominic G, another redeveloper working in Central Texas. He was checking references on a General Contractor with whom I’ve worked for many years. As we chatted, we found out we have a lot in common, including the back office system both our companies use. Then Dominic mentioned he had a house under contract in Temple. Since Temple is well outside of his normal range of operations, he wanted to know if I would be interested in buying the contract from him.

Now Temple is also pretty far north for Hermit Haus to go. We don’t usually get much farther north than Georgetown. But the numbers looked good on the surface, so I said I was.

Last month, I met yet another redeveloper at the Houston Summit who has done roughly 20 houses over the last 20 months in the “Greater Temple” area. We’ve been chatting a bit, so I called Larry and asked if he’d like to JV (form a joint venture) with Hermit Haus to get the deal done. He did. We did an onsite evaluation with Larry’s lead contractor, revisited the numbers, and came to an agreement on how to proceed. Hermit Haus is now under contract to buy its third house since December.

We’re calling this project “The Ash House” because the previous occupants appear to have heated the house with a lovely wood-burning fireplace for several years. Unfortunately for the neighbors, they just dumped the ashes in a flowerbed until the pile is at least 36 inches tall and a couple of feet in diameter. One of the first items to clean up on the list!

Everybody wins!

It’s Not Always a Nail

If all you have is a hammer, pretty soon everything starts to look like a nail.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-31.

This post is my take on the situation that spawned Sue Ann’s post yesterday. We came across a prime example of a deal that is not a good deal for everyone, but we were still able to find a good solution for a distressed seller.

Carol knows a frustrated landowner whose last tenants left his house unlivable when he was forced to evict them. He wants out of the renting business but is willing to owner finance the house.

There is a reason it’s called “property management.” Despite my series of posts extolling the benefits of rental ownership, renting houses is a business. It’s risky, and it’s not for everyone.

Russell, Carol, Sue Ann, and I all evaluated the house to determine what we would be willing to pay for it. At the same time, the owner asked Carol to show the house to another investor who had approached him. Sounds weird, huh? We’re looking to buy a house, and the owner asks us to show the house to a competitor. And we did so without hesitation. Carol is a Realtor®, so that gives us one more tool to help distressed owners find an acceptable solution. So, no problem.

It turns out that the other investor was willing to pay slightly more for the house than Hermit Haus was, because he focuses on that particular part of town. But he still wasn’t willing to pay what the owner wanted for the house. The owner didn’t see either our offer or the slightly higher offer from the other investor as beneficial enough for him at the time.

So what is the best win-win solution?

This trashy image from HuffPo symbolizes the house we evaluated. It isn’t that the problems were so bad, just that there were so many of them.

Let’s step back and look at the house. It’s a four bedroom 2.5 bathroom brick two story with a two-car garage. After renovation, it will be a perfect home for a growing family. Unfortunately, there is that thing about the house not being livable right now. That means a family will have trouble finding a bank willing to finance the house in its current state. But that’s okay because the owner doesn’t want to sell the house outright; he wants to finance it. We can also help the right buyer find funding to rehab the house and increase their equity in it—kinda like what they do on Fixer Upper, but we don’t to the rehab. Luckily, we can put the right buyer in touch with the right contractors, as well as the money to fix it up.

In investor language, that’s called having “multiple exit strategies.” In Hermit Haus terms, it’s called “having the right tools to find the right solution for the problem.” The old saying is holds that if you only have a hammer, everything starts to look like a nail. At Hermit Haus Redevelopment, we pride ourselves on being able to look at the actual situation and find the right solution, not just the one that fits the tool at hand. Depending on the situation, we will take one of six positive actions to help any distressed owner:

• Buy the house ourselves and renovate it to sell
• Buy the house and renovate it to as a long-term hold (rental)
• Wholesale the house to another investor
• Refer the house to Carol to list as a Realtor^®
• Advise the seller on other methods of getting out from under the property
• Walk away from the house and nothing but good wishes for the seller

In this case, our solution was for Carol to list the property as an owner-financed fixer upper. When she finds the right buyer, we will have a good set of solutions for them, too.