Wholesaling 101: 3 things to look for that makes a real estate investment GREAT
Before I dive in, this topic is always a matter of opinion. Everyone has different strategies and of what they think constitutes for a good real estate investment. But, this is a generalization from my experience in dealing with investors and being involved with financing hard money loans, conventional mortgages, and just all around networking. Some patterns seem to stay consistent. For those that wholesale real estate, these are some things to look for so that you are aware of what to look for in order for your inventory to move FAST.
LOCATION, LOCATION, LOCATION
Now this doesn't mean the subject property HAS to be close to schools, shopping, public transport areas, etc. (although, that really does help, but we'll get back to it). The best way to approach this is by researching where there are a lot of frequent cash purchases. You can find this on public record, or if you have access to MLS. There are even online programs that you can subscribe to that can show you the neighborhoods on a map where there have been consistent cash purchases. They will either show up as a closing done by an LLC, or individual, instead of a mortgage note. By knowing where investors are buying, you will have an immediate step in the right direction on where you will want to focus your campaigns.
Look for an area that has a low DOM average of sold properties (Days On Market). If an investor flips a house, they wouldn’t want to do so in an area that takes a long time to sell. Try to stay within a region that has real estate that are generally 30-60 days on market. And finally, when filtering and looking for a good location to focus on, we will go back to what is around your ideal subject property. This day in age, millennials are mostly family households. Retail buyers are more likely to want a house near better schools, a short drive to a grocery store, but not necessarily too close to where there might be excessive traffic, so downtown city areas or areas of attraction (such as theme parks) are not always favorable.
THE NUMBERS MUST COUNT
By now you should already know a few buyers, correct? I would not suggest going into wholesaling real estate if you do not already have some buyers lined up at least, how would you know what to look for? Coming from a hard money perspective, let’s look at the funding. Most hard money lenders are almost the same across the board (notice I said “most”, not “all”). The most common magical number that pops up is 65% of the ARV, or After Repair Value. This is to include the rehab/construction costs. Keep that in mind when it comes to negotiating a seller. This will keep it options available when it comes to assigning your contract quickly. I have even known of private lenders to have similar criteria for the deals that they would fund out of their own pockets, and cash buyers that do their best to stay within a 70% ARV.
Now, this does not apply to turn-key investments. I mean if you have a turn-key property for that low, GREAT! Even better! Cash buyers that do not want to deal with the hassle of financing and are looking for immediate flips or to expand their portfolio generally go higher on the ARV, typically 70% and I have seen them go all the way up to 85%. Believe it or not, I have seen cash buyers buy retail to expand their rental portfolio. You will be that professional to save them an abundance amount of cash. High spreads are AMAZING, so you do not always have to go by the ARV percentage. Throw one in here and there to start filtering out who is a real cash buyer and who isn’t. $100,000 - $200,000 profit spreads are very attractive and there are investors and groups that will buy into them all day long.
You do not have to be a mathematician to figure out what would be a great deal, nor a construction expert. For all I care you could have done basket weaving and still become the greatest real estate investor of all time. Get to know someone who is an expert in their field. Remember that saying? “Jack of all trades, but master at none”? Andrew Carnegie was the most successful entrepreneur of his time in the steel industry and he hardly knew anything about steel. So, make sure you have someone on your team that can help you with estimating a rehab cost. If you do not have one, there are wonderful phone applications that can help you with that as well and bring you close.
Factor in closing costs, how much taxes on the property would be, and always do your due diligence to make sure there aren’t any liens, back taxes, or judgements on the property. This is all public record and nothing gets more frustrating than spending a lot of time with an interested buyer and having your deal shatter because you didn’t realize that there were liens. Yes, I am speaking from personal experience.