One of the most appealing things about investing in real estate is that it can be done with very little capital. In other words, you do not have to have a $150,000 in your bank account to purchase a $150,000 house. This concept is called using leverage. Leverage simply means that you can control a lot (the whole house) with very little investment.
This article will focus on how you can leverage yourself into some great deals and make some money along the way. We will focus on an investing technique called wholesaling (also referred to as contract assignments).
How It Works
Wholesaling involves finding a great deal and then selling it to another party interested in the deal. You sign a contract with the seller agreeing to the terms of the purchase. Then, you find someone else that would like to have those terms with the seller and you sell them the contract. You are not selling the property; you are selling them your position in the contract.
The seller still gets every penny that was agreed upon in writing, the new buyer gets a great deal, and you make a fee for assigning your position in the deal to the new buyer. It is a true win-win-win situation.
What is the benefit to you as the person in the middle of this transaction? Think about it like this:
If you are the one in the middle, how much money did you have to invest to make this deal work? The answer: very little. The only money that you invested into this deal was the earnest money deposit that you paid with the purchase contract once the offer was accepted. Since this amount is negotiable, it could be as little as a couple hundred dollars or less if you are good at negotiating.
How much financing did you need to get? The answer: none! Since you are selling your position in the deal, you never needed financing to make this work. The new buyer pays cash or lines up their own financing to complete the purchase.
If the property needed repairs, did you have to do the repairs? No! The new buyer is taking on the contract as is and the property as is. Any repairs that are needed will be completed by the new buyer.
As you can see, there is a tremendous benefit to be able to do deals where you invest very little money, financing is not necessary, and you do not have to do repairs. If you are doing transactions that require very little money, your credit is not needed and you do not have to be a handyman to do it, you can see that you have really removed the major barriers that keep people from investing in real estate. You have harnessed the power of leverage all because of the simple technique that you are using.
Although you could sell your contract to a buyer that wants to purchase their own home, you typically will sell it to another investor. The major reason for this is that they are always in the market for a great deal. If you negotiated a great deal, they will likely have an interest.
When most people are introduced to wholesaling, they typically comment that finding the investor to sell the contract to must be difficult. Actually, it is quite the opposite. If the contract that you negotiated with the seller is a great deal, then that represents an opportunity for the other investor to make money. That is what is going to keep them interested. You will find that the better deal you negotiate, the easier it will be to find another investor. If the deal is not that great, you will have a hard time finding investors.
If you are using this technique and you find that you are having a hard time finding investors that are interested in your contract, that tells you that you probably have not negotiated a good enough deal.
One of the easiest ways to find investors for your contracts is to use the “We Buy Houses” signs and ads that you see all over the place. If you are wholesaling, the investors that are advertising are not your competition. They are your buyers.
As you find these signs and ads, you should be taking down their names and phone numbers. Start building a list of potential buyers. You will have a lot more confidence going into a deal knowing that you already have potential buyers lined up.
When you find these investors, give them a call. Your whole objective during this call is to introduce yourself and find out what they are looking for in a deal. Every investor is different. Some of them have certain areas that they like to invest in. Some of them have specific types of properties that they look for. Some of them have to have a certain amount of profit or else they will not be interested in the deal. When you take the time to find out what they are looking for before you have a contract in place, wholesaling becomes so much easier. Build your list of buyers first and you will have a lot more confidence finding the right deals because you know what they are looking for.
When you call them, say something like, “Hi, my name is ______________ and I am an investor in the area as well. Sometimes, I run into more deals than I can personally finance and I wanted to know: If I had a deal that made sense, would it be okay if I brought it to you?” This tells them why you wouldn’t buy it yourself and it opens up the door to discuss things further. Chances are very high that they will say that they would be interested. Start to gather their information and what they look for in a deal. Now you are building a list of buyers for your wholesale deals.
This simple investing technique can help you leverage the power that real estate has to offer. This is a perfect example of why you do not need to have a lot of money or credit to invest. You simply have to know the right techniques and know how to use them. With this knowledge, you will be able to capitalize on the great deals that you see and make a profit.