Have you ever wondered whether or wished that there was a way to get into real estate investing without having to bring a large sum of money to the table? Wouldn’t it be nice to be able to make money in real estate even if your credit is not great, or you are not in a high-salaried job? Maybe you have heard stories of people that were down and out but somehow got into real estate and made a fortune.
This series or articles intends to show you how you can get involved in a successful real estate investing career regardless of how much money you have or your career situation or your credit rating. Quite frankly, even age does not matter – you are never too young or too old to make deals as long as you discipline yourself to do it according to the principles that work.
When we consider the factors that somehow get in the way of people taking action to make their lives better, more often than not the barrier that keeps them back rests on fear. Fear might not be rational, but it is real.
When you first decide that you would like to take advantage of the huge financial opportunities that real estate investing offers, quite likely your first thought was, “where am I going to get the money to put into this?” This is natural. You have heard so many things over the years about money: it’s hard to come by; you need money to make money; money makes people bad. And so most people grow up with ambivalent feelings about money. They want it, but it scares them. They know it is necessary but they believe their access to it is limited.
Then they see people around them that do not seem to be weighted down by the same thoughts and therefore enjoy an abundance of money. It seems that some few have the ability to attract money to them easily, effortlessly, while most people struggle and work to have enough to get by on.
When we say effortlessly, we don’t mean that people with lots of money don’t do anything to get money? We refer to an attitude that attracts money to them. They still do whatever it takes to get it, but it takes less effort when the money is attracted to you. The Germans have a reputation as a hard-working and efficient group of people, and they have a saying, which we will translate as: “Whatever you don’t have in your head, you’re going to need in your legs.” (Was man nicht im Kopft hat, muß man in den Beinen haben). In other words, the advice to work smarter rather than harder does not excuse us from putting in all necessary effort, but rather explains that using our heads gives us leverage over the situation. The more mental effort we invest, the less physical effort is necessary.
So now we would like to apply this principle to your situation. Possibly you have never purchase a piece of real property before, or your ownership has been limited to your home. If you cannot see yourself – if your sub-conscious mind cannot visualize – as a successful investor, it will be difficult to put in the effort to make it so. The mental leverage of a positive self-image can be your key to success.
We want to help you take this step by showing you how you can make money in real estate without the need of owning the property. You undoubtedly recognize that if you can make money without owning a property you can put aside your fears about money and focus on making the deals that will generate the money you will need later on.
A System for Doing It
A good theoretical foundation is an essential element to success. Even opening a door to go into another room if based on theory: the theory that turning the handle will cause the mechanism to activate in pulling the bolt into the door so that it can be opened, plus the theory that your thought and intention to do so will cause your hand so to move that you can turn the handle.
We might not think of such simple and everyday tasks as founded on theory because we take it for granted. On the other, without the theory you would not have the faith necessary to take the action.
Our definition of theory is “systematically organized knowledge.” You need the knowledge of what you should do in order to it correctly, you want that knowledge organized for understanding and application, and you want to apply it within a system.
The key and linchpin to this idea is that theory is nothing more than trivia facts without the application. The door does not open until you take action.
System is one of those words we got from Greek and it described a whole compounded of several parts – an assemblage or combination that forms a unitary whole. Using a sound and well-thought-out system is a key to success, especially in a new and unfamiliar endeavor.
Of course, no system for working is real estate is perfect, but utilizing a good system will get you close enough to what you want to enable you to make the necessary adjustments and accommodations to get there.
The system we are talking about here allows you to start working and investing in real estate without excellent credit or a surplus of cash. It includes strategies for aspiring real estate investors to start generating cash flow despite their financial limitation.
Making Money without Spending Money
Here’s a pleasant thought. You can make money in real estate without actually owning a property, as long as you have control over it. How to you gain control? The purchase contract gives you control. Why? Because now nobody else can legally buy the property but you — or whoever you say can buy it. In other words, the seller is not at liberty to sell to anybody but you, or whomever you give buyer’s rights to. The thing is, if this is a good contract, a deal that will make good money, then if you gave up the right to buy the property to someone else, you would be giving up an opportunity to make some serious money. We think you’d better be compensated for that. There’s your income.
Contract turns are a good starting point in a real estate investing career. While doing contract turns, you earn while you learn and you also learn the ropes. If you do it right you don’t have to worry about risk, either.
Simply put, a contract turn means you execute a contract to purchase a property then sell your right to purchase that property to a third party. This is a great, low risk and very legal way to generate quick cash.
Contract turns come in two forms, wholesale and retail. The difference depends upon who ends up with the property. If the person you assign it to plans to do some work and then sell the house, it is wholesale. If the people you turn the contract to plan to live in the house to live in, it is retail. Let’s look at the two separately.
In the real estate market place, a contract can be assigned. That means that if you are the buyer under a contract to purchase and sell real property, you can assign your rights under the contract to a third party. Assuming that the contract represents a good deal for the buyer, giving up your buyer rights means you are giving up something of value. For that you deserve to be compensated. Conversely, the assignee —the person to whom you assign these rights, gains some of value, which must be paid for.
There is no set amount for the assignment fee. It can be considered as more than a finder’s fee, since you not only find the property but negotiate a contract. It has a lot to do with the value of the property involved, and might range from $1000 to $7000 or more. This might become more clear as we look at what you actually do with a contract turn.
A Quick Turn Example
Here’s an example of how a typical contract assignment might work.
Let’s say you find a vacant house, ugly and run down. It doesn’t even have a “for sale” sign in the yard. One thing you can depend on, though: whatever you offer the owner is more than he or she is getting on this house right now. With a little detective work you locate the owner and negotiate a “risk free” contract to purchase the property. The price you negotiate would be as low as possible – in this idealized case, better (i.e., lower) than 70% of the value the house will have after repairs are made. To give it numbers, let’s say the house will be worth $150,000 when it has been made pretty. We offer $100,000. The seller wants to maintain a shred of dignity, and counters at $110,000, so the two of you settle at $105,000.
The great thing is that the owner was not actively selling the house, so a minimum earnest money deposit should not create an argument, and since the house was just sitting and presenting no economic value to the owner, the price you offer can be low. As earnest money, you may want to offer $10. This will be enough to make the purchase contract binding and enforceable. If you must offer more, do so. In other words, offer the least you can to get the job done. Normal and customary for most parts of the country is an earnest money amount between $500 and $1000. This is part of the legal principle of contract consideration.
As soon as you get the signed purchase contract, you contact an investor that rehabs houses in the area and offer to sell the house for $5,000 more than your contract amount. That would still put it at around 73% of value, which will be very attractive. To transfer your right to buy the property at the contract amount to the investor, you fill out a one page “Assignment of Contract” form and get $500 in earnest money. A few days later the transaction closes at a title company or an attorney’s office and you get a check for $4500 PLUS the $10.00 earnest money you paid.
What have described here would be called a wholesale deal. You would be the wholesaler. You get the house directly from a supplier, then act as a wholesaler to an investor who will serve as a retailer to an end user.
Wholesale or Retail?
Contract flips come in two forms, wholesale and retail. The difference depends upon who ends up with the property. If you get a contract on house with the intent of assigning it to another investor who will then sell it for an additional profit, you are acting as a wholesaler. On the other hand, if the people who take the house off your hands with an assignment plan to live in it, we call that retail. We will look at them in greater detail.
Wholesale: This is a means of buying low and selling low. Obviously if you can profitably sell low, the selling part becomes easier. Your means of selling is a quick contract assignment, generally to an investor. The investor would become responsible for any rehab work to be done.
In order to complete a wholesale contract turn, you want to complete the basic homework. Make sure you know how much the house is worth. You want to know the future market value, in other words, how much someone can sell it for when it is all fixed up and nice again. Compare this to the activity and dynamics of your local market (whether properties are selling rapidly or sitting on the market a long time).
Meanwhile, maintain a good business network. You should join and attend meetings of a local investors club. You should take every opportunity to meet, get acquainted with and stay in touch with other investors. Besides meeting investors at club meetings, get to know them at auctions and call the “We buy houses” people.
Then you go out and make lots of lowball, wholesale offers on distressed properties needing cosmetic rehab and get them under contract immediately upon acceptance of offer. The contract you sign must have good escape clauses in case you can’t move the contract. Don’t make a big deal out of this – you don’t want to make people suspicious. Typically, a good, broad inspection clause will allow you to terminate the contract just because you don’t like the condition of the house (it needs work, remember?).
The contract turn happens when you assign the purchase contract to another investor in return for a cash fee. Depending on the amount of the purchase, this can range from $1000 to $7,000.
Here is an example of a possible contract assignment: Joe has owned a house with a good market value of $200,000 since the late 60’s. For the last ten years he has lived elsewhere and rented the house out.
Now it needs $10,000 worth of work. Additionally, you discover that Joe recently purchased a retirement condo on Key West, and he’s eager to get out of town. Because of his high motivation and the ugly condition you can execute a purchase contract for $130,000. Then you call Ed, an investor who enjoys doing rehab projects. You have already talked to Ed about flipping a few deals to him, you know what he is looking for, and you know he would likely pay $3000 – $5000 for the privilege of buying the $200,000 house for $130,000. Even after spending $10,000 on rehab, his total outlay will be no more than $155,000.
Retail: This is buying low and selling high. Because you are selling high, this has more potential profit than a wholesale flip. It likewise requires that you have an end-buyer lined up before you buy. The end- buyer will probably live in the house, so you will want to know what kind of house this party wants, knowing something about the desired neighborhood, as well. Your profit comes by providing the service of finding a suitable home and negotiating a good deal in behalf of the end-buyer.
As you might guess, a couple looking for a house to live in probably is not looking for a project to work on. The house either needs no rehab or you have an end-buyer willing to do the work needed.
You can structure this transaction in one of a couple of ways.
You execute a purchase contract with the seller, then assign it to the buyer with a contract assignment form, just as with the wholesale transactions.
You can do a double or simultaneous closing. Let’s say that you find someone so highly motivated that they will sell you a nice house for well below market. Or perhaps your market is so hot and expensive that even a 95% price would allow you to give your buyers a great deal while you collect much more than the normal assignment fee. However, it might not be prudent for you to tell the buyer how much the house costs you, any more than a retail store is going to tell you how much a given inventory item cost it. In this case, the buyer does not take over your contract. Instead the end-buyer executes a separate purchase contract with you at your required sales price. At the double closing, all the papers are signed on the same day, all the legal documents are recorded on the same day, and you drop by the closing office to pick up you’re the next day.
Remember, the house either needs no rehab or you have an end-buyer willing to do the work needed. Here’s an example of how it might work. Let’s say Joe’s next-door neighbor, Sam, has essentially the same house as Joe, worth $200,000, and he has also bought a retirement condo next door to Joe’s in Key West. The difference is, Sam has been living in this house for 35 years, and has kept it up nicely. It looks great. That means he probably isn’t going to give you a $130,000 contract to buy his place. Maybe though, because he’s so eager to get down to the island, he’ll let you have it for $190,000.
Understand this; you don’t ever want to actually purchase a house at 95% of its value if you want to make a profit. Your cost of the deal will be close to 6%, so where’s any profit in that? However, Jim and Suzie is a young couple looking to find a home to buy for them, and this happens to be right in their price range. I’d think they would be thrilled to have the means of buying a $200,000 house for
$190,000, and would probably pay you $5,000 for the privilege of doing so. Now their total cost is $195,000, and for them, that’s a good deal.
If your market is slower, you can still occasionally find the $100,000 house that needs no repairs that you can get for $80,000. Using two contracts is clearly the way to get this done.
All you need to complete the transaction is a knowledgeable and cooperative title company or attorney. These should be part of your team, anyway. Ask around among your investor friends for suggestions. Or, just go in to a title company and ask, “I have two contracts for purchase of the same house. Do you know how to close them both at the same time?” At the closing, everything appears in a single escrow, all the papers are signed at varying times on the same day, all the legal documents are recorded on the same day, and you drop by the closing office to pick up your check the next day.
A Review of Contract Assignments
In this role, you gain control of real estate with the intention of immediate resale for profit. You do this at well below the going or “retail” rate. This puts you into two roles, acting as both principal and middleman, buying at one price, then reselling at a higher price. From the seller’s perspective, you are a principal, but the person taking the property off your hands sees you as a middleman – a supplier.
If there is not a large margin between the agreed upon purchase you negotiate and what someone is willing to pay you, your profit is likely to be similar to what a real estate agent might make off the deal. But your overhead is a lot less than an agents, you do not take on the same kind of fiduciary responsibility for a client as an agent, and you only spend a few hours of your time, rather than days or weeks of effort.
In order to do contract assignment transactions, you need no license. You are not regulated by any government agency. You enjoy low overhead (work from home, if you wish, you only need a telephone with voice mail) and flexible working hours.
For people just getting started in real estate and looking to build your confidence and knowledge before moving on to other real estate ventures, this is a great way to start. You make money while you learn how investing works without incurring much risk at all. Finding properties for other people to buy means you’ll be able to earn while you learn the ropes in real estate and you don’t have to worry about risk if you do it right. All you do contract to purchase a property then sell your right to purchase to a third person. And, best of all, it is perfectly legal in all states.
A Word of Caution
Persistence is vital to any success, none less vital in this activity. Some months you may find two, three,
or more properties to control. Other months you may not find any. Take efforts to continually network
yourself, not only to find deals to control, but investors or owner-occupants to assign the deals to.
Develop new leads constantly. Some leads will work out, some won’t. Some sellers will be very
motivated, and some won’t be.
We like the attitude of “S-W-S-W-S-W-N.” This simply means “Some Will, Some Won’t, So – What Next.” If a homeowner chooses not to accept your terms or your offer, that is not a personal rejection of you, it is a simple difference of opinion. If the seller accepts your terms, you have successfully closed a sale. But even the greatest sales people do not close every sale. Time has a way of changing everything. Learn to stick with it, even when you are discouraged.