Wet Feet - Online Marketing and Real Estate Investing Blog

What is wholesaling? In short wholesaling is selling to a reseller, not an end user. So wholesaling real estate means that you are selling the property to someone else who will be selling it to the end user. Wholesaling can be done with deals for all cash, subject-to (sub2) or with financing.
Let’s look at some examples.
We went out and put a nice 4 bedroom home under contract to buy it subject to the existing loans with no money coming to the seller at closing. House is worth $230k on a bad day, existing loan balance is $202k. We marketed it as take over payments deal for only $6k plus closing costs, which makes purchase price $208k and leaves $22k in equity for whoever buys it. So you need $6,000 to get it and you make $22,000 profit at the closing table. That makes 366% return on investment (ROI) on this deal.

All three parties benefit in this situation. Obviously we benefited by 6k, the seller benefited, since they got rid of the house they did not want or can afford to keep and the buyer benefited by purchasing 22k of equity with 6k.

On one hand wholesaling is the great way to make a quick couple thousand, without taking possession of the property. All you need to do is to market to attract sellers, prescreen sellers, go out construct and present offers, negotiate, sign the contract and do the due diligence. Once you have the contract signed with the seller you must market to attract buyers, show them the property, etc.

On the other hand wholesaling is the great way to buy properties. You do not have to do any of the above! All you have to do is bring 6k to the closing and you own property without signing for debt or borrowing hard money and you made 22k. This is a great way to buy your rental properties, since now the lending industry is in big turmoil and it is almost impossible to get 100% financing for investment loans. Think about is, on the home worth 230k the bank will ask you to put down at least 10% which is 29k. You can buy 4-5 subject to wholesales with that kind of money.

Let’s be hones, the current lending situation sucks. Sub prime lending industry disappeared literally overnight, banks stopped giving out loans to everyone and their sister. The situation is such that if your credit is less then perfect, no bank will lend you money to buy your own home. So the only option is to rent? Not exactly. There are still couple ways to make your dreams come true. Those creative solutions are: lease option, take over payments and owner financing.

Today we will take a closer look at the Lease Option, also called Lease Purchase or Rent to Own. Like name implies there are two ingredients in this cocktail.

First ingredient is the lease. You are renting your dream home and get to enjoy almost all of the benefits that home ownership offers. You can try out the schools, shopping and dining in the neighborhood and the home itself. This lease period gives you time to improve you credit situation to be able to qualify for an excellent loan.

Second ingredient is the Option. An option give you an exclusive option to buy the home for a set period of time – the seller is obligated to sell but you are not obligated to buy. So if after living in the home for 6 months you realize that this is not the home for you can walk away and not buy this home. The downside of doing this is that you loose your option fee which is non refundable.
The only difference between Lease purchase/rent to own and the lease option is that you are obligated to buy at the end of the lease period in lease purchase case.

To get into your dream home on a lease option program require a little bit of capital up front. Option fee is from $3,000 to $10,000 and largely depends on the price of the home. Expect to pay $3,000 for a home around $150,000 and closer to $7,000 for a home worth $300,000. Do not forget that the rent is paid in advance, so you will have to come up with first month’s leas payment at the time of move in also. If you do not have full option payment amount, part of can be spread out in terms of monthly payments.

As far as monthly lease payments, expect to pay market rent with no money going towards purchase price, but you may elect to pay extra to accumulate bigger down payment for the purchase day.

Next time we will tackle how to buy the home by taking over payments on existing financing.

From time to time i bump into investors who want deals on a silver platter, zero down and no need to borrow money.

I would like a dozen of those too, but I have to disappoint you - buying a home with no money down and without getting the loan is impossible.

You either:
A. Buy with no money down by getting a loan and including closing and acquisition cost into the loan or
B. Buy by taking over payments and do not get the loan, but pay the closing and acquisition costs.

To buy a home you will have to close and that means attorney fees, recording fees, transfer tax, title search, title insurance and other misc. fees have to be paid by someone. You would like the seller to shell out couple grand to give you their house, would you? I would, btu have not met such owner yet.

And to acquire the property you have to market to attract sellers, go out research the property, make offers, negotiate with sellers, sign the contract, do due diligence on the property and the loan. All this takes time and money. even if you do it all yourself you will have to spend money. If you go with the real estate agent it will cost you even more, 3-6% of the sales price.

So when I say I will bring you a deal on a silver platter, but you have to choose… either it is A or B - you can not eat your cake and have it too.

A lot of times I hear a lot of confused new investors talking about Subject to. So what does it really mean? I explain it to the sellers this way:

“I will take over your mortgage payments until I sell the house.”

sub2 means that you are taking(buying) the property subject to existing mortgage in this case. If seller has two mortgages you can take the property subject to both mortgages. If there are any other leans on the property you can take the property subject to those leans too. In essence you are acknowledging that there are liens/deeds to secure debt on the property when the title gets transferred to you.

How to execute a subject to deal:

Step 1. Agree on terms with the seller and sign the contract. (best to get one prepared by the closing attorney you will use to close the deal. And you will always do the closing with the attorney.)

Step 2. Get the seller to sign “authorization to release information” for each loan so you yourself can call the mortgage holder and verify the loan balance, terms, rate, etc. Payoff NEVER equals the principal loan amount.

Step 3. Order a title search. You want to know if there is a tax (or any other) lien on the property besides the mortgage(s) before you sign on the dotted line, because you would be taking those subject to too.

Step 4. After everything checks out as it should, close at the attorney’s office or at escrow agent, whatever laws in your state are. At closing, title (warranty deed or grant deed) gets transferred to you, so now you own the property.

Step 5. Pay the monthly mortgage payments. If you don’t the bank will foreclose and take the property from you. Since you bought the property subject to, the liens are still in place, no matter who is on the title.

And last but not least, do not confuse subject to with assuming the loan. You are not assuming the debt, you are agreeing to pay the payments on the debt. In other words you are not signing for debt personaly; the loans will still show on the sellers credit report.

The most important thing is to take action. Stop wining and looking for excuses, get off your but and do it. If you put your mind to it you can achieve anything you dream up.

I came to USA in November 1998. I had one suitcase full of my earthly possessions and $200 in my pocket. I came from a small country on the Baltic Sea called Lithuania (Lietuva). Long story short I was not born with a silver spoon in my mouth. Everything I have I had to work for. Life was hard in the beginning, no job, no car (and you need to have a car in Atlanta to drive to work) no credit history, new country and new language.

About one year later my wife joined me here. In 2002 we bought our first home in which we still live. Sometime in 2004 I picked up a book by Rober Kiyosaki called “Rich Dad, Poor Dad” and our journey into real estate investing began.

Being a curious person I started reading everything I can find about real estate investing. I found tons and tons of information. I found out that there is million and one way to make money in real estate, but I was not able to find any single source of information which would outline all steps. There was no step by step guide to real estate investing. People who wrote books never did it in practice and the infomercial gurus did it so long ago that it did not matter anymore. So you have to create your own step by step manual on how to invest form all the bits of information you learn.

One thing is clear by now - there is no get rich quick way, even real estate investing is hard work. It is hard work but the pay is good too. Anyhow after about a year of reading books, internet sites and message boards we bought our first rental property.

The best thing about it was that we did it. We took action, we started on our path of financial freedom, but we never stopped learning. I constantly talk to people about investing, listen to their advice, buy books and tapes, read and post on message boards. So education is a good thing, but it all comes down to one thing - can you actually do it? Can you sign on the dotted line?