David: Alright guys, welcome back to the Discount Property Investor podcast! I am your host David Dodge, joined by my co-host Mike Slane.
Mike: Hey Dave, how are ya today?
David: Hey Mike, I'm doing good, buddy.
David: Feeling good.
Mike: I am loving wholesaling lately, man. The market is going crazy out there. We are-- I mean it's easy to sell deals right now.
David: It is.
Mike: When you are finding something that is a little bit of a discount, there are buyers lined up and ready. Again, with the market good, it's a great time to be a wholesaler.
David: It is. Absolutely.
Mike: So let's talk about wholesaling, Dave. What is wholesaling first off? And what are we going to talk about today?
David: You got it, man. Yeah absolutely. Wholesaling is nothing more than buying a property at a great price and selling it to somebody else at a good price. Typically when we refer to wholesaling we refer to selling the contract to purchase. So we are actually flipping the paperwork, but not always. Sometimes we actually have to go to the closing table. It depends on the strategy we use to exit that deal, to close it.
Mike: That is interesting you bring that up. I was actually just reading an article and we are in St Louis Missouri, we are right next to Illinois. Illinois passed a law that you can't buy and sell real estate without a licence. There are a few other States following suit. What Dave was talking about with the flipping paper, that is what has got people a little bit nervous. It is a really good reason to change strategies a little bit. Either one get licenced, or two make sure you are closing on the property, physically closing on the property and physically selling the property. By that I mean signing the contract yourself. You are doing an A B and a B C transaction there, where you buy the property, take title to it, then sell the property. This can all happen same day, just like Dave was talking about flipping the paper or signing your interest in that contract. Again, it is one of those things to be aware of. This is happening, this is real life stuff. Be careful out there, but yeah let's go make some money, man. Let's go make some money.
David: The most beautiful thing I think about wholesaling is you can flip a property with little to none of your own money. You are selling the paperwork. You don't need to have a massive marketing budget. Some people that I know don't have any marketing budget at all and they just cold call, they use time, they trade time instead of money to generate those leads. So again, there are a lot of different ways you can go about doing that.
Mike: There are a lot of people in our market, a couple of them come to mind. They kind of brag about the fact, oh I don't do any marketing. It's like, that's fine, man. I just do a lot of marketing because I don't want to spend that much time generating leads personally.
David: Me too.
Mike: I like doing marketing.
David: I love doing marketing.
Mike: I will brag about that all day. I do a lot of marketing.
David: We spend money on deals to get deals, but we're lazy. It's easy to spend money to get the phone to ring.
Mike: I love that you said that, Dave. I was actually having a conversation with some friends this morning about how I'm lazy. That is part of what drew me to real estate was that passive income. We all know there is no real passive income, and there is a lot of work with your holdings, your portfolio of rental properties. But, again, being lazy allows you to be creative. You find creative solutions to things that wouldn't necessarily be out there. That is going to help you big time in wholesaling. You have got to be the creative one that finds new ways to get a hold of sellers, finds that motivated seller before the next guy.
David: That's right. So again, wholesaling is nothing more, guys, than buying a great deal and selling it to somebody else at a good deal. You may close, you may not, okay? The difference would be if you assign that agreement or if you double close it. Depending on the area that you live, the city, State, county. They may require you to fund those deals. In some places they don't require you. Where we live, Mike and I, here in St Louis Missouri; we can do what's called a double close dry fund. Dry funding. So we don't have to actually bring money to the table. In other areas, you may have to use a transactional funder, it all just depends on your local title company and or licenced attorney that will handle the transaction--.
Mike: A lot of that is what I was mentioning too--.
Mike: -- stuff is happening where we all may have to start funding our deals. Does that mean it has to be your money? No. But, you may have to go find a private funder or a private lender to fund that deal for you.
David: There are a lot of people out there that offer transactional funding. It's a great way to make money on your money, and it is super low risk and short term. There are guys out there in our market place that I know--.
Mike: What is transactional funding? Let's talk about that. Let's describe--.
David: I walk into title companies from time to time and see business cards sitting at the front desk for transactional funding. These people want to lend you money. So don't feel like it's something that you need to be afraid of.
Mike: Let's talk about a double close using transactional funding. How does that look? Dave, you can be B, the wholesaler, okay?
Mike: So Dave goes in with an A to B contract. I will say-- the original seller in this case, right? So Dave goes in with his contract to me, Dave doesn't have $100'000 to buy my house, but that's what's on the paper.
David: Or in some cases in some markets, $3, 4, 5, 600'000.
Mike: Right, he doesn't have the cash in hand today to buy it.
David: Do you want to know a secret? I rarely do. We get a lender for all of our deals.
Mike: You want to know a secret? Retail buyers don't either. They get mortgages.
David: That's a great point.
Mike: Nobody has actually got--.
David: Great point.
Mike: There are very few people that actually have the money, the cash in the bank to go and close on it.
David: To go and close on it.
Mike: So what Dave does though, Dave goes out and wholesales this deal, he finds a buyer, he finds the B C contract, let's say you the listener are the end buyer. So you have the $120'000, because Dave was going to sell this property for 120, and you are thinking this is a sweet deal because you wouldn't be able to find anything else out there on the MLS even close to this property for under $150, 160'000.
David: You are getting a deal on it. Right.
Mike: Fixed up it is probably worth 200. You are getting a great deal, you are happy to buy this house at 120. But Dave, you are feeling a little nervous. You are going to make $20'000 on this. You don't want to assign it.
David: Yeah I don't want to offer an assignment in some scenarios because it may upset the buyer, it may make them not want to move forward with the deal, there are a lot of reasons. So typically--.
Mike: Think about it; would you want to pay Dave $20'000?
David: To basically hand some paperwork over to you? It depends.
Mike: It's a tough pill for a lot of buyers.
David: Absolutely. That's why we have different types of closes, but we are talking about the double close. What I would do in this scenario, depending on where you live, you can either dry fund double closed it or you have to wet fund double close it which really means nothing more than you have to actually fund it, or you don't. Where we live it's a dry fund, meaning if I can line up my buyer and my seller to both come into the title company on the same day, I can actually use the proceeds from the end buyer to cover the purchase of my purchase, the first contract. In other parts of the country you can't do that, you have to fund those deals.
David: You have to actually fund it, and you bring in a transactional funding partner, again, there are people actually out there, they are all over the place, they want to be found.
Mike: How much money does Dave need to borrow? That's the question. So Dave's contract with me is $100'000, there is going to be some title work, some fees, some stuff on there. He is going to have to borrow right around that $100'000.
David: Maybe 102, 103.
Mike: Something like that.
David: Yep. I am typically borrowing that money for hours. Not days, not weeks, hours. Okay? They will fund the deal, the deal goes into my name briefly. Then the other buyer, the end buyer comes in, you guys come in and you close, you pay the 120, probably ends up being 121, 122 with closing costs and everything else. My transactional funder gets paid back immediately. His cash is really just a placeholder to show that it is being purchased, okay? They get paid back, that 101 or 102, whatever it might be, and I get to keep the difference. In this scenario about 18 grand.
Mike: 101 or 102 plus their fee.
David: Plus their fee, good point.
Mike: That's why transactional lenders are willing to do it because they are going to throw out 100'000, but they know they are getting it back the same day or whatever, and they are going to make 1.2 or whatever.
David: Sometimes three points. So they can lend a hundred grand for three hours and make three thousand bucks. So they do have risk, but typically these transactional funders won't lend unless everything is lined up, all the ducks are in a row and the title company basically gives them a thumbs up and says, hey everything looks great, there are no issues. Even better whenever they know the end buyer does deals and closes on deals. Then the title company really gives them a thumbs up like-- this is a no brainer, you are going to make a couple of grand for lending Dave or Mike money to purchase is. Everybody wins. We want to make that clear, this is always a win win or win win win scenario. Always.
Mike: I would never look down on the fact-- oh I live in an area and I need to get my deals funded-- for whatever reason you can't do a dry funded close like we were talking about, you have to get the transactional funding. It's the cost of doing business. Big deal. So it costs you $3'000 to make 17 instead. So you made $17'000, guess what? You still had zero actual dollars out of pocket on that transaction. So you still making $17'000 net, it is just that your cost of business is higher in that area on this transaction.
David: That's right. The purpose of this episode is actually to keep it simple. Don't over think the closing process. If you don't have the money, the money will come. There are people that will lend you money called hard money lenders to buy, rehab, rent out, fix and flip, whatever you want. There are also people called transactional funders. Often times it is the same person. They will help you will the wholesale transaction, okay? So do not stress about the money,t hat is like the number one thing that Mike and I hear from our students is I am afraid to put this property under contract, because what happens if I actually have to close on it? Well if you actually have to close on it, to me that means you have found a buyer and you are going to get paid, why wouldn't you want to do that? So to me that just seems it is a no brainer. These people are out there. Keep it simple. So we have explained what wholesaling is, we have explained the ways that you would exit the deal and close them up.
Next I want to talk about some of the simple steps, this is all about keeping it simple, alright? I would say number one most important-- you have to have a marketing budget. Either has to consist of time, or money or both. Either you are out sourcing leads for your business, or you are paying to get your message in front of people so they can call you. If you phone isn't ringing, or you are not picking it up, you will not get deals, period. It all starts with marketing.
The next thing I want to say is-- almost as important, but obviously that's first, you have to have marketing or you have nothing, you have no business, no deals, no inventory.
Mike: That's one of my favourite quotes, Dave, you know what it is. No matter what business you are in, you are in the business of marketing.
David: I love it.
Mike: I could not agree more.
David: Next, keep it simple, guys. This is so incredibly simple. Next, you have to be making offers. Every marketing that you send out is costing you money, every piece of marketing. Every time you pick up the phone to cold call somebody, it is costing you time. So you are investing time and energy into sourcing leads. When these leads come in, that money has already been spent, that time has already been spent. So you need to make the most of these leads. Which means you need to work them, and part of working a lead is making an offer on it. If a lead comes in and you don't make an offer on it, you might as well take a hundred dollars out of your wallet and light it on fire. Would you agree, Mike?
Mike: Yeah, I have done that before, it's not good.
David: Hopefully not literally.
Mike: No, I have just thrown leads away when you don't answer the phone.
David: We've all done it.
Mike: When you don't make an offer.
Mike: Just throwing the money away.
David: That's really all it comes down to, you have to market, you have to make offers. Next you have to learn how to make the offer in terms of what that number is, alright? We have other podcast episodes about the MAO formula.
Mike: This is important too though.
David: Not to dive too deep because I want to keep it simple.
Mike: Let's talk about just making the offer. That's what I was gonna say is-- you don't want to just make an offer, you have to make an offer that makes sense for you.
Mike: You can't-- oh they want 120, okay here is 120. If that number is ten grand higher than what the property is worth, don't make that offer, guys. We are not suggesting you go lock up properties that you have no ability to close on and no ability to sell. That is foolish to say the least. Do no do that. Make offers that make sense. Dave was leading us to the MIA, MAO formula, which is super important as well.
David: Yeah so the MAO formula is very simple, it is just a simple formula for us to determine what the perfect real estate offer is, okay? We start with the ARV, we multiply it by about 70%, we take out our wholesale fee, and then we-- have what's called our MAO. We have podcasts on this, or it is in our book if you want more details to dive down. Essentially we don't start with the MAO, we end with with. We discount that number even more. At the end of the day we are making offers to buy properties at a discount. If you have forgotten what show you are listening to, it is the Discount Property Investor podcast. That is what we do here. We make offers to people that own properties and try and buy them at a discount. It is so incredibly simple. The only other thing you would really need to know is how to determine repair estimates. You are going to need to know that in order to determine that MAO or calculate that perfect offer. If you don't know how to do determine repair estimates, don't worry, I didn't, Mike didn't know how either when we first started. The simplest way is to basically take the square footage of the property, and multiply it by 15, 25 or 40 dollars. Mike, why would you multiply it by one of those, and how does that work?
Mike: So we call that the multiplier, right?
David: The square footage multiplier.
Mike: So why would I do that? It depends on what quality of rehab I am shooting for, or the amount of work. Those two things factor in. So the lower one is going to be a light cosmetic fluff up. Doesn't need a lot of work. Your next number of 25 square foot is going to be-- maybe needs a kitchen update, maybe needs a little bathroom update--.
David: Maybe windows.
Mike: -- as well as the paint and carpet, some of the other major things. The $40 sqaure foot is going to be a gut rehab. You walk in and you can't stand the smell, there are holes in the wall, the bathrooms are 50 years old and just everything needs to go.
David: You're talking plumbing, electrical, roof, windows, flooring, paint, appliances, cabinets. You name it, if it needs everything, you are looking at roughly $40 a foot in repairs.
Mike: That is going to give you a ball park of the amount of repairs that are going to be needed.
Mike: Guys, we are wholesalers, right? You guys are going out and trying to wholesale your first deal. You don't have to be an expert. You have got to ball park that number first that you can make your offer, then you are going to go partner with the rental buyer, or the flipper who is going to know those numbers. They are going to come in and say, on $40'000, well I think you are a little low because of this, this and this. They are going to teach you. You are going to learn from there where they are seeing the extra cost. Okay next time I should use 45 when I see it this bad, or I should have checked that foundation crack out, I didn't even think to factor that in. Again, you are going to learn from your buyers. That's okay.
David: That's okay. It's better to over estimate the cost of repairs than it is to under estimate them, that is a gold nugget. Another gold nugget is that it is better to under estimate your ARV than over estimate your ARV. You will learn as you go. So if the house doesn't need a whole lot, figure out the square footage. If you don't know that go on Zillow or Realtor.com. You can find that information, the tax records. Take the square footage, multiply it by 15 a foot if it barely needs anything. If it needs some stuff but not a complete gut rehab, multiply it by 25. If it needs everything, multiply the square footage by $40, okay? Now, if you live in a market that is super cheap or super expensive, you may want to move those numbers up or down a little bit. But the point of this episode is to keep it simple. You do not need to go make a list that is 62 pages long to determine your repair estimates. You could show me a property, and Mike, with five or ten pictures and I can tell you typically if it is a 15, a 25 or 45 dollar per square foot rehab, it is not that complicated. This is not rocket science, so keep it simple, alright?
Let's recap here, guys. You have to be marketing, or have a marketing budget consists of time and or money. If your phone isn't ringing, you need to do more marketing, or you need to pick up the phone and start making calls, or go door knocking, or driving for dollars, alright?
Next, you need to be making offers on every single lead that comes in the door. No matter what, okay? After you are making offers on these leads, you need to get good at determining what the right offer is. That can-- you can flip flop those too. But, you need to understand how to run comps, and determine your ARV as well as your repairs. We just talked about how to determine your repairs. If you want to run comps and you are not an agent, use the same software we do, guys. Go to DPIPodcast.com/comps. You can get 14 day free trial of a service that we use that allows you to run MLS comps nationwide. Last but not least, find yourself a buyer, a cash buyer that is looking for a deal, and trust me, these people are everywhere. There are so many people looking for fix and flips, and rental properties. If you have a deal, you will find a buyer, I am just over the top confident on that. People are looking for deals from the time they wake up to the time they go to bed, I know I am.
Mike: Yeah. We are all day everyday. We can't keep deals because we keep selling them.
David: That's right.
Mike: It's a great problem to have. We just keep selling everything which is awesome. Again guys, keep it simple, get out there, do some deals.