Real estate investors live and die by their ability to add value. With no added value, there are no profits. This is true with any business, but what makes real estate such a great business and a great investment, is the number of ways you can add value and cash in on big profits. Here are three ways you can add value to your properties.
Upgrades and Repairs: OK, this is the obvious one and is the reason fix and flippers can make money. Some repairs add a lot more value than it costs to do. The more creative you are with the improvements, the more value you can add. For example, I have a client that adds square footage to every house he buys. He really likes the inner city properties because they are the hardest to add square footage. You either need to finish an unfinished basement, or add a second story. There is not typically enough land on the lot to add an addition by increasing the foot print of the property. This client does a lot of basement finishes and “pop tops,” but where he has made the most money is the basement that is only 5 or 6 feet deep. He will go in and dig out the basement to a full 8 or 9 foot height and then finish it. Something most investors would not think of, so he is able to get the deal most other investors pass on. I have also seen some investors find houses that don’t really fit into a neighborhood and they make them fit. This could be limited bedrooms or bathrooms or funky floor plans. All of that can be changed. Obviously many cosmetic fixes like kitchens and bathrooms add a lot of value too. There is a lot more to it than this, but the idea is to buy a property at its true ‘as is’ value, (don’t over pay), and then add value with the repairs and upgrades.
Owner Finance: I love this one because it is so easy to add value with very little to no work. You will need to wait to cash in on your profits, but it is a way to increase a sell price significantly. You can also use this strategy to defer tax gains over a few years, instead of taking a big hit all in one year. When you have a property for sale there are a limited number of buyers for the house, although right now that pool of buyers seems pretty big. If you can increase the pool of buyers, the demand for that one house increases, which forces the price to go up. Someone that cannot qualify for an ordinary loan, limiting the supply of houses to choose from for that buyer, will likely buy your property. That also increases the price. You are adding value by giving them the chance to own a home that they normally would not be able to own. For this value, you should be compensated with a higher price and a decent interest rate on the profits, while you wait for the buyer to refinance and pay you off in full.
Shared Units: This is one area of real estate that I have not dabbled in, but it is extremely inviting. The idea here is to sell your property to multiple buyers. You are seeing this a lot in resort towns. It is always a vacation or second home. Have you ever been to a time share presentation? They are pretty enticing aren’t they? About 13 years ago my ex wife and I were in Florida and got sucked into a time share sales pitch. We decided to go because they offered us free tickets to Disney. We sat there for about an hour and a half and then the hard sale came. They were very good at selling the “idea” of the time share and had my ex wife sold. She asked me to move forward with the deal, but I could not bring myself to do it. I told her that I was not comfortable with an emotional purchase and that we needed time to think it through. “Can I please have our Disney tickets?” was my response. As we rode back to the hotel that afternoon, I started thinking about the math. Each unit can be sold to 52 different people because your purchase only gets you 1 week a year. Add that to the annual maintenance fees and the numbers are staggering. I know people who have flipped time shares successfully, because you can get them for free or near free on Craigslist, but it is not an investment I was interested in. With that said, I have considered doing a half or quarter share on a house in a ski town in Colorado. In this scenario, you are sharing a house with 1 to 3 other people so there is a ton more flexibility. You can use or rent out your weeks and you can be guaranteed valuable high demand weeks every year. It is a way to get a second home without the full expense. From the seller’s point of view, it is a way to get more for the house. ½ a share of a house is going to cost the buyer more than ½ of the fair market value. I have seen business plans from investors that would buy a house and quarter share it out. The idea was that after they improved the property and sold ¾ of the house to 3 different buyers, they would own the last ¼ free and clear. Obviously this strategy will work best in areas where people want second homes. The downside is if there are any improvements or major issues. I can see there being disagreements, so this is something you would want, as a buyer, to work out with all the other owners in writing before you buy.
Want to invest in real estate with no financial risk and no money or credit? Wholesaling houses is a popular choice. I personally think wholesaling can be a challenging way to get started, but the fact that you can get started in real estate investing without any barrier of entry makes wholesaling an attractive option. If you can get good at this side of the business, you will be success with anything you want to do. The reason I say that is finding deals is what makes a wholesaler successful. If you can get good at finding deals, you have unlimited potential.
Once you find a deal, you need to understand how to sell it to make your profit. Here are four ways you can structure your wholesale properties.
Contract Assignment: This is the easiest, but comes with some risks if not done correctly. It is also somewhat restrictive as bank owned properties will prevent this. This works well when you negotiate your deals directly with the seller. The way this works is you will get a house under contract and then you will assign your rights in the contract to another buyer for a fee. That new buyer will take on the rights and responsibilities in the contract and will close in your place. It is best to get your fee paid up front, but it is very common to get your fee when your buyer buys the house. Here are a few things to keep in mind when assigning contracts.
Be sure that you always disclose to your seller that you are or may assign the agreement to another buyer for a fee. I suggest you actually put this in the contract. Sellers should be OK with this if you are transparent that you are an investor who buys houses for a profit before you start to negotiate.
I would get money from your money that is at least enough to cover any earnest money you put up with your seller. That way if your buyer defaults on the agreement you at least cover your costs. Always try to get the entire fee paid when you assign the contract.
I like this way the best because it is easy to do on your end, it is easy for the buyer and the buyer’s lender, and it is the cheapest way to go.
Double Close: This just means that you actually buy the house and then resell it. There are several ways to do this, but the most common is to buy and sell in the same day or within a day. Typically, you will need to bring in financing to get your closing done with the seller, which is why this is my least preferred method to wholesale. Also, because you have two closings you will have two sets of closing costs, so it is the most expensive way too. With that said, some wholesalers prefer this method because they do not have to disclose to the seller their intent to resell and they can both keep their deal with the seller and their deal with their buyer private. It is believed by some that this is a good way to protect your profits. The information will all become public record at some point, but that is well after the closing.
This is the method you will use by default if you do not do your contract on the front end correctly, so we do see double closing frequently.
Flip the Entity: This has become the most common way to wholesale in my market. Most, if not all, the successful wholesalers will use this strategy. Especially when wholesaling foreclosures where contract assignments are forbidden.
The way this works is the wholesaler will set up a separate entity, like an LLC or a Trust, and put that entity as the buyer of the house to be wholesaled. They will then sell the entity itself for a fee. The benefit with using this strategy is that actual contract on the house does not change. Since the buyer of the house is the entity, there are no issues with any regulation or assignment restrictions. The downside is it could be more work because of the extra step to set up the entity, and there could be additional fees to register the entity with the state. The risk for the buyer is whenever you buy a company you are buying all of it. So, if the entity was used in another transaction and owes money to anyone, the new buyer could be on the hook. Knowing this, the best way to do this transaction is with a brand-new entity used for this one purpose.
Relationship Close: I don’t know if there is an actual name for this method. In fact, it is rarely seen. What I mean by relationship close is that you have such a strong relationship with a buyer that you write offers in the buyer’s name. For this to work, you should be a licensed agent and preview houses for your buyer. You would need to understand their criteria and only offer on houses they will want to buy. I have a client that works this way. He has an agent write his offers and the agent/wholesaler gets paid a commission with each successful closing. They do 2 to 3 deals a month with this strategy. My client just signs contracts without looking at them at this point and trusts what the wholesaler is putting together solid offers. There is always an inspection clause protecting the buyer and the agent, but more than 9 out of 10 houses that go under contract close. That is because the agent/wholesaler knows the business and knows what this buyer will buy.