Carmen Johnson, Licensed Broker - GET THE MOST MONEY FOR YOUR REAL ESTATE INVESTMENT

GET THE MOST MONEY FOR YOUR REAL ESTATE INVESTMENT

GET THE MOST MONEY T MONEY FOR YOUR REAL ESTATE INVESTMENT

Carmen Johnson, Licensed Broker

Table Of Contents

Introduction

Thinking About Investing?

Financing Your Investments

Homes to Invest In

A How-to Guide for Wholesaling

Benefits and Risks of Wholesaling

A Guide to Flipping Houses

Making Money on Flipped Houses

Home Renovation ROI

10. Protect Yourself from Flops

11. A Guide to Investing in Rentals

12. Property Management 101

13. How to Sell or Rent Your Investments for the Most Money

118

14. Why Staging Makes All the Difference

124

15. Why Curb Appeal Matters

140

16. Why You Can’t Afford to Invest Alone

144

17. How Agents Help Investors

148

CHAPTER 1 Introduction

Have you ever watched one of those house-flipping or income property T.V. shows? They seem to just update what needs to be updated, then sell or rent it — and quickly — at a profit. Sure, there are always unexpected expenses, but it seems to always work out in the end. And it’s exactly that portrayal of real estate investing that draws people in. Who wouldn’t want to do a little work to make a place look more attractive and walk away with thousands (or tens of thousands) of extra bucks in their pocket? I’m guessing you, since you’re reading this book, and I don’t blame you one bit. The problem is that there is so much more that goes on in real estate investment than television can show you in 30-60 minutes of heavily edited content. That doesn’t mean there isn’t potential to earn money this way — there definitely is. It’s just that there’s a lot you need to know in order to actually make this happen. This book will help someone exactly like you: hardworking, intelligent, realistic, and ready to change your financial situation — and your life — through real estate investment. In the following pages, you’ll learn about how to get started in real estate investment, including what types of properties to invest in and how to finance your purchases. (Note: If you’re already an investor, I suggest reading through this section anyway, just in case there are strategies you haven’t tried yet that could enhance your ability to make more money.) I’ll also teach you the different types of real estate investing, 2

which includes resources and tips to succeed in each arena, the real ROI (return on investment) for home projects (i.e., how to spend your money the right way), marketing techniques that will make you and your properties stand out, how to build your investing team, and the benefits of working with an agent.

CHAPTER 2 Thinking About Investing?

Before we begin, I want to point out that this section is geared more toward people who are interested in becoming a real estate investor but want to know more. If you’ve already started down this path, you could theoretically skip this section; however, if you flip through the pages of this section as you move to the next, you might find some new information. Maybe you’ll learn some strategies you haven’t tried yet, or weren’t even aware of. Maybe you’ll just find validation you’re on the right track, or a reminder of you why you got into investing in the first place… What I’m saying is that there’s a lot of good information here, and it can’t hurt to give it at least a quick glance. As for those of you who are looking to get into the real estate investment game, my goal here is to give you all the information you need to decide whether real estate investment is right for you, and then teach you how jump in. So let’s get started!

THE STATS

In the United States, the average commercial real estate investment returns over 20 years are around 9.5%. Diversified and residential investments average around 10.6%. Both of these are higher than the S&P 500 Index, which has an average annual return of about 7% over the last 20 years. If we look back historically, for example to the housing price burst in the 2008 recession, even during that time real estate investment still did better than the housing market as a whole.

These stats alone obviously show a great reason to buy real estate. But what do investors hope to get when they’re buying property? According to the most recent National Association of REALTORS® (NAR) Investment & Vacation Home Buyers Survey, 37% plan to rent it for income, 16% for the possibility that the price will appreciate, and 15% because it was a good deal. This all sounds great, but I’m guessing the main stat you’re interested in is how much you can make. (Am I right?) Well, here’s the answer you’ve been waiting for: Experienced real estate investors can make within the range of $100,000 to 150,000 per year. Talent.com reports that the national average earning for real estate investors is $100,000 per year, with beginners averaging around $65,613 per year and experts earning an average of $150,000 a year. Other surveys found the average real estate investor salary ranges between $70,000 and $124,000, depending on area and experience.

CHAPTER 3 Financing Your Investments estments

Now that you know why real estate investment is a good idea, it’s time to learn how to do it. But before we get into the nitty-gritty details of each investing method, let’s address the elephant in the room: To make money, you need to have money to invest, right? Well, yes and no. While you do need money to invest, it doesn’t necessarily need to be your own. If your only reference for real estate information is house-flipping T.V. shows, you might assume real estate investing is all about cash buying. There are many investment deals that transpire throughout the real estate market on an annual basis. The majority are achieved through traditional lenders and institutions such as banks, but some are accomplished through less traditional means. In most cases, it’s because the investor couldn’t raise the capital or didn’t have the credit score to do so. According to the most recent NAR® Investment & Vacation Home Buyers Survey, 47% of investors financed less than 70%. And more than half — 64% — used a mortgage. So, whether you’re reading this as a newbie or a seasoned pro, you shouldn’t feel bad — not even for a minute — if you don’t have the cash to use. In fact, the ultimate goal for real estate investors is to not use any of their own money at all! This works to every investor’s advantage — those without the funds can still get in the game, and people who’ve been playing for a while can use other people’s money as a way to invest more, which leads to increased income. 6

Obviously, there isn’t a bunch of people out there willing to just hand over their cash so you can invest. This is when having a solid network is important. You’ve got to be clear on whom you access for help and how to best use the help they give you. It’s also to your advantage to have a high credit score. Why does this matter in this business? First, you’ll get more access to working capital, but you’ll also have lower interest rates if you do take out mortgages or loans, which can lead to significant savings versus people with “so-so” or low scores.

WHERE TO GET MONEY

Investing without Your Own Money

The first and most common option is hard (i.e., private) money lenders. In this case, people or businesses loan you money as an investment for themselves. They make money through fees and interest rates, both of which tend to be higher than other types of loans. One way to make sure you still come out ahead in the deal is to use these loans to buy homes at 50 cents on the dollar. Partnerships are another popular way to get funding. These can work in a variety of ways, but you want to make sure that you balance each other out well. For example, if you have a less- than-stellar credit score, make sure your partner has a great one. Perhaps you can be the one to find the ideal properties and your partner can get the financing, which will come with lower fees and rates thanks to that higher score. Keep in mind that you don’t want to partner with someone just because you already have a good relationship. The key to a fantastic partnership is being in sync, such as agreeing on what kind of risks you’re willing to take, determining what short- and long-term goals you have, figuring out who will do what, and

deciding what kind of return you’d like.

Investing with Your Own Money

If you don’t have access to private lenders or partners, you can still start your investing career without having all the money on hand. One way to do this without paying any money upfront is through home equity. You can use this by taking out a home equity line of credit (which leaves your mortgage as-is) or rewriting your mortgage and getting a cash-out refinance. Of course, this works only if a) you currently own property; and b) there’s capital in it. Another route is a lease-option, also known as option to buy. In this situation, you would rent the property, but sign an “option to buy” at a later date for an agreed-upon price. This legally binding path to property ownership might take a little longer, but is still a viable option if you have the funds. Seller financing is just like getting a loan through a bank — except you agree to the payback and terms directly with the seller. This loan should include a repayment schedule, interest rate, and consequences, should either party default on their agreement. Often, these agreements include a significant down payment (sometimes higher than mortgages). Many of these agreements also involve the seller holding on to the deed until the buyer has completed all the payments. An option that may or may not work for you is investingyour retirement funds. This typically doesn’t work for people over the age of 60 because there’s not enough time for rental income to pay off the mortgages. The so-called “sweet spot,” age-wise, is around 35 to 40. This is because people this age have theoretically been paying into a retirement account for about a

decade and might have a fair amount to spend. Also, there’s time to get a good return. Perhaps the mortgage will be paid off in 10 years; after that, the net income after operating costs is all yours. Your retirement account can be used for purchasing and maintaining properties as well as collecting rent. However, none of that money can go directly to you until you’ve reached the age when you can start withdrawing money out of the account. (Well, you technically can withdraw in many cases, but if you’re younger than the legally allowed age for withdrawal, there might be a significant penalty. This could mean losing thousands of dollars, depending on how much you take out.) Self-Directed IRAs (SDIRA) are traditional or Roth IRAs (individual retirement accounts) that allow you to invest beyond the usual mutual funds, stocks, etc. With an SDIRA, you can invest in precious metals, tax lien certificates, and — most importantly, for our purposes here — real estate. When you use your IRA to buy real estate, there are some important things to keep in mind. First, you’re required to report the value of your investment to your IRA custodian every year. Also, the fee structure can be complicated, so you need to understand what you’ll owe and how that relates to your overall profit. Also, your investment needs to bring in enough money to pay for both regular maintenance and any expenses that come up without you having to add cash. The major benefit of using an SDIRA for your real estate investments comes down to taxes. With a traditional IRA, it’s tax-deferred income, but with a Roth IRA, your gains are tax- free, and the money will also be tax-free when you ultimately withdraw it. If you go this route, you can move funds around from multiple projects without affecting your taxes. (Keep in mind that tax and another financial laws can change at any time, so make sure you keep on top of any changes, and make any

adjustments, as needed.)

One tax downside is that if your property has a net loss, you don’t get the tax breaks other investors get. You also can’t claim depreciation. Another advantage of real estate over traditional retirement accounts is the return. Real estate can net you perhaps an 18-20% return over 30 years, whereas the more common accounts, IRAs, 401(k)s, etc., might only get you 3-6%. Not only that, but you can use compounding to your advantage. If you keep investing your money for the first 20 years, you can leave it for the last 10 and just let it grow. Doesn’t doing almost nothing while still making plenty of money sound great? As with any investment, there are risks to using an SDIRA. You might make a bad decision or get scammed, which is so common the SEC has an investor alert about the scamming risk for SD-IRAs. Other risks include not having enough diversity in your investments (it’s hard when you have limited funds) and potentially not being able to access the money — even once you’re retired, due to liquidity issues. This means you might not be able to take out the required minimum distributions. Again, this is why diversification is important; you need to have enough cash to meet all the requirements. Speaking of “following the rules,” it’s vital you know them all. If you do something wrong, you might accidentally disqualify the IRA, which means you’d owe taxes. This includes not purchasing property for yourself your immediate family members. (You can’t buy property from them or sell property to them, either), but there are many other more nuanced rules, as well.

TAX BENEFITS FOR REAL ES R REAL ESTATES INVES TES INVESTORS

Because both federal change and state local taxes can vary, there’s no specific guidance I can give about that here. However, please understand that the tax ramifications of any kind of real estate investing will depend on your particular location and circumstances as well as annual changes in the tax code. I strongly recommended that you consult with a CPA or tax attorney before beginning any real estate transaction or investment. With that said, at the time that I write this book, there are some general tax-related benefits for real estate investors that I want you to know about. The first has to do with all the deductions real estate investors can get: mortgage interest; business expenses, such as property management, office, mileage, travel, educational events, etc.; repairs; and improvements made that increase your property’s value. All of these can be immediately deducted, with the exception of improvements, which are depreciated over time. Depreciation of the property itself, regardless of any work done, is also a tax deduction, and it’s done over the course of time. Commercial properties can depreciate over a longer time than residential (currently 39 years versus 27.5 years). The land on which the property resides never depreciates. If you rent out a property, sometimes depreciation can get you a phantom gain. Here, on paper, the numbers look like a loss; however, because of the depreciation amount, you actually come out ahead. A tax attorney or CPA can help you figure out exact numbers for your situation.

1031 Exchange

Another benefit is the 1031 exchange, which allows you to put off paying capital gains taxes if you use your profit from a real

estate sale to buy another property. This makes your income essentially tax-free, and you can put all your profits toward the next property, which is called trading up. A 1031 exchange covers only business or investment properties. In general, vacation or second homes don’t qualify, but you should check with a tax expert to see if there are any exceptions, especially when it comes to the usage test. There are three specific requirements to qualify for a 1031 exchange, and you must meet all of them: • The like-kind exchange. The property you buy must be similar to the one you sold. The purchase price of the new property must be the same as, or more than, the one you sold. There’s no switching from commercial to residential or vice versa; however, you can often exchange property and land. • Time restrictions. You must officially record identifying a new property within 45 days of selling your old one. There are different ways to identify replacement properties: • Find three properties, not worrying about their fair market value. • Identify as many properties as you can, as long as their aggregate fair market value is less than 200% that of the sold property on the date of the transfer. • If the above two rules are exceeded, you can buy 95% of the aggregate fair market value of the identified properties. You also have to close on the new property within 180 days of the previous property’s sale.

• A qualified intermediary. Not only can you not be directly responsible for the transactions or money, your intermediary must be someone with whom you haven’t worked for at least two years. Savvy strategies can significantly impact an investor's tax liability and overall investment growth. In an interview that investing advisors The Motley Fool conducted with Thomas Castelli in 2019, Castelli describes the 1031 exchange as a powerful tool for investors, allowing the deferral of capital gains taxes when the proceeds from a property sale are reinvested into a new property: What a 1031 allows you to do is invest that entire amount so you’re not paying the taxes today, and you can purchase a larger property. This mechanism not only defers tax liability but also enables the continuous escalation of property investments. As Castelli explains it, In theory, you can just keep purchasing larger and larger properties, making more and more cash flow, but never actually paying any taxes on that property. Moreover, it holds the potential for tax elimination on capital gains if the properties are passed on to heirs, as they are revalued at the market rate at the time of inheritance. So investors could leave their appreciated properties to their heirs. The heirs would then inherit these properties at the fair market value at the time of the investor's death, effectively resetting the tax basis and potentially erasing the capital gains tax that would have accrued during the investor's lifetime. Castelli also discusses opportunity funds, which present another avenue for tax-efficient real estate investment, particularly in designated low-income areas known as opportunity zones. These funds offer a variety of tax incentives, including the deferral of capital gains taxes on a broad spectrum of assets. The tax benefits escalate with the duration of the investment: a 10%

step-up in basis after five years, increasing to 15% after seven years, and culminating in a complete tax exemption on the fund's capital gains after a decade. However, these benefits come with stringent requirements, such as substantial asset improvement or ground-up development, and a minimum holding period of ten years. Castelli notes the potential of these funds, stating they aim to raise the status of those communities and opportunity zones. Both the 1031 exchange and opportunity funds offer pathways for real estate investors to not only defer and diminish tax liabilities but also to contribute to community development, albeit with certain conditions and requirements.

RENTAL TAX SPECIFICS

Rental property owners are open to a variety of benefits, which I’ve listed below. You’ll notice that several are the same as for other real estate investments. Also, as with all properties, if you sell within a year of buying, you’ll be taxed at your income rate. If you hold on to a property for a year or more, as is usually the case for rental properties, you’ll deal with capital gains tax, which is a lower rate. Your overall tax deductions can depend on what type of investment business you have (sole proprietorship, partnership, or corporate entity). And, as always, do your research to make sure you’re up-to-date on all the latest tax laws, as these can, and do, change.

Rental property tax benefits:

• home office, office supplies, computer software • mileage

• travel • meals (50%, as long as you’re having a business meeting while eating) • mortgage, unsecured loan, and credit card interest • loan origination fees or points (they’re considered kinds of interest) • utilities, trash, and recycling

• property taxes • licensing fees • occupancy taxes

• insurance, including liability, hazard, fire, sewer backup, flood, and loss of income (talk to a tax professional if you have an umbrella liability policy or a landlord liability policy) • maintenance, repairs, improvements, and cleaning • advertising • commissions to real estate agents or property managers who find tenants and renew leases (this is considered part of marketing, not property management) • property management fees, salaries, and benefits (if you manage yourself and your business is an LLC or corporation, you may be able to be employed and have your salary be deductible) • homeowners’ association fees (HOAs), as well as whatever HOA requires, such as specific “For Rent” signs • professional and legal fees, including bookkeeping, filing taxes, and all legal work • any losses incurred up to $25,000 per year; anything over that can be carried over to the next year. Note that your tax savings will be less than you lost • Social Security (FICA) or self-employment taxes (the

benefits vary, but can range from about 7.5% to 15.3% of your profit) • second/vacation homes rented out for at least two weeks per year might allow you to write off advertising and rental commission and prorate other expenses • some states have historic tax credits that include both the rental operation and/or any renovations • incentives from your state or locality to invest in lower- income areas You’re also required to take a deduction for depreciation. Just know that when you sell a rental property, you’re subject to depreciation recapture. Any gain that has to do with depreciation is taxed at 25% (as opposed to 20% for regular capital gain). The depreciation-related gain is also called unrecaptured section 1250 gain. One way to mitigate this is to always keep track of passive activity losses. While they may not be deductible while you own the property, they are when you sell it, which means the amount you’ll owe will be less. By the way, if you’re thinking, “Well, I just won’t claim depreciation, then,” I’m sorry to tell you that this simply won’t work. The IRS states that the recapture’s calculation is based on “allowed or allowable” depreciation, meaning that even if you didn’t claim it, you’ll still have to pay it. You might as well get the deduction while you can, and perhaps consider setting it aside for when you do end up selling the property.

ALL ABOUT CREDIT SCORES

As I briefly mentioned, credit scores can play an important role in getting financing and the rates you’ll need to pay. I want to talk in detail about what makes up a credit score so you’ll know 16

what you need to do, should you want to improve it.

First, your score is a number that tells lenders how likely you are to pay back the money. When you have a higher score, you get better rates, which leads to long-term savings and more money in your pocket. Credit scores are often based on the FICO scoring model. They can range from 300 to 850:

• Bad credit: 300-600 • Poor credit: 600-649 • Fair credit: 650-699 • Good credit: 700-749 • Excellent credit: 750-850

The determining factors and how much weight they carry vary between credit agencies (TransUnion, Experian, and Equifax). However, the following five are the major contributors to your score:

• Payment history: 35% • Outstanding balances: 30% • Length of credit history: 15%

• Types of accounts: 10% • Credit inquiries: 10%

By knowing your credit score, you’ll have a clearer picture of your investment strategy. If your score is high enough, you might be able to get a traditional loan and help with down payments. If your score is lower than you’d like, take a look at the determining factors and see where you can improve — making on-time payments should clearly be a priority. You can also consider paying down balances as you’re able, and not

opening up a bunch of new credit cards.

BEWARE OF SCAMS F SCAMS

With so many people out there looking to make money in real estate, it’s pretty much expected that there will be people out there ready to take advantage. The two main types of scams to watch out for are seminar scams and lending scams. Seminar scams can give some truly helpful tips, but it’s always used as a way to gain people’s trust. Once they have the trust, they’ll offer “limited-time” investment properties or expensive classes. When people fall for the trick and buy a property, they often find that it’s got a lot of issues and is quite likely a money pit. However, signing up for classes can be negative, too. Why? Because people often end up spending thousands of dollars for little to no new information when that money (and their time) could’ve gone toward their investments. To make things even worse, people who get taken in by scammers often sign agreements without reading them through. These documents often include a section that keeps the scammed people from taking legal action against the scammers. So how do you find genuinely helpful seminars? (Yes, they do exist.) Do your research! Look up the organization, the presenter, the properties, and the courses. You can also start by looking up certified experts and see if they offer any educational opportunities. Lending scams are another common scam in real estate. It’s a fairly easy type of scam for real estate investors to fall into because often they’re looking for alternative financing (i.e., private lenders) that doesn’t have the same qualifications

required by traditional mortgages.

This kind of financing often has a requirement to pay back the money more quickly and tends to have higher interest rates than mortgages. Those things alone don’t mean they’re a scam, though. The problem is that lenders don’t have to be licensed to hand out money, so it can be a bit tricky to make sure the lender’s legit. So, how do you make sure the lender you’re working for is on the up-and-up? First, you find the lender through one of the following ways: • Through a certified real estate investing website • Through referrals from people in your network who’ve personally worked with the lender Second, you should ask the following questions (and if the answer to any is “yes,” it’s probably a red flag, pointing to a scam): • Does the lender seem to know details about investing and lending, including the correct jargon? • Is there a major upfront fee? • Does the lender seem a little too eager to give you the money? In other words, do they skip asking you essential questions and get right down to the “money talk?”

CHAPTER 4 Homes to Invest In

So now that you’ve got the financing in place, how do you know which homes or properties to buy? There are plenty of factors you need to consider to ensure the purchase makes sense. As the saying goes, you make money when you buy , not when you sell . This is why it’s key to buy the right property, which entails being clear on where you’re trying to sell and who your buyers are. Also, keep in mind this saying: “You don’t have to like the house, just the numbers.” Read on for more details on how to make the best choice, particularly when it comes to flipping homes.

WHERE TO START

The first thing you have to do is choose your market. If you’re flipping, consider looking for the location closest to you that has a population of at least 100,000 people. (Bigger market = more opportunity.) This is considered your local market . Another option is remote investing , which could theoretically be anywhere. However, be sure to choose someplace that’s not only familiar to you, but also a place to which you feel emotionally attached. This might surprise you, as most people have been told that emotions should stay out of these kinds of decisions. I don’t disagree when it comes down to the details, like which specific property to buy, what to fix up, etc. However, in this one case, emotions are important. You’ll be spending a significant amount of time there doing some pretty 20

hard work, and being in a location that you enjoy and feel connected to will help. Plus, you’ll know the area well, which can be advantageous in many ways, as well. Once you’ve decided on a market, it’s time to look at inventory levels . This means finding out how many homes are for sale. Keep in mind that low levels (e.g., few houses for sale) can be a good thing, because it means it’s a seller’s market. Ideally, you want your market to have less than four months of inventory. The following are the different types of markets to look for: • Hypermarket: Less than one month of inventory; little to no competition. Listings tend to sell above asking price after receiving multiple offers. • Seller’s Market: Less than four months of inventory; low competition. You will likely sell for a good price. • Stable Market: Four to six months of inventory. Properties might take longer to sell, and could sell at or below asking (if they sell above, it probably won’t be by much). • Buyer’s Market: More than six months of inventory; lots of competition. Properties take a while to sell, and often sell below asking. I suggest that flippers focus their efforts on hypermarkets and seller’s markets, as these will bring in the most profits. It might be hard to find that initial right property, but it’ll be worth it in the end. In addition to looking at the overall inventory, you will want to look at the average Days on Market (DOM) , so you’ll be able to make an educated guess about how long it will take a property to sell. This is something I can help with by researching similar types of properties that have sold in the previous 30 days.

MAKING THE NUMBERS WORK

The most important thing you can do is to conduct your research about the structure, the land, and the surrounding areas. This includes seeing if there are any new roads or construction planned, ensuring there aren’t any liens on the property, looking at comparable properties, and researching anything else that could affect the value of the property. If you’re just buying land, go over the deed with a fine-toothed comb. After you’ve accumulated sufficient information on all applicable factors, it’s time to decide whether it’s a wise investment. That said, remember that even with the most detailed research, things can change. Maybe the up-and-coming neighborhood takes an unexpected downward spiral, or maybe it up-and-comes more quickly than expected. Unless you’re psychic, there’s just no way to predict what will happen, so making the most well-educated decision you can is the best way to mitigate — but not eliminate — the risk. The most important part of running the numbers is calculating your Return on Investment (ROI) . Here’s how to do that: • Figure out the investment gain . This is the amount of money you’ll make before expenses. So, if you make $500 per month on your rental property, multiply it by 12 months a year, and your investment gain will be $6,000. • Add up all your operating expenses. This should include taxes, insurance, repair costs, and any other expenses you know or think you might have. If you pay $1,200 in taxes, $450 for insurance, and $900 in repairs, your total expenses would be $2,550.

• Subtract your expenses from your investment gain: $6,000 - $2,550 = $3,450. • Divide the figure from step three by the price of your investment. So, if you bought the property for $75,000, then $3,450 ÷ $75,000 = .046 • Finally, turn the figure from step four into a percentage. In this case, 4.5%. This number is your ROI. You need to know what your bottom line is, i.e., how much you want to spend and what your ROI should be. If the price of buying and/or fixing up the property is too high and/or the ROI is too low, it’s time to move on and find another property that better fits your goals.

WHICH HOMES TO BUY

While some investors might look at For Sale By Owner (FSBO) properties, many others focus mostly or completely on purchasing bank-owned properties. Some go to sheriff ’s sales or other auctions. But what type of properties should you be looking for? 1) Distressed properties; 2) foreclosures; 3) short sales; 4) and REO/Bank-Owned properties. Let’s take a look at each of these options in more detail.

Distressed Properties

Owners of distressed properties tend to be pretty desperate to sell, which means investors can often get them for less than market value. For these types of buildings, a popular option for investors is to wholesale them. This means the investors get the home under contract, then market it to other buyers for a higher price than their contract, and ultimately assign the contract to another buyer. The investor ends up with the difference between the new

contract with the new buyer and their contract with the seller.

For example, if an investor gets a home under contract for $60,000, then finds new buyers who agree to pay $70,000, the investor will make $10,000. A major advantage of wholesaling is that you don’t have to have a lot of capital, and there are many cheap — or even free — options to find them. They can use auction websites, including Hubzu.com, Hudsonandmarshall.com, Auction.com, and Zone.com. Because I have access to MLS (Multiple Listing Service) , I can help locate properties, as well. In addition to my own MLS, I can look through others in the area, which helps to expand your search.

Foreclosures

According to the most recent NAR® Investment & Vacation Home Buyers Survey, 18% of investors buy foreclosed homes. In order to purchase these properties, investors must go through auctions. If they’re the highest bidder, they have to pay the full amount at that time. They will then get the trustee’s deed once the sale is complete. Foreclosed properties’ prices are determined differently from other properties. Instead of using what the home is worth, the starting bid includes the following:

• How much is still unpaid on the loan • Interest owed from attorney’s fees • Any costs stemming from the foreclosure process

Sometimes, properties don’t even get that starting bid. When this

happens, it becomes bank-owned, or Real Estate Owned (REO) property. The loan lender owns the home and will use a real estate agent to try to get it sold. One thing to note is that these properties are sold as-is, so if you’re looking to buy one, that’s something to keep in mind. There are three main ways to find pre-foreclosed homes. The first is to check with the County Clerk at the County Recorder’s Office. There, you can look up Notice of Default (NOD), lis pendens (“an official notice to the public that a lawsuit involving a claim on a property has been filed,” as defined on Investopedia), or Notice of Sale public records. There’s also a good possibility that you’ll find properties that aren’t yet online. Speaking of online, that’s another good way to find properties. There are national and regional listing services. Most have a weekly fee but offer a free trial so you can get a “feel” for them and how they work. I suggest taking them for a trial run so you can see which site or sites best fit your needs. You’ll likely find out all the important details, including name, address, amount owed, and outstanding loans. Sometimes you’ll even find contact phone numbers. These listing services may also have REO properties, but don’t let that be a factor in deciding which sites to use, as most of these properties will already be listed on their lender’s (e.g., bank’s) website, which you can access for free. The third option is to look through newspapers and business journals. This is because when a foreclosure is filed, the Notice of Sale has to be published. You can look in the Public Notice section for trustee sales to find these notices.

REO/Bank-Owned Properties

The main advantages of buying REO properties is that you can

get them at below market value without having to worry about unpaid taxes or liens. The downside is that it can be an intense process to buy one of these properties, but the ultimate profit is usually worth the effort. Earlier, I mentioned these homes tend to be sold as-is. However, buyers are allowed to have an appraisal and inspection done. The bank won’t make any changes to the property itself, but they will likely negotiate the price down so you can use that money to make the repairs yourself. If you want to buy an REO property, you have to have your financials ready. Lenders set the prices low so properties will sell quickly, and if your finances aren’t in place, you could miss out on a great deal. To prepare, you need to make sure you’re pre-approved and have a letter from your lender. The letter must include the pre- approval total, how much you’ll pay for the down payment, and how to reach the loan officer. If you’re paying cash, you’ll still need a letter from the bank. This will state that you have enough money to cover what you’ve offered. One step that’s different in making an offer on REO properties is that you include an earnest money deposit . Essentially, this is a show of good faith that you’re truly interested in purchasing the property. The deposit will stay in an escrow account, then go toward your down payment and closing cost. These deposits tend to be 1-2% of the full offer, and may or may not be refundable. For example, if you decide not to buy after all, you likely won’t get the money back. However, if the bank backs out of the deal, you will probably get a refund. There are a few ways to find REO properties. A good place to start is by enlisting the help of a real estate brokerage that can search lists the general public can’t access. Sometimes the brokerage

has one or more realtors that focus solely on REO properties; sometimes, they have an entire department dedicated to REO. Second, you can look online at websites like Foreclosure.com, Auction.com, and RealtyTrac.com. Just be aware that you might have to become a paid member in order to search these sites. In addition, you can look at government and bank loan sites, which often list relevant properties. You can search national and regional banks and the government-run sites HomePath.com (Fannie Mae) and HomeSteps.com (Freddie Mac).

Short Sales

The most recent NAR® Investment & Vacation Home Buyers Survey also looked at how many investors bought properties through short sales: 17%. A short sale occurs when the buyer purchases a property for less than what’s still owed on the mortgage. The lender must approve of the transaction. They usually do this when the seller is going through a hardship (divorce, health problems, job loss, etc.), and the home doesn’t have enough equity to cover the balance of the mortgage, especially when factoring in sale costs. Part of the process of short sales is that sellers must give the bank their financials. What exactly this entails varies between banks, but the process tends to be comparable. Why would lenders be okay with getting less than they’re owed? Because the loss they take in short sales can be less than the loss they’d take if the home went into foreclosure. Plus, they won’t have to deal with marketing and selling the property. Just so it’s clear, this doesn’t mean you’ll get the deal of the century on a short sale. Lenders still want to get the most they can! (Wouldn’t you?)

Overall, short sales are good for everyone. Investors get a good deal, lenders get a significant amount of money without having to deal with the foreclosure/REO process, and homeowners don’t get foreclosed on, which can tank their credit score.

CHAPTER 5 A How-to Guide f o Guide for Wholesaling or Wholesaling For those of you who skipped Part 1, or who simply need a refresher, wholesaling involves an investor putting a contract on a property for below market value, then finding a buyer to buy the contract (called simultaneous closing ) for a higher price and/ or a fee. Another option is for the wholesaler to buy the property outright, then quickly sell it. The wholesaler uses a purchase and sale agreement (also known as a purchase contract , sale contract , or agreement of sale ),which states the purchase price and terms of purchase. Wholesaling can often be one of the faster ways to make money in real estate (sometimes it takes just a few hours!), which is why some investors center their business on this strategy (although many still include other types of real estate investments as well). In order to be successful, you need to learn how to find the great deals before the general public knows about them, which is where a professional like me can be helpful. Real estate agents and brokers can search the MLS for properties. Experts in wholesaling can also help you throughout the process, which varies from a typical real estate transaction. Of course, this process won’t work if you don’t have the buyers, so you need to make sure you’ve got a thorough database complete with buyer names, contact info, and property preferences.

THE WHOLESALING PROCESS

The good news is that anyone can be a wholesaler. There’s no 30

license required, although knowing how real estate transactions work can be helpful. Another advantage involves working with a real estate agent or broker, since they can search the MLS for properties. I can also help you find a title company that’s open to the wholesaling process (not all are). And each company has different requirements for all the parties involved, so I can educate you about that, as well.

Finding the Right Properties

When I’m helping my clients look for properties to wholesale, there’s a specific number to keep in mind: 70. End buyers (think flippers) tend to want to pay 70% of what they can get once the house is fixed up. Here’s the formula to use: fixed-up resale value – repairs – wholesale fee = max offer you should make Here’s an example if you want to make $7,000 on a home that should be worth $125,000: $125,000 (ultimate resale value) – $15,000 (repairs) – $7,000 (wholesale fee) = $103,000 (max offer) If you work through this formula and the deal seems to be possible, it’s time to see the house in person. Of course, there are usually unexpected expenses that come up in renovations, but by seeing the property for yourself, you’ll be able to get a better estimate about potential repairs. After you’ve done this, rework the formula, then figure out an offer. It’s often advantageous to offer less than your max so there’s room to negotiate, if needed. (Or maybe you’ll even get it for that price, which means more money in your pocket!)

Closing

Before I continue, it’s important to understand what exactly happens during closing. The buyer signs closing documents, including papers that allow the money to be released to the seller (which will happen within a few days). Then, the seller signs the deed over to the buyer. The buyer will get a title insurance policy. This proves that the property title is legal. Finally, the County Recorder’s Office will record the deed and other pertinent documents. One option for wholesaling is assigning the contract. In this process, you never actually buy the property, although you do put down an earnest money deposit. Also, not only is the seller aware that you’re selling the property to someone else, but they will also know who that is and what your profit is. The contract with the seller will state your name; however, it will also say “and/ or assigns” for the buyer. You will also assign the contract with the buyer, which means the buyer assumes all of the contractual obligations, not just the purchase price. This contract states your assignment fee, letting the buyer know your profit as well. One benefit to this process is that your assignment fee isn’t used for closing costs, so your profit will be exactly what is written in the contracts. One possible downside is that you’re relying on the buyer and seller to address any problems along the way and to officially close on the deal. You get paid at or after closing, so it can be stressful waiting for that to happen, especially since sometimes deals do fall through, and you have no legal recourse if that happens. However, if you know your buyers, your risk can be significantly mitigated.

Another wholesaling option is a double closing (a.k.a.

simultaneous closing or back-to-back closing ). This process involves two contracts generally signed on the same day, sometimes with a mere 20 minutes between the closings. The first is the seller selling to you (the A-to-B transaction), in which your or your company’s name is put on the title. The second contract involves you selling to the buyer (the B- to-C transaction); the second transaction typically pays for the first, which means you don’t have to put any of your own money into purchasing the property. Because the attorney already has the money for the B-to-C transaction, it’s clear that the A-to-B transaction will happen, so the B-to-C typically takes place first. Neither party will know your profit, so this is the best option if you’d rather keep that private. However, there’s a downside — you’ll have to pay closing costs both when you buy it and sell it, so your total profit might be lower. There are a few important points to keep in mind with both types of transactions. First, if you’re a real estate agent, you often can’t assign the contract because you’re cutting out the broker. If you’re not an agent, you can put the deal together yourself and then hire an agent to do the work. The agent’s commission should be written into the contract. As for double closings, investors need to be careful. Depending on the mechanics, it might be that the investor is essentially doing what an agent would do, which could be viewed as illegal if the investor isn’t a licensed agent. It’s important that you’re clear on the laws of your state and that you bring in a licensed professional, if necessary. Finally, if a real estate agent is involved in either kind of transaction, they must disclose this. This is because, theoretically, there could be an unfair advantage.

FINDING BUYERS

I’ve already mentioned this, but I want to be clear: The key to successful wholesaling is having a solid list of potential buyers you can trust. Without them, you might find yourself stuck with properties you don’t want. Your buyers will mostly likely be other investors, including both flippers and rental investors. Just keep in mind that people who own rental properties often don’t want to do major repairs. This is why it’s crucial to know exactly what your buyers are looking for — the more you know, the more likely you’ll find the right buyer quickly, which means the process is more likely to go smoothly. Also, it can’t hurt to have a potential backup buyer, just in case something unexpected happens.

So, how do you build your list? There are several options:

• Search the Internet for properties. Then, you can reach out to anyone to has rental for rental listings or purchase listings with a “for rent or lease” option. • Network. Post on social media, talk to or email family and friends, and reach out to related professionals you know, like lawyers, mortgage brokers, and financial planners. You can also go to more traditional networking events. • Search the newspaper for ads from people paying cash for houses. • If you already know hard money lenders, ask them if they (or others they know) are interested in buying. • Call the numbers on the “We Buy Houses for Cash” signs. Just explain what you do, ask what they’re looking for, and see if it feels like a good potential business

relationship. • Join all related investment and real estate groups you can find, whether it’s online or in person. Whenever you make a new contact, connect with them quickly, learn exactly what they’re looking for, and stay in touch, even if you don’t have a property that fits their needs at the moment. A trusting relationship is just as important as a good deal. Keep in mind that while a good list is important, sometimes all you need are a few investors to make your wholesaling a success. That way, you’ll always have people who want the kind of properties you find. One potential obstacle to overcome is that many investors will want to work only with wholesalers who have experience. If you’ve been doing this a while, be sure to have a portfolio you can show them. This can be a website showing all your deals — both past and present — so it’s immediately clear you’re serious about wholesaling and they can count on you to find good deals.

Cash Buyer Advantages

In an ideal world, you’d always work with cash buyers. Why? Because the process tends to go more smoothly and quickly, which means you get the money in your hands faster and with less stress! But that’s not all. When you get a cash offer, you don’t have to pay closing or realtor fees, and you don’t have to deal with banks’ red tape or refusal to give buyers a loan. In addition, cash buyers, particularly those who are investors themselves, are often willing to buy the property as-is, so you won’t have to spend any money to fix things up.

While a buyer’s cash might come from their own bank accounts, they might also have obtained a HELOC (home equity line of credit), used a self-directed IRA, private or hard money from other investors, or even a loan from a bank that works with investors. (These loans are closed in at most two weeks, making them close enough to cash to count for these purposes.) One important thing to keep in mind is that you need to do your due diligence to make sure the cash buyer is legitimate. Research the buyer or the company they work for and make sure you talk to the person over the phone at a minimum (ideally, meet them in person). And while sometimes real buyers don’t want to see the house themselves before purchasing, this can also be a red flag that they’re scammers, so be sure to listen to your gut. I’m sure you’re wondering how to attract cash buyers. There are a few places to look. The best place to start is by using your network. Ask hard money lenders and real estate agents if they can connect you with any cash buyers. (Just know that agents might charge a small finder’s fee.) In addition, you can look for investors in classified ads. You also might have seen those signs or billboard-style print advertisements saying, “We Buy Ugly Homes.” In general, these companies pay considerably less, so it’s best to look for individual cash buyers instead.

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