Fix and Flip Module 3 - Finding A way
Finding the right property is the secret to success, it is also the most difficult part of the business. Competition is stiff, you have contractors, realtors, wholesalers, and other flippers out there searching for that property that will provide them the return they need to stay operational. Just in case you don’t know what a wholesaler is, we will get into that a little later in this article.
To stay on top of your game and beat the competition you need to build alliances and spend a portion of each day finding properties. Alliances with realtors and Mail delivery person (just so that I am Politically Correct), is one outlet. Realtors are out there working and if they can provide the deal to someone where they can make it on both ends they will be very happy. You want to build relationships with every realtor, but you want to focus on active agents who also work. Active realtors only makeup about 10% of the industry and produce 90% of the business. These are not the people who are looking to go out for a cup of coffee, or lunch, they are too busy working. Look for the top performers, the top agents in the office. Many times the receptionist, office manager, or broker in charge can help you get that information. Do not go into the office all cocky, they will ignore you, be a little humble and be knowledgeable, it will go along way. it takes constant contact to start a relationship. Realtors have dozens of people contacting them trying to make money with them, but many give up after a few contacts. The golden rule is that it takes 8 to 12 contacts to build a business relationship. Just a note- I have had people who struggle at this business thinking they know better, month after month goes by and yet no business, and after 5 -6 months they get out of the business. Yet if they started a plan to build relationships as we teach in our course in 3 months they would have built a successful business based on referrals. Yes, there are exceptions to the rule which I believe falls under another golden rule. If you work at it you will reap the benefits, meaning as you work at building your referral network you will gain relationships on the 2, 3, 4, etc. contact. Its the reward for putting the effort in.
Now you may be asking yourself about the mail delivery person. You will see them as you work in an area. They usually work the same route for years, they are familiar with the neighborhood and they know things before anyone else does. They also get to see the mail and the notices that come through the mail and that are posted on the property. They also are the first to notice when a property starts to be neglected. Neglection of the landscape and other areas is the first sign that homeowners are in trouble. It’s easy to get the entire delivery fleet to be your eyes and ears on the ground. Find your first-person and let them know they can earn cash money if they see a property they think is in foreclosure and you get the deal. I am not going to tell you how much to give them but make sure it’s at least worth their while, you will pad that money to the project as an expense. Then let them know that they can develop their own side hustle by letting te other postal workers if they come across something and it pans out that they will earn a part of their commission.
Money talks! I am sure that you have seen the “We Buy Houses” signs while driving around. Some of them hire, what I call Hunters, to put up signs and find properties for them. They typically pay $5,000 for a completed transaction. That seems to be the standard fee, and again that is added to the costs of the deal when figuring the budget and ROI.
You too can drive neighborhoods, looking for distressed properties and even FSBO’s (For sale by owners). Have a flyer for a handout, and to leave on a door where no one is home. Don’t be afraid to knock and talk to the people. Be understanding to break them down, they will typically be standoffish because they are embarrassed about their situation. You have to be a psychologist, social worker, and a friend all at once. They are going through one of the 3 phases which are, denial, hatred, or acceptance. What you want to do is get them to acceptance as quickly as possible. It may take a couple of follow-ups over the next few weeks, but if you can show them the opportunity that lays ahead for them they will come around. What do I mean by that? This goes back to you figuring out the resale value, your budget, and what the payoff of their mortgage and back taxes are (be warned that the bank is probably paying the taxes and adding it to the mortgage balance). You can contact the attorney handling the case for the bank if it has been already assigned to a foreclosure attorney, otherwise, you can get the info from the bank. Remember when speaking with the bank or attorney, you are representing the owner of the property. Have them sign an authorization that allows you to represent them on the existing finance of their property. If you can show that you can give them enough money to help them get settled again and that waiting is just delaying the inevitable you can close the deal.
Now, what about other sources. Foreclosure filings and auction sites are other areas to search properties. But I must warn you, many of these sites are heavily dredged by others and the auctions can be overpriced. These can be done from the comfort of your computer and the sites may charge a membership fee.
You can never stop the search. This is the fault of many Flippers. They search and search and finally find a property that fits their needs, and they stop all searching. They become so engrossed with the one property that they forget everything else. They don’t start searching again until the property is finished and sometimes even after it is sold. This is not economically feasible or high on the business sense ladder to success. You are limiting your income, and not earning the money you should, especially that it could at times take you 2-3 months to find the right property. So that will limit your business capacity to one house per year.
In module 2 we expressed that money is needed to complete a project. Downpayment, closing costs on both ends, and even money to start renovations and to have in reserve for unexpected incidences. If you are not privy to excess cash there still are ways to obtain the money needed for the costs that can be expected to be incurred. We will discuss 2 ways to obtain the money you need, and each way may take some other external efforts to position the borrower to be able to complete the process successfully.
First, we are going to look at wholesaling, remember when I mentioned that earlier in this article? Wholesaling is when you find a property that is a flip candidate and you are able to place the property on a 30-day contract. You put no money down and through your resources you can then offer this contract through assignment to an interested party for a commission. The spiff on this kind of transaction is usually around $5,000. It is a quick buck for the wholesaler. There are many wholesalers who do very well doing this and provides an opportunity to put money aside to grow the business.
There is an added feature to wholesaling. There will be times that a property will be considered a home run. This is a property that the wholesaler can turn the property and make 20, 30 40,000 dollars and still leave the rehabber a great spread to work with. In a situation like this, you don’t want the seller or the rehabber to know what you are making. This is where transactional funding comes into play. The transaction will consist of two closings usually done on the same day and only minutes or hours apart. The first transaction will be between the wholesaler and the seller. The transactional funding will fund the purchase of the property for the first transaction and the wholesaler will have no out of pocket expense. The second transaction will consist of the wholesaler to the rehabber. During this transaction, all monies and fees owed to the transactional lender will be reimbursed and the wholesaler will be cut a check for the remainder. There is no qualification for this type of funding just a contract to purchase on both ends and a commitment from the lender for the money the rehabber needs. This allows the wholesaler to make a good sum of money on the transaction without the seller or the rehabber becoming upset.
Wholesaling can help you earn good money, where some can be saved towards starting or growing a rehab, construction, or real estate investment business. There is another way to get the money you need, and this can be combined with wholesaling to maximize your efforts. Personal Lines of Credit can be a route to obtain up to $300,000 in low-interest financing. This does take a credit score of at least 680 or better and have multiple credit accounts with age and good standing.
Obtaining funding may take some work if your credit is not up to par. But for the budding entrepreneur they must understand that to be successful in their venture, preparation is key. With Ebizmore we can help them repair their credit, get them new accounts to build the depth of their credit, and get them the money they need. These things do not happen overnight, and they need to be patient and work diligently to help the process. Depending on the present state of their situation it could take 6 months or even a year or longer. The goal is to get them to a point where they have the best opportunity for success. Starting too soon and unprepared will only result in failure and disappointment.
This module was all about finding the homes to build a flip or a wholesale business. It is important as a loan professional to know what is entailed in running a successful rehab business. The key to finding the right projects is building an affiliate network of searchers, similar to how a true loan professional does. Building a referral system expands the range of work that can be done.
In the next Module, we will finish up with the final qualifications, and the underwriting.
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