Do You Know What A Wholesale Deal Is

Investing In Real Estate With Lex Levinrad

On today’s podcast episode I talk about understanding what a wholesale deal is.

Would you be able to recognize a wholesale deal from a house for sale? They are not the same.

Regardless of whether you want to wholesale real estate, fix and flip houses or buy rental properties you need to be able to understand what a wholesale deal is, and why someone would sell their house at a discount. If you have limiting beliefs or excuses of why you cannot own a rental property, then I will share with you a mind exercise that I sometimes use with my students that will help you overcome limited belief mindsets (like not having enough money to buy a rental property).

Here is the exercise

Imagine your own mother inherited a million dollars and she wants you to buy single family rental properties for her. So you don't have to worry about having the money to buy rentals because she has the money. And you don't need to worry about having credit since you are paying cash (with her money).

So now all you need to do is go out and look for a rental property. In your mind it sounds easy because in your mind there are now no obstacles to you buying that rental because you don't need money and you don't need credit.

But the exercise is a little bit more tricky than that. Your mom gave you specific instructions. She said that It's very important that you maximize the income that she gets because she needs that income to live and pay her bills. And she also told you that she does not want to lose any money.

Start off with eliminating the excuse in your mind that says “I can't buy rental properties because I don't have any money”. Eliminate the excuse in your mind that says “I would like to buy rentals but I don't have good credit.

Money is not the obstacle to you building wealth or buying rental properties. Neither is having good credit. The obstacle is understanding how to find a good wholesale deal at a discount.

If mom has $1 million to spend, why can't you just pick up the phone and call a real estate agent and buy some rentals for her?

Because she told you:

"I don't want to lose my money, and I need to get as much income as I can because I am using this money to pay my bills".

You can't leave the money sitting in cash at the bank since at 5% inflation your million dollars would be worth just $950,000 next year. She told you that you cannot leave the money in cash or buy stocks bonds and mutual funds. You have to buy single family rental properties.

So you could buy one property for $1 million or 5 properties for $200,000. Which one would you do? Most people who want to buy rental properties would call up a real estate agent. But can a real estate agent help you?

Remember mom said:

1. I don't want to lose my money

2. I want to get as much income as possible

3. I cannot invest in anything other than single family rentals

Why can you not call a real estate agent and get a good deal on a rental? Because the agent will go on the MLS and look for rental properties for sale. They will be showing you RETAIL properties listed at RETAIL PRICES (or higher). So for example they may show you a $200,000 house that has a tenant in place that you could purchase.

But if you purchased this property at a retail price, and then decided you wanted to get rid of it a few months later, you would immediately lose 10 percent (4% closing costs plus commission). So paying retail will not work.

Let's say that you like this particular neighborhood where this $200,000 house is located.

In that neighborhood, and on that street, let's assume that all the houses are identical and were all built in the same year by the same builder. They are all 3 bedroom, 2 bathroom houses. They are all 1,200 square feet. And they were all built in 1989. Would all of these houses sell for $200,000? No they would not. Why? because a house that is upgraded and remodeled would sell for a lot more than an outdated house that has not been upgraded or remodeled.

How much would that same house sell for if it was vacant for 5 years, and had not been remodeled since 1989? Obviously for much less than the remodeled house.

What about if in addition to being vacant for 5 years, the house had bad urine odors from cats, had rats running around, and was infested with cockroaches and was a hoarder house with tons of boxes, trash and newspapers? What would it sell for then?

What if in addition to all of the above, the house needed a new roof, new electrical and new plumbing. What would it sell for then? The point that I am making is that the exact same house can sell for substantially less because of damage to the property. But that is not the only reason why a house can sell for less. Another reason is seller motivation and how motivated the seller is to sell their house fast for cash.

Why would a motivated seller sell a house that was worth $200,000 to me for $100,000? Why would that seller sell that house for 50 percent of fair market value? Because he inherited the house, had to go through probate, had not seen the house, and lived on the other side of the country in Seattle. He was motivated to sell as is for cash. He received one of my postcards in the mail (because I mail to inherited properties). When he asked me how much he can get for the house I said let me go take a look at it. And when I called him back I told him it was in really bad shape, texted him some pictures showing him the condition and told him I was not really that interested in buying the house and could offer him $100,000. He accepted my $100,000 cash offer.

He was willing to sell the house that he had inherited for $100,000 when identical houses on the same street had sold for $200,000. Why? Because he was motivated to sell fast for cash. Don’t overthink this part. He was a motivated seller.

Now If I purchased that house for $100,000 and spent $30,000 putting in new flooring, new paint, new appliances, new kitchen and new bathroom, and then I listed it for $200,000, I would get multiple offers on this property and sell it for above asking because is is remodeled, so it is nicer than the comparable sold properties. Let's say I sell it for $210,000. After paying the commissions, and all repair costs, and interest, fees and points, I would make $50,000 to 60,000 profit on this house (from mailing a postcard).

Let's assume that instead of me mailing a postcard, you were the one that mailed the postcard. Imagine that the seller called you. You spoke to the seller, and you got the seller to agree to sell it to you for $100,000.

If you called a lender like me and said “I am buying this house for $100,000, and I can put down $10,000 can you lend me the $90,000?" The answer would be yes. Why, because earning 12% in interest is better for me than earning zero in my checking account. Earning 12% in interest for me is better than 5% in Treasury Bills. It’s a good return on my money and I would be very happy to lend $90,000 on a $200,000 house. What's the worst that could happen? As the lender I have a first mortgage on the property. That means if you don't pay me a get the house! So then I would own a house for $90,000 that with just $30,000 in repairs would be worth $210,000. That's a win. So I win whether you pay me interest or not. That's why I would do the loan. I am not lending based on your credit. I am lending based on the collateral (the house).

So with this example we have just established that lack of capital is not what would prevent you from buying this property. You could probably figure out how to come up with $10,000 down by borrowing from a family member, selling something, using credit cards or whatever you needed to do to get that deposit money. If you didn't have the rehab money you could borrow that too. That is what I did on my first house. I borrowed the money to buy the house and I borrowed the money to repair the house. So lack of money is not the obstacle. Lack of money is not stopping you from buying that rental . Lack of credit is not what is stopping you either because you don't need credit to get a collateral based loan like this from a private lender. What is stopping you is the limited mindset belief that you have (which says I can't do this). The other thing stopping you is lacking the knowledge of knowing how to find a wholesale deal like this probate property at a discount of 50 cents on the dollar. That is what is stopping you. Lack of knowledge (information). The other thing stopping you is fear.

By buying at a discount, you are buying with a margin of safety. If instead of flipping the house you rented it to a tenant, then after the house is rented, you could call a mortgage broker and refinance your loan. You would pay off the private lender loan to me and you would get a conventional mortgage. This is called the Buy, Repair, Rent & Refinance Method (BRRR for short). If the house appraises for $200,000 and the bank is willing to lend you 75% of that amount ($150,000) then you would net $140,000 after refinance fees. After you paid me back the $90,000 loan, and you paid yourself back the $30,000 for the repairs on the property you would still have $20,000 left over. Assume that when you purchased the property your down payment was $10,000 and closing costs, points and fees was $10,000. You use the $20,000 left over from the refinance to pay yourself back and you have effectively purchased the property for no money down. You would have a cash flowing rental property that was appraised at $200,000 with a mortgage of $150,000 leaving you with equity of $50,000. This means you just added $50,000 to your net worth. And now every year that goes by, you get to raise rents, and your mortgage balance goes down. Every year that goes by, the value of the property goes up. This is how you become wealthy.

This Buy, Repair, Rent and Refinance strategy works because there are motivated sellers everywhere. Every day, people have fires, floods, hurricanes, tornadoes, storm damage, water damage from burst pipes etc. Every day people die, lose their jobs, go into foreclosure, get sick, or get disabled. Every day people inherit properties that need to go through probate from a relative or parent that passed.

If you are buying rental properties using this BRRR method and you are buying at 50 or 60 cents on the dollar, then you will have a margin of safety. And if you are buying right, then you will also have positive cash flow. When people told you the first rule of real estate is location, location, location they lied to you. As a landlord the only rule that matters is cash flow. If you don't have cash flow then you don’t survive to hold real estate long term. I have many rental properties in very bad locations in bad neighborhoods that have increased ten fold in price. I purchased some of these properties for as little as $25,000. 15 years later they are worth $250,000. In that time rents on these properties have gone from $400 a month to $1,800 a month. That's cash flow.

You could spend your entire life coming up with excuses of why you can't buy rental properties. That’s the easy way out. Staying in your comfort zone won't get you to financial freedom. If you want to create wealth and financial freedom you will need to get out of your comfort zone and buy a rental property. After you have purchased one property, buy a second, then a third and keep going till you have at least ten rentals.

Buy a rental property at a discount using the BRRR Method. Fix it up, rent it out and then refinance the mortgage. If you buy just one single family rental a year, you will become a millionaire. It’s just a question of time. I recommend you learn how to buy rental properties at a discount as soon as possible by attending one of my real estate training events (boot camps).

To your success, Lex

P.S Enjoy the podcast!