Every investor is looking for houses at a discount (wholesale deals). I define a wholesale deal as a house that can be purchased for no more than 65% of its After Repair Value or retail price. As an example, if a house is worth $200,000 retail, then a wholesale deal would be buying that house at $130,000 or less. If you were asking me to lend you money on a fix and flip, I would be lending a max of 65% of the ARV. So your goal is to find houses at a huge discount like this. We call these houses “wholesale deals”.
If you are a wholesaler and you want to wholesale/flip houses to other investors, you need wholesale deals. If you are a rehabber looking to fix and flip houses, you need wholesale deals. And if you are a landlord looking for rental properties, you need wholesale deals. Even if you are buying Airbnb short term rentals, you would be better off buying a wholesale deal and creating equity.
So the question is this…..
What is a wholesale deal? And how do you find one? And why buy wholesale? The answer is simple. Banks will lend up to 75% of the appraisal value on an investment property. That means that if a house appraises for $200,000, then banks will lend $150,000. If you can buy that house for less than that amount, then you can refinance and buy the house for almost no money down.
How does this work? Well first let’s look at regular retail real estate. Let’s say you find a $200,000 house in move in condition and in order to buy it the bank wants you to put down 25% (which is $50,000). So you buy the house, you have a $200,000 house, a $150,000 mortgage, and $50,000 in equity (which was your cash). You have not increased equity or increased your net worth. You have simply transferred $50,000 cash from your checking account into the equity in your house.
Now let’s say a house with the same exact layout down the street was abandoned and outdated and had not been lived in for a few years. It would need a $20,000 interior remodel, new kitchens, bathrooms, flooring, and paint in order to be listed for sale on the MLS. Let’s say you could buy this “damaged” house at a substantial discount of only $130,000 cash because it is a probate property and the children that inherited the property just “want to get rid of it”.
Now assume you are the investor, and you borrowed the $130,000 cash from a relative to buy the house. And this same relative was willing to loan you the $20,000 to repair it. Your “all in” cost would be $150,000. You could offer your relative 8% interest on the $150,000 that he/she loaned you, or you could offer to partner with them on the deal in exchange for 0% interest and offer them a small percentage of your profit on the deal.
So as an investor, you buy this house for $130,000, and spend $20,000 renovating it to bring it up to the $200,000 market value that houses on this street are selling for. Now that the repairs are done, you go to an appraiser to appraise the house. The house appraises for $200,000.
So the bank would be willing to lend you $150,000 which is 75% of the $200,000. Since you borrowed $150,000 from your relative, you could pay them back and you would now own a $200,000 house with a $150,000 mortgage. You would have $50,000 in equity. You have essentially created $50,000 from nothing. And you could then go back to that same relative and borrow the same money again on the next house. This strategy essentially allows you to buy unlimited real estate (assuming you can find houses at 65% of market value).
So in the above example, we assumed a vacant boarded up house that was a probate property that had been inherited. This is what we call a “motivated seller”. The heirs to this property have no desire to spend money out of their pocket to fix up the property. They may not have the money or the time. They may be on the other end of the country and simply “don’t want to deal with it”. And that is what creates the opportunity.
So if you want to understand how to find wholesale deals at 65% of market value then you need to understand that these deals are going to come from motivated sellers.
I break down motivated sellers into 6 different categories
1. Damaged Houses
2. Inherited Houses
3. Bank Owned Properties
4. Need To Sell Now Houses
5. Retirement Houses
6. Emergency Situations
So if you are looking to find wholesale deals at a huge discount, then understand that you are going to be buying houses from sellers in one of the 6 categories above.
Damaged houses could have mold or be water damaged, fire damaged, hurricane damaged, or tornado damaged. Inherited houses could be probate houses or any situation when someone dies. Bank owned houses could be foreclosures, pre-foreclosures, short sales, and REO’s. Need to sell & emergency houses could be anyone that needs to sell their house fast for cash. Retirement houses are anyone that is looking to sell their home and downsize or move.
You need to learn how to market to motivated sellers to find wholesale deals!
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