It is always a really good idea to get ahead of the game when preparing your home for sale. Did you know that the home inspection period, called the Option Period here in the great state of Texas,
The Truth About No Money Down Real Estate Investing
If you’re like me, then you have had the occasional night when you just can’t sleep and you end up getting sucked in to some infomercial about the latest workout gadget, some new age crock-pot, and of course, none other than the infamous pitch: How to get rich in real estate without using your own money. You know, the one with the guy who lost everything after being laid off, newly married, with a newborn and living in the family’s minivan (in-laws’ basement, buddy’s couch, you get the idea). Just when he hits rock bottom, he discovers the “secret” to financial freedom through real estate investing and he figures out how to do it all without spending a dime of his own money.
What he doesn’t tell you, at least not before you pay $99.99, is that even though you might not have to spend your own money, you will have to find someone who is willing to spend theirs. This is the world of “creative investing”. You are essentially a middle man (or woman) who facilitates deals between a buyer and a seller. The most popular form of creative investing is ‘wholesaling’ and the majority of these infomercial programs will focus on this. Let me explain.
Wholesaling is when you, the wholesaler, find a property that is significantly less than market value. You negotiate the price with the seller, sign a contract to purchase the house and then try to find a buyer who is willing to pay more than you have offered the seller. You then collect the difference (or spread). Sounds simple, right? Well in theory, it really is that simple, however in practice there are some very important things you must be able to do:
You must be able to locate another buyer in a timely manner or you will lose the opportunity to secure the property. Once you have a signed purchase agreement with the seller, time is of the essence. For this reason, the first thing you need to do is build an “inventory” of potential investors before you ever begin looking for a property to wholesale.
You must be able to pay the option fee. In a typical purchase contract, there is an option period where the seller gives you the “option” to back out for any reason, but you normally will have to pay a fee in order to have that option. This fee can be anywhere between $75 to $500 or more. Usually this fee is applied to the purchase price if the deal closes, but if you back out, the fee is non-refundable. In a normal transaction (one where there is one buyer and one seller), the option period is used to perform inspections before finally committing to purchase the property. However, in a wholesale transaction, you, the wholesaler will be using this period to secure another buyer. If you are unable to locate the buyer, then you lose the option money.
You will likely need to put up some earnest money. Most sellers, unless extremely distressed or motivated (these are in fact the kinds of sellers you will be focused on primarily) will not enter a contract with you unless you offer some money up front to indicate you are a serious buyer. Earnest money is refundable depending on the terms of the sales contract. The good thing is you decide how much earnest money to offer, if any, but the seller will decide if the amount you offered is reasonable.
You probably noticed that both #2 and #3 actually DO require you to spend your own money, even though the amount is usually quite low in comparison to other types of investing. And what about the time and effort you will have to put in to find investors you can consistently rely on to make the purchases? We all know time is money. These are not reasons to shy away from this form of investing. However it is important to realize that there is no easy way to build wealth in real estate.
I will end this writing with an example of how a wholesale transaction works:
Gertrude, a 75 year old widow has fallen behind on her property taxes. For the last few months, she has been receiving letters from the tax appraisal district threatening to foreclose unless she forks over the cash. Gertrude is on a fixed income and has no one to borrow the money from. Needless to say, she is a distressed seller who needs to sell her home quickly so she can pay the taxes and find something more affordable. This is where you come in.
The market value of Gertrude’s home is $150,000; however, you make her an offer of $100,000. Gertrude agrees and you both sign the purchase contract. Because she is in such a bind, she doesn’t fuss about you not offering her any earnest money; however, you do offer a $100 option fee since you requested an option period of 10 days. Gertrude agrees, but asks you to please hurry since the tax man is on her back.
You already know which of your investors would love to purchase this deal. You call John P. Investor to tell him about it and, as you expected, he is thrilled. He offers to pay $125,000 because he knows he can sell it for $150,000. You sign a contract with John. Now that you have secured the buyer, you go to closing with Gertrude and you sign over the property to John. John pays you $125,000 and you then pay Gertrude $100,000. For your effort, you collect $25,000. Not bad.
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