| | What To Do When Your Canít Find a Buyer for Your Wholesale Deal
Q: This summer, I put a "junker" property under contract for $7,000. It had an ďafter repairedĒ value of $45,000 and needed about $12,000 in work. This seemed like a classic wholesale deal, but I was unable to find a buyer at $10,000 before my inspection period ran out. I chickened out and exercised a contingency to get out of the contract. I'm very sure of my numbers and I'm sure this would have been a great deal for someone at $10,000. That lost profit has been haunting me for months. What can I do next time? B.F., Cincinnati
A: As I see it, you have two separate problems here. First, you donít have the resources to find a buyer quickly. Second, you donít have any strategies for buying or controlling your great deal if you didn't find a buyer right away. Let's look at these problems one at a time.
When a wholesaler offers a deal where a buyer can purchase and renovate a property for an investment of less than 50% of the value of the property, and that wholesaler can't find a buyer for that property, one of four things is happening. One possibility is that the property is in an area so bad that buyers donít want to deal with. If other buildings in the area of yours are mostly boarded up, or the area is extremely unsafe or has a reputation for open drug and gang activity, finding a buyer can be difficult even when the numbers seem to work on paper.
The second possibility is that your estimates of the value or cost of repairs are badly wrong, so that the deal is not as good as you present it. This mistake is sometimes caused by overlooking an incurable defect in the property itself that makes it significantly less valuable than your comparable properties. Examples of this kind of defect might include a house sandwiched between industrial properties, or a terrible floor plan, or the only concrete-block bungalow in a neighborhood of brick Tudors. Fortunately, these mistakes don't usually hurt you in the long run, because your potential buyers will quickly enlighten you as to the reality of the situation. You then have the opportunity to enlighten your seller, and renegotiate or get out of the contract through your inspection or partner approval clauses.
The third possibility is that you did not leave enough time in your inspection period to locate a buyer and give him time to inspect the property and make a decision. If youíre working with the right kinds of buyers - that is, experienced investors and rehabbers with cash - this is not a particularly lengthy process. Still, a minimum of 10-15 days is a must.
The final - and most likely - possibility is that you have neglected the very important task of creating and maintaining a good buyer's list. A professional wholesaler does NOT depend on "finding" a buyer to make a profit on a particular property. Instead, he works hard to identify potential buyers before he's ever found a property to sell to them. By networking with investors and rehabbers, he learns who's a cash buyer, what areas and types of properties they're looking for, what their exit strategies might be, what their requirements and pet peeves are, and how fast they can close. He gathers this information and keeps it where he can get to it when he needs it - that is, when he has a deal to sell them. By having a list of potential buyers, and knowing it well, you'll know to whom the property will probably sell before you even get it under contract. At that point, it's simply a matter of calling the right people until you get the answer you want.
Occasionally, matters conspire to put you in a position of having a great deal - but no buyer - despite your best efforts. This is where your real estate education comes into play. If you have the knowledge and resources to get these properties purchased and/or for getting your closing date delayed, you can still make these deals fly.
Tools you might use include a partner or private lender who can come up with the cash to close very quickly. Once you own the property, your exit strategies are no longer limited to a quick flip; you could retail the property or offer it for sale with owner financing. Another strategy might be to negotiate short-term seller financing or a "split funds" deal where you pay part of the purchase price now and part in 90 days. In wholesaling, as in the rest of the real estate business, knowledge is the key to profits.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com