Wholesale Flip?

[abohlig 0]

Hi Guys,

 

I have not posted for a while, not because I fell off the edge of the earth or died or got out of this business or anything, just because I have been busy. I had something really interesting happen yesterday. There is definately a deal in this one.

 

I think that others could probably benefit and learn something from this one, including me so that is why I am posting.

 

I will try and keep the background short:

 

A friend called me about her older neighbor whom she had befriended. The neighbor and her husband were old and ill. She says the kids are out of town and do not have any sort of relationships. They live in a very desirable part of town where houses like this one sell for $450-$600k, however she said the house was in dated and in disrepair. We spoke about some possibilities and told her to have the lady call. We left it at that and honestly I never thought I would hear from her. That was about a month + ago.

 

Fast forward to yesterday morning. The old lady/homeowner calls me says she wants me to come over right away. She says her son is there and they need to talk to someone today. Only because this place is about 10 minutes from my office and because a friend had referred her, I make the trip over there.

 

I show up and of course the place is completely overgrown, dated and in need of both updates and repairs etc. The woman/ owner is is able to stand to greet me, but she is hooked up to oxygen and looks very frail. It turns out the husband just died on Sunday and her kid whom she had not even spoken to for 15 yrs is there with all the bills laid out on the dining room table. He sort of takes over the conversation and proceeds to tell me that the place is a complete dump, he lives in 400 miles away and has absolutely no monetary or financial ties to this whole transaction and just wants to be done with it all. He has a dumpster ordered, everything is going including the old lady. The last thing he says as we walk out the door is "look, we are basically despirate, just make us an offer. My target to have the whole thing taken care of is July 31st." I tell him I will get back to him and off I go.

 

Now to the numbers/Questions:

 

Me: How much are you asking?

Seller: Old lady says I would like to get out of it what we paid + what we put in. She claims they put 70k in, but who knows. Kid says Ma, no, no, no don't get your hopes up this house is a dump etc etc. I looked on the countiy site for the last sale and it was theirs in 93 for 200k. That obviously puts her # @ 270K and he is definately suggesting less but how much less, I do not know...

 

Me: How much do you think this dump is worth? Seller: I really have no idea. I went on zillow.com and see where houses are selling for in this neighborhood. By the way theirs shows $465 with a range of $414-549K for what ever that is worth. Seller also says "I also understand that this house needs at least 50k in repairs/ updates and I understand that you are going to want to price it agressively to sell maybe 50k under top price and I understand that you are going to need to make a profit of 50k or more to make it worthwhile......" It was very difficult to get him to give a specific #. The county tax records show the property valued at 414K Another house right down the block just sold last month for $590k She still owes only about $95k or so.

 

I have bought 3 forclosures in the past 2 yrs and have done remodeling on them so I have a little bit of knowledge here, but I am no expert. My untrained eye tells me you could probably do 50k of work to minimally get it in selling cond or you could probably spend much, much more.

 

What is next?

 

First of all, I up to my eyeballs in with the 8 properties I already own and a couple of them are vacant right now. I might have more cash reserves than others here, but not so much so that I am willing/able to take this on myself and put a mortgage on it. The seller was pretty adament that she needs to be cashed out quickly and was not the least bit interested in any sort of seller financing/ c4d/ note etc. Considering the above mentioned, the only deal I see here is to get a short/medium term option on the place and then scramble like crazy calling looking for a wholesale buyer that is better able/willing to take this on than I. Get the wholesaler under contract and then release myself from the transaction so the wholeseller and the seller can go into contract with one another. I guess another idea is to get the place under an option contract and then try and partner with someone to finance it. Do some sort of partnership deal for this one transaction where they provide the money and I provide the work (line up contractors etc.) and partner for some of the equity too ..........I am sure there are other ideas..........

 

A few questions that come to mind:

 

1) Am I on the right track with this one?

2) Should I try and get an appraiser/inspector out there before even making an offer?

2a) I have never done a wholesale flip so I am somewhat unfamiliar with this, but is there a danger that the wholesale buyer will try and go around me by just waiting out my option? How do I minimize this risk?

3) If I do go this route, how much profit do I try and put in there for me?

4) How much profit is someone that would be likely to quickly buy something like this going to expect?

 

 

Obviously some of these questions are aimed at trying to figure out what sort of price I should set my option at, which in this case is going to be a bit of a shot in the dark.

 

I am more than open to suggestions with this one.

 

Alan

[Dan (SoCAl) 0]

I'd be eyeballing that first mortgage; what's the balance? If you wrap it, you could conceivably be picking up a first mortgage with only 16 years left on it -- definitely worth saving.

 

In these situations, the first thing to do is to find out what the seller actually needs short-term...how much cash? Then get the property under contract, write in a 30-day due diligence period and a 60-day close of escrow. *Then* figure out the details.

 

Sellers *always* say they are not interested in seller financing, but then do it right away if you can get them what they want. It sounds like she's going to want $40,000 to $90,000 out of this. Because your potential equity position is so good, you could easily cash her out and get the funding for renovation from just a second. You could offer her interest-only payments (amort over 30 yrs) with a 180-day call or even a 12-month call; either of which should be plenty of time to sell for a profit, refi for an equity position, rent for positive cash flow or set up a lease-option with new tenant/buyers.

 

Just some ideas...good luck with the property!

 

Dan

Freedom Creek LLC

[abohlig 0]

Because your potential equity position is so good, you could easily cash her out and get the funding for renovation from just a second. You could offer her interest-only payments (amort over 30 yrs) with a 180-day call or even a 12-month call; either of which should be plenty of time to sell for a profit, refi for an equity position, rent for positive cash flow or set up a lease-option with new tenant/buyers.

 

Just some ideas...good luck with the property!

 

Dan

Freedom Creek LLC

 

Thanks Dan,

 

I had thought about that too and I even mentioned this to them and they are very uneasy about this type of thing. No liens or judgements right now but they are facing a bunch medical bills and that type of thing is not out of the question in the future. He wanted to have the house out of the way completely so that this did not become an issue down the road.

 

Alan

[MichaelC 160]

Hi, Alan. As I reread your post, it seems to me you have answered your own question. When you noted that you have enough on your plate presently and so don't want another fixer in front of you, and that the seller just wants out, locking up the property via a Pure Option is a wise move. Get your best price for the longest time frame you can negotiate, and then find your buyer.

1) Am I on the right track with this one?

I'd say so. You know what you want and what the seller wants.

2) Should I try and get an appraiser/inspector out there before even making an offer?

You have enough experience to know values, Alan. Previously, what have you done to determine a property's worth?

2a) I have never done a wholesale flip so I am somewhat unfamiliar with this, but is there a danger that the wholesale buyer will try and go around me by just waiting out my option? How do I minimize this risk?

Sure, there is always a chance some wise ass will try and get around you. You can minimize this from happening by getting an option for a long enough period of time so if one guy tries to wait you out, you'll have ample time to find another. Make sure your price is low enough to attract attention. Market aggressively so you have more than one interested party. And let anyone know who is looking that you have another appointment in an hour. . .even if you don't.

3) If I do go this route, how much profit do I try and put in there for me?

I'll say it first: as much as possible. It's market driven, Alan. Get the lowest price you can, and sell for as high a price as you can. Let the market point you in the right direction.

4) How much profit is someone that would be likely to quickly buy something like this going to expect?

Impossible to say. It all depends upon their plans for the property after they buy it. For example, if it is a buy, repair, and hold long term purchaser, I think this guy would be less concerned about the initial purchase price and immediate profit. On the other hand, someone looking to fix and flip will obviously have a different viewpoint.

[abohlig 0]

Thanks Michael, good answers.

 

In response to this one:

 

2) Should I try and get an appraiser/inspector out there before even making an offer? You have enough experience to know values, Alan. Previously, what have you done to determine a property's worth?

 

I guess I should have mentioned that the roof has issues. There was an insurance claim a while back where the roof was not fixed. There is some visable signs inside of leaking. I guess it would just make me more comfortable to get an inspector out there first just to make sure there is not major structural damage or some major mold problem. I have already asked and the owner is fine with this. The obvious downside is cost. Usually I would just skip it , but on this one I'll probably just do it.

 

I called back yesterday morning it seems that the neighbor/friend has suggested that they talk to his realtor friend. He said he would call me back after the realtor was there and he did. Of course he is now a little more hesitant to move forward now as the realtor told him he might be interested and he might have investors that might be interested or someone in his office might etc. I have an inspection tenatively set for tomorrow morning and am supposed to talk to him again this afternoon.

 

Any suggestions on how to deal with the realtor objections that are sure to be coming are welcome

 

I will report back.

 

Alan

[MichaelC 160]

First lesson: never hesitate when a deal shows promise, and never believe a seller: "sellers are story tellers". If it's a good deal, word will get out and other investors are gonna come a-runnin'. And it seems every seller has a Realtor in the lurch. And if that happens, the Realtor is going to pull out the ol' PowerPoint presentation and accompanying bells and whistles, and sell the unsuspecting homeowner on an overpriced listing.

Don't know if it's too late now, Alan, but you need to get over there today, offer in hand. If you go with a Pure Option, you have nothing to lose. If you go ahead with an inspection and it does show unexpected problems, you have nothing invested and you can always let the option expire.

[abohlig 0]

First lesson: never hesitate when a deal shows promise, and never believe a seller: "sellers are story tellers". If it's a good deal, word will get out and other investors are gonna come a-runnin'. And it seems every seller has a Realtor in the lurch. And if that happens, the Realtor is going to pull out the ol' PowerPoint presentation and accompanying bells and whistles, and sell the unsuspecting homeowner on an overpriced listing.

Don't know if it's too late now, Alan, but you need to get over there today, offer in hand. If you go with a Pure Option, you have nothing to lose. If you go ahead with an inspection and it does show unexpected problems, you have nothing invested and you can always let the option expire.

 

 

well, maybe this will be a costly lesson. Do you think I should have gone over there with said option in hand in the first place? It might already be too late to get them to sign anything today. Just from what he said yesterday they were having a title search done and he wanted to slow down a bit. the only thing I could have done to move any faster would have been to go right back over that very first night with an offer in hand or show up with it in hand before even seeing the place or knowing one thing about what they wanted. Maybe I should have gone right back over that night???

 

I can certainly skip the inspection, but now that I have said what I have said I probably made things more difficult than they had to be.

 

I'll see what I can do about getting over there with option in hand.

 

btw, in regards to the pure option: In your pure option agreement it just states that I would have so many days to exercise the option, but states nothing about how many days one would take to close. I am absolutely 100% certain that this will come up and the guy will say he would rather have a purchase agreement that states it will close by such and such a date. I completely understand why it is written as it is, but in this case is there a way to modify the pure option to accomotate this type of request?

 

Would there be anything so wrong with agreeing to a PA with some sort of language that gives me an out, like "subject to an appraisal that meets my approval" or some other such vague out?

 

 

Alan

[MichaelC 160]

well, maybe this will be a costly lesson. Do you think I should have gone over there with said option in hand in the first place?

Hindsight is always 20/20. But, yes, it sure seems that way now.

I completely understand why it is written as it is, but in this case is there a way to modify the pure option to accomotate this type of request?

Any agreement can be modified to meet the needs of the parties involved. Just be sure not to expose yourself in the process.

Would there be anything so wrong with agreeing to a PA with some sort of language that gives me an out, like "subject to an appraisal that meets my approval" or some other such vague out?

Not at all. Again, if both parties agree and you are covered, that's fine. You can make it subject to your inspection, or something similar.

[abohlig 0]

Ok, time for an update on this one:

 

I spent about 30 min or so talking to the owner/homeowner/old lady. We actually had a really nice conversation! She was telling me all kinds of stories about the old days when she would go to their cabin snowmobiling etc with the kids. I made several connections with her as I am familiar with many of the places where these tories took place etc. Even though the son told me that he was not going to leave until tonight it turns out that he left first thing this morning to drive home back to Chicago. (400miles)

 

Next conversation with the son/decision maker: It turns out that my worst fears "may" be somewhat unfounded, none the less, I told him that exactly what he wanted to hear which was that I could take care of their situation quickly! I told him how I wanted to do it with the pure option and we even talked about the realtor a bit and of course I emphasized what I could do to conclude this thing quickly. He even brought up the commissions and made a point to recognize that the whole realtor process would take much longer etc and that he realizes this is a fire sale etc....... After speaking to him I am pretty sure he is on my side and will be an advocate for me.

 

How we left it: He was going to talk to his mom tonight after he gets home. Even though he is the driver, she is still the one that needs to sign papers etc. She is certainly of sound mind and is perfectly capable of doing this and is now coming around to the realization that this is what needs to be done. We are going to talk tomorrow and hopefully I will be able to report back that I have a pure option agreement in hand.

 

Alan

[MichaelC 160]

Good work, Alan. Selling any idea or product first starts with selling yourself. Keep us posted.

[abohlig 0]

Well, after a lot of talking to all the parties involved today I now have an appointment to meet the woman/owner at her house in an hour to sign a pure option agreement. I have been given the green light by all the different influences that are involved.

 

Alan

[abohlig 0]

I am a more than a little fired up right now!!!!!!!!!!!!

 

I just returned with a signed Pure Option agreement in hand for what I feel is at minimum $100k in equity and probably a lot more.......... Who knows for sure but time will tell. I have until Aug 31st to figure out what I am going to do now.

 

Thanks MC for encouraging immediate action. I feel that this is a big reason why I got the deal. If I had waited until next week I now feel it is almost certain that I would have lost it.

 

Alan

[MichaelC 160]

Fantabulous, Alan! Way to get it done! But no need to thank me just yet. Now your marketing needs to kick in big. Let everyone know what a great deal you have so you can soon cash in your chips. Then you can thank me. I'm thinking an all expenses paid trip to the St. Paul Winter Carnival in January ought to do it.

[kyoung 0]

Love this post... I know it hasn't been long but do you have any updates??

[abohlig 0]

Love this post... I know it hasn't been long but do you have any updates??

 

I had an appraiser come out on Thursday and I got lots of pictures and some good news! I just spoke to him again as I was out of town for the weekend. He said that on the conservative side $75k equity and on the optimistic side $125k right now without even lifting a paint brush.

 

I am starting to have second thoughts about passing this off to someone else. I might just take this one on myself, don't know yet.

 

I will post again with updates as they are relevant.

 

Alan