"Retailing"
The next Section we are going to cover is "Retailing", which is in the upper righthand comer of the Deal Sections.
The idea behind Retailing is simple.
- You purchase a property in a nice sellable area at a discount, then fix it up if needed and sell it at full market value to a buyer who will live there.
- While this sounds simple, Retailing is actually the hardest way to invest in real estate but it usually is the most profitable when done correctly.
For now, let's just give an overview of how the entire process works by starting at the beginning and working our way through how to Retail a house.
Overview Of How To Retail A House
You start by locating a deal that is in an area where homebuyers are looking to buy. After estimating what the property is worth after it is fixed up, to calculate if it is a deal, you then subtract closing costs (both when you buy and when you sell), holding costs (such as mortgage payments), repairs costs, and of course ... how much profit you want to make. This profit margin is usually 20% of the after repaired value of the property plus a hedge factor of up to 4%. This gives you the maximum amount you can offer for the property.
If you plan to use a hard money lender, you'll also have to compare this maximum offer amount to how much you can borrow from them.
If the deal requires more than what a hard money lender will lend you, you'll have to come up with more money elsewhere.
In case you're not familiar with what a hard money lender is and what they do, they usually loan up to 60% or even 70% of the after repaired value of the property and then from that, they set aside any money needed for repairs into an escrow account with the title company or closing agent.
Because they usually won't be qualifying you by your credit and their loan is virtually solely based on the property itself, their interest rates usually run anywhere from 12%-18% and many times, the mortgage payments are "interest only".
This may sound expensive at first but it is better than giving away 50% or so of your deal to a partner.
Besides, once you get into this business enough, you'll quickly learn that it isn't the cost of the money that matters but the availability of it!
We'll go more in-depth into hard money loans in the next module on the Money Section.
Once you get the offer accepted, you must come up with the funds to close plus any money needed to cover the repairs that are needed on the property.
Then, as soon as you have purchased the property, you must hire repairmen and get the property ready to go on the market.
Finally, you must find a buyer, make sure they get qualified for new financing and then get them to the closing table.
Again, doing a retail deal may be a difficult and long process, but the paychecks can be enormous once you get the hang of it.
Beginner Retail Techniques
There are techniques you can use as a beginner to try your hand at retailing without having to deal with coming up with the funds to close or dealing with repairmen.
For example ...
- If you know of an investor who has a property they are retailing and you have a buyer, that investor may be willing to bring you in as a partner on the deal and pay you several thousand dollars or more for getting the house sold.
- Now realize we are not talking about acting as a real estate agent or charging a commission which would require you to have a real estate license.
- As long as the other investor gives you some type of equitable interest in the property or makes you a partner, you can sell that property and collect part of the profits without needing a license.
Simply start by contacting other investors to see if they are retailing any houses. If they are, you then see if they will bring you in as a partner if you have a buyer.
There are several ways in which to do this and if you are dealing with an experienced investor, they will tell you what works best for them.
Most investors will be happy to work with you and have you help sell their property.
Later, when we go over the Seller Financing Deal Section, we'll go over other ways to sell properties retail without borrowing money, doing repairs and sometimes without having to get buyers approved for a loan!
Advanced Investor Techniques
Many advanced investors have a property resold before they buy it or have it repaired.
- They do this buy chauffeuring around pre qualified buyers to houses.
- This is similar to what a real estate agent does except that the investor shows the buyer another house they have already fixed up so the buyer has an idea of the quality of work the investor does.
- The investor then shows them other properties that can be bought and fixed up on the buyer's behalf. By walking the buyer through a property, the investor is able to explain what repairs could be done and what the property would ultimately look like.
- If the buyer likes the layout of the house and the location, the investor can then purchase the property knowing exactly who the house will be sold to and for how much. This puts the investor in a very powerful buying position. Because of their experience, they are able to squeeze the numbers and pay a higher price than other investors might be able to.
By the time the property is fixed up, the buyer's loan application has been completely processed and they are ready to close.
And if for any reason the buyer backs out, the investor simply retails the property to another buyer as usual.
Types Of Properties To Invest In
As we said earlier, to be able to retail a property, the property must be in an area where people want to live and own a home.
By the way, this does not necessarily have to be where you would want to live.
Because you have to buy the house below market value, the houses will usually be in a slightly older area where you can find properties that are in need of repairs.
Also, home buyers tend to look for houses with at least three bedrooms (we like large 3 or 4 bedrooms) and it helps if the house has two bathrooms.
Advantages Of Retailing
There are some very important advantages to working within the Retail Deal Section.
- The biggest advantage to retailing houses is the paydays, which can be very large.
- Sometimes you will be giving the buyer a seller held second mortgage as part of getting the buyer qualified more easily.
- After doing several retail deals and holding back several seller held mortgages, the monthly cash flow from these second mortgages can begin to add up.
- You can also use the second mortgages as down payments on other deals or sell them at a discount for cash.
Another nice thing about retailing is that you get to deal with prettier houses in nicer areas than if you were wholesaling and you get pride in the accomplishment that you made an old house look new again.
Disadvantages Of Retailing
Of course, Retailing houses does have some disadvantages. We said a minute ago that Retailing is the hardest way to invest and there are several reasons why.
First, you have to find a deal that you can buy at a steep discount which can be harder to do sometimes in nicer areas.
After finding a deal, you usually have to come up with the funds to purchase the property along with the funds to hire contractors.
You also have to deal with these contractors, which is probably the worst part of investing in real estate. Just ask any experienced investor what they think about dealing with repairmen. Repairing houses can be a hassle and it can be an even bigger hassle if you don't know what you are doing.
The whole time the property is being repaired and is on the market, you have to pay holding costs such as mortgage payments, taxes & insurance.
Once you do find a buyer, you have to get them qualified for financing. As part of getting them qualified, you may have to help them with their mortgage application as well as help them fix their credit.
Something you have to worry about with the buyer's new financing is "seasoning" issues. Seasoning is the amount of time you as the investor have owned the house. Banks don't like to do loans where you as the investor are reselling the house at a higher price than you bought it for. The fact that it needed work doesn't matter.
To get around seasoning problems, many investors have their buyers get FHA or Fannie Mae financing, because these loan programs do not have any seasoning requirements. However, these types of financing loans can result in you as the seller paying some hefty closing costs on behalf of the buyer.
All in all, retailing houses can be very time consuming and requires some skill.
