Rich Dad Education Blog

In fact, it is highly recommended that new investors start investing without using any of their own money, even if they have extra money to invest. This may surprise a lot of you, but having money can be detrimental to learning to be the best real estate investor possible. If you have money to invest, it is very easy to pay too much for a property. It is also tempting to use money as a crutch to close deals that are not good deals or marginal at best. But with the right education and an open, teachable mind (using the creative mind of your coach and your mentor is allowed) no money can be a substantial force to push you to be a more skilled, creative, and professional investor.

If you do have money to invest, you will be surprised at how fast investing in real estate can gobble up your nest egg. If you are only relying on your own money to invest, no matter how much money you have, you may end up cash poor very soon. If you are forced to develop ways to invest in real estate without using any of your own money, you will soon master techniques that allow you to buy in any market under any conditions. This will also force you to develop numerous sources of funding – having these sources setup will help you in future deals to have money available. You will always be grateful that you learned to invest in real estate without using any of you own money.

There are many ways for financially constrained investors to begin making money and/or generating real estate cash flow without using their own cash or credit. First realize that you don’t need to own a property to profit from it. You only need to control the property to harness its money-producing potential.

The way that a lot of new real estate investors first get involved in real estate is by using the buy, fix and sell model. This is a good model, but it requires money to buy the property, money to fix the property, and money (holding and selling costs) to liquidate the property. And if the investor has made any mistakes in estimating the fix-up costs or has miscalculated the dynamics of the selling market, they may see their profit melt away like snow in the hot sun. But there is another way to make good money from fixer properties that doesn’t require much money at all – that model is called wholesaling. In wholesaling, you are not buying and selling properties, you are obtaining and selling contracts.

The wholesale model is very similar to the buy, fix, and sell model with main exception – you never actually buy the property. The basics of the buy, fix, and sell model can be simplified into 10 steps:

1. Find a motivated seller
2. Analyze the deal
3. Present and negotiate the offer
4. Finalize all property and title inspections
5. Fund the transaction
6. Close on the property and take title
7. Repair/refurbish the property
8. Market the property and find a qualified buyer
9. Close with the new buyer
10. Cash your check

The wholesale model can be simplified into seven steps:

1. Find a motivated seller
2. Analyze the deal
3. Present and negotiate the offer
4. Finalize all property and title inspections
5. Find a wholesale buyer
6. Sell your purchase contract to the wholesale buyer
7. Cash your check

The end result is the same, but you just eliminated most of the risk involved with the buy, fix, and sell model. You don’t have to have much money (maybe a small amount for the earnest money deposit), because you are not going to buy the property. You don’t need any money for fixing the property, because you are not going to do any rehab. You don’t need money to make mortgage and utility payments while fixing and selling the property, because you don’t have to sell the property. The only thing you have to do is to find a motivated seller, analyze and negotiate the deal, and find another investor to buy the deal from you.

Now the rehabber stands to make more money than you will on each deal, but they are taking all the risk. On the other hand, it may take several weeks or even months to realize their profit, while the wholesaler gets their profit usually within a few days.

Even though wholesaling is fairly easy and takes little to no money, like every thing else in real estate, it takes time and effort. The key is to get going, take action, and start making lots and lots of offers. Here are the beginning steps to getting started in the real estate wholesaling business:

1. Get educated in the basics of real estate investing.

• Get to know your local market. You need to know how much to discount the selling price to get a quick sale. Where are properties selling and how much they are selling for?
• Learn how to quickly estimate the repair costs for a property.
• Know how to quickly analyze a deal to determine how much you can afford to pay for it. You need to include a reasonable profit for the rehabber (just as if you were going to do the rehabbing yourself) and also add in the profit you want to make from the deal.
• Learn how to deal with motivated sellers and solve their problems.
• Learn how to negotiate a good win-win deal. Your profit will be proportional to your ability to negotiate good deals.
• Learn various exit strategies. Even though you are not going to actually buy the property, the deal you negotiate has to be a good deal for the investor who buys your contract or you won’t be able to sell the contract.

2. Start building a good wholesale buyer’s list. As you talk to other investors who are your potential contract buyers, get the following information: their buying criteria including location and price range, their ability to close quick with cash, can they close without getting a loan, their ability to get a loan, and what amount of profit they need in a deal to be interested. This way you can profile your buyer’s list and better match potential contract buyers with a particular deal.

• Call on all the I Buy Homes signs you see as you drive around your area.
• Call on all the I Buy Homes ads in your local papers.
• Call on all the I Buy Homes ads on various internet ad sites like Craig’s List.
• Join your local real estate investors club and meet as many other investors as you can. Join several clubs if they are available. Even driving a few hours to attend club meetings in nearby cities will be worthwhile.
• Run ads in your local papers (as money permits), advertising handyman specials, and fixer-uppers. Calls will come from rehabbers looking for a good deal.

3. Start building a retail buyers list. This would be a list of people who want to buy a fixer-upper to live in. You can sell your contract to an end user as well as to another investor and maybe make even more profit for yourself..

4. Develop methods for finding motivated sellers. The key to successful wholesale investing is finding motivated sellers – only motivated sellers will be willing to sell at a large enough discount to enable you to make a profit. If you ask sellers why are they are selling, you will find out if they only want to sell or if they have to sell. You are looking for those sellers with a problem that have to sell. Your job is to help them solve their problem.

• Have the realtors on your team look for ads in the MLS that indicate a motivated seller
• Screen all the ads in your local papers each day – look for ads that indicate a seller is motivated
• Call on for sale-by-owner signs
• Drive the areas you want to invest in and look for run-down properties and vacant properties. Track down the owners and ask them if they want to sell
• Call on for-rent signs and ask the owners if they would consider selling. Be sure to ask if they have other properties they might be interested in selling
• As you make money from your wholesaling, be sure to put some of it into a marketing fund. That way you can start running your own We Buy Homes ads, put out We Buy Homes bandit sign, and eventually develop a post card or yellow-letter advertising campaign. A good advertising campaign will produce a steady stream of sellers calling you
• Develop an army of bird-dogs to find properties for you who get paid when you get your check from the sale/assignment of the contract

5. Become good at solving the seller’s problems. You must provide benefits to the seller. One of the biggest benefits you can offer is peace of mind, which come with a smooth and easy deal.

• Be prepared to do business by quickly analyzing the property
• Make offers quickly
• Follow-up in a timely manner
• Perform all inspections as soon as possible
• Take care of all the details
• Offer to take care of all the paperwork and all the closing arrangements
• Have a good buyer’s list (and a method to quickly contact your potential buyers with the details of the deal), so you can get the contract sold quickly
• Close as fast as possible (you wholesale buyer will actually close, but you need to make sure everything falls into place)
• Even though you will get your check when you sell/assign the contract, stay involved and do your best to make sure the deal actually closes
• Provide superior service that will set you apart from the crowd

6. Become a good transaction engineer. You want to become a source of profitable transactions for your fellow investors. If you always leave a good profit in the deal for the investor (or homeowner) who buys your contract, you will have repeat customers. You will have investors calling you to find deals for them. Your buyer’s list will grow and finding a buyer for your negotiated contracts will, eventually, only be a matter of sending out an email to your list and taking the best offer you get. Your own profits will grow as you get a reputation as being the go-to guy for profitable wholesale deals.

Wholesaling can get you into the real estate investing game even if you lack cash and have bad credit. Don’t let the lack of money keep you from your dream of real estate investing. You can do it. In fact, a lack of money can be a big advantage to a new investor. It forces you to be creative and find ways to buy property without money. It also forces you to find sources of other people’s money that will serve you very well throughout your investing career.