Wholesaling Is NOT Investing. Do THIS In...

cash Hi Moguls, Cody Sperber here sharing an eye-opening lesson for you about investing. No, I mean really investing. It was a painful lesson for me, but here’s hoping it will help you!

At the outset of my real estate investing career, I gave very little thought to cash flow. What mattered most to me? A quick deal and fast cash. I looked at the spread between the low price I could get a property under contract for, and the higher price I could flip it to another buyer for.

I guess you could say I turned into a wholesaler junkie. I was addicted to fast, easy payouts and the ability to “invest” with no money or credit. It was more fun than I’d had in a long time.

Fast forward a few years…

After working in my business for about 2 years and pulling in close to $30K each month, I thought I deserved a little time off. In my mind, if I ran short, I could always get out there and flip another house. Because I’d cracked the wholesaling code – I had it all figured out, of course.

What a colossal mistake!

Anybody remember 2006? The house of cards (a.k.a. the real estate business in the U.S.) came tumbling down. All of a sudden I couldn’t flip a house to save my life. As I watched my savings dwindle away, it dawned on me that I’d never really been investing. All I had was a full-time job of wholesaling houses. Admittedly, it was a fun job with good money, but a job nonetheless.

It was transactional money, not passive money. I was now out of a job and I was ready to panic!

Then it dawned on me

It was a hard lesson, but an enduring one. From that time on, I focused 80% of my time on creating cash flow through long-term, buy-and-hold properties.

In order to do that, I gave motivated sellers a choice of two entirely different offers:

1. The first offer was my Maximum Allowable Offer (MAO) at wholesale pricing. This is calculated by taking the current market value of a property and subtracting out estimated repairs. I took that number and multiplied it by 70%. Then I subtracted out what I would earn as my wholesale fee. The final number was my cash purchase price.

2. The second offer was a “terms” offer. I offered to pay the seller’s full asking price, but making a monthly payment, usually at 0% interest rate. Using this structure, I could oftentimes offer to pay more than the seller’s full asking price. That is, if the payments and interest were low enough to make it a workable deal for me.

Additionally, I tried to stretch the length of the agreement out 10 years or more. This allowed me plenty of time to decide what I wanted to do with the property.

You know what they say about assuming…

Keep in mind that this kind of offer will work only if the seller has decent financing in place – or if they own the property free and clear. I’ve learned that you should make the terms offer anyway, because you just never know.

assume Beware of making the mistake of assuming the seller wouldn’t consider such an offer – especially if they’ve already locked in a cash price. But, as I said, you just never know.

Think about it – how can a seller consider such an offer if they’re not even aware it’s an option? The fact is, a homeowner may have heard the term “owner financing,” but likely doesn’t even know how it works. It’s not even on their radar.

Once you clearly explain how it works, including highlighting the benefits to them, you’ll be surprised at how many sellers will consider a “terms” offer like this.

Let’s look at some examples

Here is an example of my two-offer approach on a property where the motivated seller owns a house currently worth $100,000 (using easy numbers), which he purchased 10 years ago for $50,000. His mortgage payments are $485 a month and he owes $30,000 on the loan.

OFFER #1

Initially I would offer $56,000 cash for the property – my wholesale MAO. How I calculated this number:

Take the current market value ($100,000)
Subtract the estimated repairs ($15,000)
Subtract my wholesale fee ($5,000)
Multiply the final number by .70 (70%)
This gives me $56,000

If the seller started hedging, I would slowly allow him to talk me into paying more in exchange for the seller carrying back part or all of the note at 0% interest. My goal is to have immediate cash flow and allow amortization to occur and help me quickly build equity.

OFFER #2

My second offer is a terms offer. I offer to pay $100,000 or even $105,000, but the seller will carry back $90,000 to $95,000 at 0% interest. I offer $10,000 down and take over payments of $485/month (including taxes and insurance) for the remaining balance of the original loan.

NOTE: This is often referred to as “Subject To.” I take over the seller’s property subject to the original loan. This is different than assuming the loan. This is just a “buyer making payments to a lender on behalf of a seller.” The loan stays right where it is.

Sweeten the pot

Let’s look more into this terms deal...

In addition to the $485 a month mortgage payments, I might offer an extra $100 a month to the seller just to sweeten the pot. Why would I do this? Check this out:

pot My cash invested up front in the deal is $10,000. My goal is to quickly get the original seller out of the property, clean it up and rent it out for full-market rent. Let’s say for this example it will be $750 a month; this means I have a positive cash flow of $165 a month after all expenses.

During the first year or two, I apply all the money the property earned to pay down the underlying mortgage.

Eventually, when it’s paid off, my monthly cash flow would jump by $485 a month minus whatever the taxes and insurance cost each month. Plus, over time I would raise the rent on my tenants and increase cash flow there as well.

Conceivably, I could do as many of these deals as I could find. Let’s say I didn’t have the $10,000 to put down. My back-up plan would be to break the $10,000 into equal monthly payments that I would pay out over the first year to a year and a half. I would use the money from the positive cash flow the property produced.

It sure does work

Over time, you can have enough cash flow from these types of deals that you could stop working altogether and just live off the passive income the properties produced.

This is what I call true investing; this is how you get rich by real estate investing. This approach creates wealth and not just a paycheck.

I’m not knocking wholesaling, because I still do a ton of wholesaling deals every month. In fact, it’s our primary strategy for generating steady cash flow.

But if you have an eye to the future, if you want to be a true real estate investor and not just a real estate dealer, then you need to give serious thought to the approach I just described.

Two offers on every deal

Start off by crafting two offers on every deal. Remember – you are not to assume what the seller might or might not consider. Believe it or not, many sellers deep down are motivated by more than just a cash offer. Older people, especially, would love the opportunity to add extra monthly income to their budget.

Don’t assume – just make more than one offer and make one of them a “terms” offer that works great for you. Let them decide which one works best for them.

Also remember this: YIELD IS EVERYTHING in the cash flow business. In the scenario I just laid out for you, my yield is huge off of just a $10,000 investment and a little creativity.

Now get out there and start making offers to motivated sellers who have equity and decent financing. You may think they’re not out there, but they are. You’d be surprised at how many free-and-clear properties there are; it’s up to you to find them. Even in areas devastated by foreclosures, you can still find solid deals if you understand how to market for them.