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Is Wholesaling A Strategy For the Beginner Or the Experienced Investor?

by Sharon Vornholt on July 23, 2013 · 45 comments

  
Wholesaling Real Estate

This topic comes up quite a bit when I am around other real estate investors, and I have to say that everyone has a little different opinion and a different story to tell.

A lot of seasoned real estate investors will tell you that wholesaling is the strategy they started out with. Typically they either didn’t have a lot of money or their credit wasn’t good enough (or both) to dive right into buy and hold strategies or rehabbing. So wholesaling seemed to be a perfect fit for this group of folks. They just went out with a truckload of bandit signs and when the phone started ringing, they started making offers. It’s just about this time they will also chuckle and tell you they had no idea what they were doing. Sound familiar?

My Way or “the Other Way”

I have often told folks that I went about this process in an entirely different manner. Wholesaling was the last strategy I tried.

My very first investment property was a fix and flip. Now I am the first person to admit that this isn’t probably the best strategy for most folks to start out with. There are so many things that can go wrong, and there are so many things you don’t know. In fact when you are just getting started, you “don’t even know what you don’t know”.

To be successful as a wholesaler you have to:

  • Buy the property at the right price
  • Be competent at inspecting the property and coming up with a good list of repairs needed. You will need this whether you intend to keep the property or wholesale it.
  • Know how to figure the costs associated with rehabbing the property (remember the part about buying the property at the right price?)
  • Understand holding costs and other costs you (or your end buyer) will likely incur such as Realtor commissions when you sell the house, utilities, insurance etc.

And, this is really just a “short list” of things you need to know. I think it’s fair to say you need to know a lot about the basics of real estate investing to be successful with this strategy.

After my first rehab project which I did make money on (just not enough), I bought my second property which was a rental. I continued down this path with these two strategies for years.

This brings us back to the question, should you start out as a wholesaler first or after you have some experience?

Wholesaling Pros and Cons

I believe that there are pros and cons for each argument.

If you start out like I did with a fix and flip strategy or by buying rentals and becoming an “instant landlord”, one of the biggest dangers you face is that you will pay too much for your first properties. This is what I did. I paid substantially less than retail but it was only after the fact as I gained experience that I realized that I didn’t pay “wholesale”. Inexperience was not my friend when I sold those first few properties.

“When you are just starting out, you really don’t know how to buy properties cheap enough”

Looking at this equation from the other side of the fence, if I had started out wholesaling I would have learned pretty fast that I was paying too much; I wouldn’t have been able to sell the properties to another investor.

And if you and pay too much for those initial properties you can find yourself in a bad position with the seller. You could go back to him and try to renegotiate a better price which he may be willing to do, or it might just cost you the deal.

You could invoke one of you contingencies and get out of the deal. This is sure to leave a bad impression with the seller, and it has the potential to really leave them in a bad position if they were counting on that sale to meet a deadline of their own.

“Backing out of the deal should always be a last resort”

Let’s Get Some Opinions

I would love to hear from everyone and get their input on this question:

“Is Wholesaling a Strategy for the Beginner or the Experienced Investor”?

Photo: Marco Bellucci

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{ 45 comments… read them below or add one }

Leo Kingston July 23, 2013 at 11:04 am

fyi….A newbie gives a wholesaler like myself a bad name. I have see many tie properties up and not close because they paid too much.

I started by accumulating rental properties.

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Sharon Vornholt July 23, 2013 at 3:20 pm

Leo – It took me a long time to “wrap my brain” around wholesaling.

I started off on a different path too, and each way has its own challenges for sure. The one thing I know for sure is if you learn what a good deal is before going down the wholesaling path the only person you will disappoint is yourself when you pay too much.

Thanks for reading.
Sharon

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adam July 23, 2013 at 11:14 am

From my point of view, rehabbing takes all the components of wholesaling and adds even more.

I think everyone universally says that wholesaling isn’t easy, but I guess as long as you can invoke a contingency when you can’t sell it to another…that’s your only safety net as a beginner.

So in conclusion, neither are easy, but one is less risky???

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Sharon Vornholt July 23, 2013 at 3:27 pm

Adam –

I think that it depends too on your level of experience and your skill set. If you have solid construction skills you will have knowledge that a lot of other folks won’t have going in.

You do have a safety net as far as contingencies go, but you will get a bad reputation pretty quick if you end up not closing with multiple sellers. They will tell the next investor that comes in the door so you have to be careful about that. Thanks for your comments.

Sharon

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john milliken July 23, 2013 at 1:53 pm

i would say no for someone who is just starting out to wholesale.
my first real estate experience was a buy-n-hold with a small rehab,lived in it, and sold it 2 years later. understanding the process of buying, living(not being a renter), and the sell of a property is huge. after selling my first property, that gave my the cash to start flipping houses. i’m just now starting up wholesaling for finding rehab deals to flip, and hope to wholesale to other rehabbers/buy-hold investors. i feel very confident in my ability to do well in wholesaling since I’ve flipped houses before, and understand from past rehabs the process/problems of doing so.
didn’t know anything on wholesaling until i joined BP couple of months ago, and my mindset is totally different now thanks to you Sharon and others on BP.

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Sharon Vornholt July 23, 2013 at 3:30 pm

John –

You sound like you have taken the slow route and learned along the way which is a safe way to do it. Good luck going forward.

Sharon

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Glenn Schworm July 23, 2013 at 3:55 pm

Sharon,

I started off like you. We had done over 30 flips before I even considered wholesale. My first one was an actual purchase. We put the sign in the yard the day we closed that said “coming soon”, and a woman called and offered my $10k over what I paid. We were very busy so I said, well……I accept! Flipping was our life blood, but this year alone we have wholesaled over 15 deals with some great spreads. Some upwards of $24,000. We also do it very differently. We have them sign an agreement that explains that we will put the deal under contract and then locate a third party buyer from our list of buyer. We also can market by an means necessary to find that buyer. We really like being up front with everyone about how the process will work. People like it and allow us to find a buyer for their homes.

At the end of the day, I am not sure which is better to learn first. Experience is experience and I think you need it to be successful. Wow, this went way longer than I expected!! Sorry!! Thanks for the article I enjoyed it.

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Sharon Vornholt July 24, 2013 at 4:46 am

Glenn-

I think that is a great system. I really believe everyone should add wholesaling to their toolbox.

If you are a rehabber, it will help you build of cash reserves for your business.

Wholesaling can help buy and hold folks pay off their best properties fast. Landlords should think about that for a minute; combine the money your tenants pay each month with big chunks from wholesaling those properties that don’t exactly fit into your portfolio. How different would your life be if you had 10+ paid off properties NOW in addition to your job or business?

Thanks for sharing your story Glenn.
Sharon

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Bliss Mitton July 23, 2013 at 5:25 pm

Is wholesaling for beginners or the experienced?….The short answer is yes. Regardless of the part of real estate you mostly focus on, you need a constant flow of deals to choose from. Otherwise you will have a “feast or famine” income. Some leads are deals but not deals for me. Some leads are perfect for a rental. Some leads are meant to be rehabbed. Wholesaling good deals that do not fit my approach provides more money to find the deals that I like to work with. Wholesaling stretches, and usually pays for, my constant advertising. Wholesaling also takes the pressure off the expected income from other projects. This allows me to make better decisions because of a less tense financial atmosphere. Note: Wholesaling by itself is not investing. It is the selling of a real estate opportunity.

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Sharon Vornholt July 24, 2013 at 4:49 am

Bliss –

I agree completely. Just by adding wholesaling to your business whatever that business model is, gives you choices along the way. It also removes you from being in the position of having to make decisions solely because you “need money”. Great comments.

Sharon

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Mike Berlay July 23, 2013 at 6:48 pm

I did not personally closed on any RE deal, so will tell you from freshman point.
From my knowledge, any investment deal starts from:
1. Finding potential property
2. Finding comparable sold properties
3. Getting cost of repair to bring condition of the property to comparables (ARV) + holding cost during repair.
4. Appling 70% rule to find purchase price
5. Negotiate deal.
As I understand above steps make everyone to get investment deal.
Next steps depend on your strategy how to make money on deal.
1. Wholesale – sale deal for finding fee. Get profit after closing deal- you own property for a minute or less, under 15k profit, less risk, under $5000 investment.
You get double check on deal, as buyer will check again your numbers.
Target – build capital
2. Buy-repair-sell. In this case you need to have money to buy, hold, repair. Have knowledge to deal with contractors or DIY. Sell to retail customer and deal with buyer financing issuies.
Get profit after selling property: 1-3 months, higher risk,  15-30k profit, 5-50k investment.
Target – build capital
3. Buy-repair-hold. Everything from point 2, but instead of selling you have to manage tenants.
Get profit after renting unit.: 1-3 months, require reserve funds, 100-300 profit per month per door, 50 – 100k investment.
Target – build cash flow, equity.

The reasons every new guy on forum going to wholesaling are simple: a) we do not have  capital to invest.
b) without experience and knowledge high  risk of losing money.

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Sharon Vornholt July 24, 2013 at 4:52 am

Great summary Mike. The biggest thing that can go wrong is you pay too much for the property. The biggest challenge when you are new (and we all have done it) is that you will choose inflated comps and underestimate repairs. Getting good at those two things just takes experience.

Sharon

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Ryan July 23, 2013 at 7:46 pm

Wholesaling, like others said, seems like the “easiest” and least risky. How can I flip a house without knowing repairs AND having hard money/my own money I have to invest in the 10s of 1000s? Not to mention, this will be at least 3-6 month process while I am learning, if lucky, and still have to turn around to sell it. doesn’t sound appealing. I could buy and hold, but why do I want to buy a property (using cash again) that I could overpay for, have to deal with finding tenants/keeping it occupied…sounds really risky for a beginner again (although better). Wholesaling seems “easy” enough, using it loosely. Find property, invest nothing, have buyers ready beforehand (if done correctly), can get out of the deal, and no cash needed outside of marketing. Seems a lot simpler of a process. Granted, you still have to know repairs and such, but if you’re not in a rush and wanting to learn (as well as broke), it seems like the best way.

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Sharon Vornholt July 24, 2013 at 4:55 am

Ryan –

Wholesaling is definitely a way to learn and the reasons you mention are exactly why folks start there. The one big thing you have to avoid is getting known as the person that “backs out of deals” all the time. I would advise everyone to find a mentor to help you with this initially. Folks also post deals here on BP where experienced investors can look at the numbers. Don’t forget about this valuable resource for guidance.

Sharon

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Melvin July 29, 2013 at 10:43 pm

A mentor is the key, the challenge is finding the right one that will work with people starting their journey investing in real estate. I will suggest Ryan that you find your hard money lenders and other buy and hold investors in the beginning to start your data base. I receive several emails a day of people trying to wholesale properties. Unfortunately, the numbers just do not add up at the price they are trying to sell meaning they did not get it under contract at the right price.

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Sharon Vornholt July 30, 2013 at 10:03 am

Melvin –

I agree that a mentor can help you from making some big mistakes. I had someone in my area contact me yesterday about helping to “sell his wholesale properties that won’t sell”. I told him that typically if they won’t sell they are either overpriced or they are in areas that regular folks don’t want to live in.

Sharon

Haim July 23, 2013 at 9:30 pm

I started like you. My first deals were also rental properties, then bought turn-key properties at premium price and decided to buy the properties from the bank, do the rehab and place a tenant. All from out of state. Not an easy process. I decided that wholesale will be easier and I’m about to close my first deal. For me at least, having experience help me analyze a deal more accurately and make it easier to establish credibility when talking to sellers (I tell them to go check public records to verify that I’m a serious investor). Lastly, you can generate capital quickly compared to cash flow from rentals. The downside-it’s a lot of work compared to passive income from rentals.

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adam July 24, 2013 at 10:13 am

Haim,

Why did you start doing rehabs from out of state?

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Sharon Vornholt July 24, 2013 at 5:02 am

Haim –

Experience is definitely your friend when it comes to wholesaling. I have often said that I think a strategy will ultimately “choose you”. There will be one or two that you just like better than the others. And it’s important to note that this will likely change over time as both you and your business grow.

There is a lot to be said for trying them all, and then deciding which strategy or strategies seem to be a fit for your business and the lifestyle you want to create.

Sharon

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Chris Clothier July 24, 2013 at 8:28 am

Hi Sharon –

Great article. I keyed on one thing you said, which I think is the most important factor in wholesaling real estate. It sounds like when you buy a property you have outcomes in mind or a particular strategy that you want to use to make a profit on that property. Wholesaling – it does not sound like anyway – was or has been your initial strategy. But, because you buy a property correctly and understand pricing, wholesaling the property is an option.

That is the smartest strategy of all – buying a property where it leaves you with multiple options for selling and not simply buying it to wholesale it and then wondering what to do next if you do not sell it quickly. I really think wholesaling, while many say is an easy way to make quick money, is a very difficult strategy to do really well and really well for a long time. The best wholesalers are the more experienced ones who have spent a little time cutting their teeth on deals and understanding really well how to buy properties at the right prices.

Awesome article – thanks for sharing it.

Chris

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Sharon Vornholt July 24, 2013 at 3:32 pm

Hey Chris –

You are right. Wholesaling was an “after thought” for me. It allows me to work on other aspects of my business now. Even if you aren’t a wholesaler, I think wholesaling should be a strategy you use alongside whatever primary strategies you use in your business. It provides you with cash for your other strategies. As far as exit strategies go, if you always buy any property with multiple exit strategies you will never have a problem. Thanks for your input Chris.

Sharon

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Elizabeth Gray July 24, 2013 at 9:25 am

Wholesaling is WORK, not something I want to get in to. As a real estate investor, however, I have purchased properties from wholesalers. There are some really great ones out there. Unfortunately, there’s a lot of them that don’t know what on earth they’re doing and they give others a bad name.

If you want to wholesale to raise capital for your own buy-an-hold investing, my advice is to first GET EDUCATED. You can enhance your education through experience (buying and managing your own rental property(ies), apprenticing or interning with a real estate investor, or participating in a mentoring and education group.

It’s important for you to thoroughly understand how to locate, evaluate, finance, rehab, and manage rental properties. So you’ll know what a good product looks like. So you’ll understand what the investors to whom you’ll be assigning your deals are looking for.

Bottom line? Get some experience, it’ll make you a better wholesaler.

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Sharon Vornholt July 24, 2013 at 5:49 pm

Hi Elizabeth –

Great comment – “Bottom line? Get some experience, it’ll make you a better wholesaler.”

I agree completely. Wholesaling is a great compliment to any of the other strategies. It will indeed make you a better real estate investor. Thanks for leaving your comments.

Sharon

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Douglas Dowell July 24, 2013 at 6:55 pm

Outstanding coverage of the raging debate. I think the great thing about BP is it gives an “hype” free opinion of what it will really take to do wholesaling without experience. I believe if you really follow great advice from experienced wholesaler’s such as you….success is certain. Just hop in expact 3 closings a month starting tomorrow without a clue on how to price right fulled by guru hype…pain and frustration….for the wannabe and anyone unfortunate enough to get spamed by their non deal.

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Sharon Vornholt July 25, 2013 at 1:45 pm

Douglas –

Well said. Nothing is ever as easy as the “guru’s” make it sound. The real teachers in our business tell it like it really is. This business of real estate investing takes a lot of knowledge and a whole lot of work.

Sharon

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Sam July 28, 2013 at 8:05 am

Hi Sharon,
I live in Chicago and I’m just starting out. (No deals) When I mention wholesaling to agents, some tell me that it’s illegal. What gives?
Also, other than advertising/marketing, how do you find buyers of wholesale properties?

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Joshua Dorkin July 28, 2013 at 8:28 am

Sam – I’ll leave the first part of your question to Sharon, but as for finding buyers, if you have a deal, the buyers will come. There have been countless articles written here on the topic of finding buyers. Just do a search and you’ll get all the info you ever need.

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Sharon Vornholt July 28, 2013 at 10:50 am

Sam –

Unless the real estate agent is an investor they don’t understand what we do especially when it comes to wholesaling. If you plan to have an agent find you properties they should either be an investor or work with investors. REO agents are just one example of agents that work with investors. Where do you find agents that know real estate investing? At your local REAI.

Wholesaling is not illegal. You are simply selling or assigning your rights that pertain to the property (you have under contract )to another person. You are not selling the house. Agents will always object to the idea that they might make 3k on a 100k house, and you just made 8 or 10k on a wholesale deal. They don’t understand this process.

You find buyers by marketing. Just look of marketing post here and on my blog. There are a number or ways to do that. You also need a website.

Sharon

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Sharon Vornholt July 28, 2013 at 10:51 am

Sam –

Some of my best cash buyers are members of my local REIA too.

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Sam July 28, 2013 at 11:02 am

Thanks Sharon,
This is great information. It’s nice to hear from people who have done wholesaling. Seems like there’s a negative stigma among those not familiar with it. I don’t want to do anything shady, I just want to get my feet wet and benefit EVERYONE in the process.
Sam

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Sharon Vornholt July 28, 2013 at 11:06 am

Sam –

I live in an area that has a great REIA, so it is a no brainer for me. Your REIA is also where you can find a mentor and learn the business free or for a very low cost. I bought and sold my first few deals through that group.

Sharon

Sam July 28, 2013 at 9:13 am

Joshua,
Thanks. I’ll keep searching on BP. I’m Just starting the education process. Nervous as heck to get into this business. I know there are opportunities everywhere but one has to know what you’re doing.
Sam

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Joshua Dorkin July 28, 2013 at 10:04 am

Hey Sam – Check out our Ultimate Beginner’s Guide to Real Estate Investing . . . it’ll give you the tools you need to get things moving.

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Sam July 28, 2013 at 10:26 am

Sure will thanks, Joshua

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Sam July 28, 2013 at 11:15 am

Sharon,
I’ve been looking on line for a REIA in Chicago. There are many. I just need to narrow it down. Can anyone recommend?

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Sharon Vornholt July 28, 2013 at 11:24 am

I would post that question in a BP forum. Someone will know.

Sharon

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Sam July 28, 2013 at 11:26 am

I will. Thanks again
Sam

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Michael July 31, 2013 at 9:02 am

Great way to make the comparison Sharon. I too started out rehabbing and that is what I mostly do. I wholesaled my first property because my plans changed on it and I knew another investor looking for a similar deal. I always said I think wholesaling is much more of a difficult business in my opinion. I now have some of those wholesalers working with me.
There are no shortcuts to investing and wholesaling certainly isn’t a short cut.

Great Job

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Sharon Vornholt July 31, 2013 at 12:48 pm

Hey Mike –

Wholesalers as a whole get a bad rap because of the ones out there that don’t do a good job. But the good ones can save rehabbers like you a whole lot of time and trouble not to mention marketing dollars. There are a lot of rehabbers out there that don’t want to do the marketing necessary to find these deals; they just want to rehab.

If we buy the property right, the wholesaler get’s his fee and the investor/buyer gets the house for the same wholesale price he would have if he had gotten the deal himself.

Thanks for you input.
Sharon

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Brad Myles September 1, 2013 at 3:07 pm

Greetings BP group – Very glad to have found this blog, just now getting ready to get into real estate investing. With the research I’ve done thus far, and with very, very little investment money of my own ($5k), I’m seeing wholesaling as way to build my investment capital to go into rehabbing and owner/landlord property investment.

I feel I have a pretty good gauge and eye on seeing the potential of a property that will be profitable ie: condition, market values, re-saleability, location, curb appeal, rehab labor and cost where needed etc. Can do a fair amount of rehab work myself if more time/cost effective in certain cases.

What I don’t have is experience, contract and documentation knowledge and being in the real estate ‘network’. In Sacramento area. If someone here can direct me, I’d like to know what initial steps I should take to get things going, including how to get a hold of pre-foreclosure listing/MLS listings etc… I guess getting involved with my local REIA is one of those steps?

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Sharon Vornholt September 1, 2013 at 7:22 pm

Brad –

I would spend time here on BP and reading other member’s blogs such as mine. You need to dive in and do a whole lot of studying before jumping into a deal. You have to know investment formulas and what other investors pay for properties. In other words you have to learn what a good deal actually is. The other thing you need to do is to join your local REIA and go every time. Network with those folks. a while back that was on wholesaling and marketing.

I did a podcast with the guys here at BP that you should listen to. Here is the link: http://www.biggerpockets.com/renewsblog/2013/04/04/wholesaling-podcast/. Listen to all of those podcasts as you get a chance. There is so much helpful information in there.

You can ask the question on the forum here “who’s in my area/City” and find some folks in your area. Good luck.

Sharon

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Brad Myles September 1, 2013 at 11:33 pm

Thanks Sharon. Really appreciate the reply and feedback. I’ll begin with these podcasts

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Sharon Vornholt September 2, 2013 at 2:36 pm

Brad – Most of the podcasts here on BP are full of great information and real life “stories”.

One of the biggest mistakes we all make in the beginning is paying too much for properties myself included. An investor friend once told me that “If you’re not embarrassed by your offer, you just paid too much”. I have learned (the hard way) over the years, that this is almost always true. You make your money the day you buy! Keep in touch. And, I’m not sure that happened to that comment above. Everything came up “out of order”.

Sharon

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Patrick Mike December 5, 2013 at 9:13 am

While learning about the business how can I find all of the necessary paperwork (contracts) that goes along with each deal?

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Sharon Vornholt December 5, 2013 at 1:05 pm

Patrick –

You just use the same sales and purchase agreement for each property. You just need to do an addendum to that contract if you want to assign it. You should be able to find one in the forms section here on BP, or you can send me an email and I will attach one and send it to you.

Sharon

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