How I Buy Houses High and Sell Them Low… and Still Make Money

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Yes, you read that title correctly.

Late last year I ran across a deal that I bought for more money that most investors that only buy within certain parameters would have paid, made absolutely no repairs (except adding a front and back door knob to secure the house), and resold the house to make just over $17,000 in net profit.

And, I did this all within 3 weeks’ time.

This blog post is meant to be a real world example of why percentages and complex formulas shouldn’t always play a primary role in an investor’s decision, when deciding on the purchase of an investment property. Had I been constrained by the 65%-70% of ARV rule that is commonly taught, I would have absolutely passed on this deal without thinking twice about it.

This strategy is, by far, not new in the investment arena, and I am sure that it’s being used time and time again by savvy real estate investors all over the U.S.

You Must Know WHY Your Exit Strategy Works, Not Just HOW it Works

I think a lot of new investors, by no fault of their own, will read about a strategy and if they are brave enough, will take action on it, and begin generating leads to start the implementation part the investment strategy. And while action is always better than no action, sometimes not knowing WHY the strategy works and it’s in’s and out’s, can be detrimental to the effectiveness of the investor’s marketing efforts. Sizable profit may slip through the cracks, unknowingly.

Let me explain. A few years ago, as a new wholesaler, I had always followed the 65%-70% rule when making offers and putting properties under contract with motivated sellers. However, as most investors that market consistently know, a vast majority of the leads that I received were between 75%-90% of ARV. I found myself having to walk away from deals that had a decent amount of equity, because I could not wholesale them or rehab and re-sell them comfortably. So, I began to re-evaluate my exit strategy. I began to see if there was a way to buy and quickly resell some of these houses that didn’t fit my buying preset parameters, but still had equity. Fortunately, only a few short weeks later, I had the opportunity to see if I would be able to buy, list on the MLS, and close on the sale of a house, all within a few short weeks.

Related: How to Save Your House Flips When They Don’t Sell

Why I Paid More Than I “Should Have”

I had received a phone call from one of my marketing channels from a very motivated seller whom had a house that was very livable, but not updated by any means. He couldn’t sell it to me for what I wanted to buy it for, and I almost walked away. Actually, I did walk away…for about a day and a half. Similar, updated homes where selling for about $150,000, but this house wasn’t updated. So, I went ahead and purchased the property for $107,000 and immediately listed it on the MLS for $134,900. Here’s the important part. In the past, discussions around title seasoning had prevented me from being courageous enough to implement this type of strategy.

So, I picked up the phone and began calling loan officers in my local area (San Antonio, TX). A few of them quickly confirmed for me that there will be no title seasoning requirement if the buyer utilizes a conventional loan.   So, In the Preferred Terms section of the MLS listing and in the House description, I made sure to let agents and potential buyers know that this would only be a Cash or Conventional deal. I knew the deal was way too thin for a cash buyer at $134,900, but I wanted to squeeze as much profit out of the deal as possible, and with it listed below retail value, I was sure that I would be able to a conventional buyer, as-is.

Related: How to “Hack” Your Housing and Get Paid to Live for Free

Success!

Within a few short weeks, I had my capital back, plus a sizable profit. I’ve run across similar ways of moving a property quickly to a retail buyer that some have called “Whole-tailing”, but this was not a deal that I merely had under contract, I had to actually close on this and hold it for a short period of time; but calculate the return on investment and return on time.

If you are an investor that has the ability to close on a deal of this sort, and you have leads that have equity, but may not have “enough” equity to fit within your wholesale or fix and flip model, don’t throw it away so soon. There’s a chance that if you price it right, on the MLS, you may be able to find a conventional buyer that can cash you out in a very short period of time.

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About Author

James is a wholesaler & real estate investor in San Antonio, TX. He has flipped & wholesaled many homes in his career. His business is built on helping highly motivated home owners who have a real need to sell a house fast to a cash house buyer (not to a traditional buyer) in the San Antonio area. They find that most sellers that truly do need to sell; end up choosing his company to buy their house from them.

20 Comments

  1. Yeah, rules are meant to be broken, right? Good example :)

    I also wanted to congratulate you on your website. It is one of the most honest and well-written “We Buy House” websites I have ever seen. I’m sure it helps you weed out the tire kickers, freeing up your time to deal with the truly motivated sellers, as well as set expectations upfront for the entire process.

    Good luck on using this strategy going forward….Have you only been able to do this once, or have there been more?

    • James Vasquez

      That’s right Sharon…& Thank you for the compliment about the website, I have made it a point to be very upfront, not only on my website, but during the initial phone call, and during the initial meeting with the seller. You’re right, it sure makes the processing of the leads much easier.

      I’ve only used this strategy twice, since I found out that I could implement it successfully, but I do plan to do it more often in the coming months.

  2. Welcome James — It’s amazing how well this post empirically demonstrates how often ‘experienced’ investors walk by a buncha cash layin’ on the ground, screamin’ “Take me, I’m yours!” :)

  3. Not to be cynical, but I’m going to play devil’s advocate. Congratulations on your win, but it seems to me the only actual strategy implemented here was the willingness to take on more risk by 1) buying above the normal threshold, and 2) reducing your potential buyers pool with the cash/conventional-only requirement.

    You still have to account for two closings, insurance, utilities in addition to any cost of capital. You didn’t mention if you were using all of your own money or private capital or whether you had to pay any realtor fees. Even as a realtor yourself, you need to provide a cushion for a buyer’s agent.

    I’m not saying this wasn’t a good deal, but the less equity you buy with, the less margin for error you have — longer than expected holding time to find a buyer and the uncertainty of the actual sale price. There’s a reason for the MAO rule. Did you know in advance you would close with a new buyer in 3 weeks and at what price? Unlikely – even conventional, approved buyers usually will take 30-45 days to close, sometimes longer if they drag their feet.

    Also, I think the title of your post is misleading. It doesn’t sound like you “sold low” at all. If the ARV was 150K but yours wasn’t updated, then what was its actual market value? 135k? Is that what you actually sold it for? Then that’s not selling low — that’s selling at market value. You bought low but sold at market for a spread.

    This is just about your personal risk tolerance you’re willing to take on in your business. I’m not saying the 70% rule is set in stone — I’m in a very high-end market here on Oahu and there are times when it still makes plenty of sense to go above it, but not by too much. In a lower priced market like yours, though, most people are better off sticking with it. But again – this is about your own risk tolerance. However I wouldn’t call this a “strategy”.

    • James Vasquez

      Michael,
      First, I greatly appreciate your well-throughout and detailed comments that you left. I think they will add a lot of value to the reader. Also, I will have to completely disagree with the notion that additional risk was taken because I purchased above the “Normal Threshold”. You see, I believe that the threshold is determined by the exit strategy. This exit strategy is not comparable to a fix and flip or wholesale deal, so the threshold that you mentioned is not relevant here.

      Also, you are correct, one must account for any and all costs associated with ANY real estate transaction before they buy. Some of those costs would include those that you have mentioned. Although, I did not mention the costs associated with the type of exit strategy in the post, the main number that really matters to me is the Net Profit and ROI. I used my cash, so a $17,000 return on my cash in only 3 weeks time tells me 2 things:

      1) I knew my numbers going into the deal, as any prudent investor should/must. The Net Profit was not luck or a guess, it was based on thorough analysis of comparable sales.

      2) I did not take on additional risk by reducing the pool of buyers to only cash & conventional. What I did was I removed the Title Seasoning problem, all the while pricing the property at a price point that would “Entice” conventional buyers.

      • I likewise appreciate your response, James, but I think we will have to agree to disagree. Regarding your assessment of risk, threshold and exit strategy, I see your deal here as somewhere between a typical fix/flip and wholesale, not something completely different. You bought it low, did some rehab (albeit very light) and sold it quickly. Sounds like a short flip or even a (non-assignment) wholesale to me. And as such, the risk threshold to be followed is unchanged.

        Also, I think it’s a stretch to the draw the two conclusions you mentioned in your post-deal analysis. You’re assuming causal linkages that don’t necessarily exist. Regarding the first, this is only true (mostly) if $17,000 was the profit you expected to make BEFORE buying the house. Was it? And even so, the comps only give you a reasonable estimate of price and sales time. I’m not saying your profit was pure luck, but we all know that two exactly similar houses next to each other being listed on the same date will not sell for the same price in the same number of days. Knowing your numbers is important and certainly helps mitigate risk, but there’s no eliminating the natural fluctuation of a free market and, therefore, the safety margin (threshold) has its place. All other things being equal, reducing your safety margin necessarily increases your risk. Perhaps your buyer’s loan would have fallen apart or they could have gotten cold feet and backed out, forcing you to re-list. Now your hold time becomes maybe 2 months which not only reduces your 17K profit but also keeps your funds tied up longer, potentially eliminating the ability to close other business that might come your way (depending on your capital resources).

        I also disagree with your other conclusion about risk. Just because you made $17,000 does not mean you didn’t take on additional risk. You’re stating a causal relationship that does not exist. You may have removed the title seasoning problem, but you still eliminated potential buyers nonetheless by doing so. It seems to me you took on MORE risk by giving more leverage to cash/conventional buyers.

        I think the real conclusion here is that you were willing to take on a greater level of risk than most investors would likely do. That’s strictly a personal decision – if that works for you, then great. There’s nothing wrong with that at all. However, I’d be concerned that new investors will see this post and think it’s ok to ignore the general rules of thumb because it happened to work for you in this situation and come out on the losing end.

  4. Hi James, great article! On your website I noticed you have your broker’s license. Do you think it helps/hurts/or has no effect in your wholesaling business? Thanks!

    • James Vasquez

      Devan, my short answer is that it helps…but I have to be very diligent when it comes to marketing and disclosure. It helps in that it gives me credibility, but that credibility comes at a price…I have to make sure all my ducks are in a row with regard to disclosure.

  5. Hey James Question for you in the article you stated

    “So, I went ahead and purchased the property for $107,000 and immediately listed it on the MLS for $134,900″

    Do you mean you actually purchased and closed on the house yourself with your own funds. Then turned around and listed it on the MLS? Or is there something more creative going on here?

  6. Hi James,

    Interesting post. Total newbie question re: Wholesaling – Why is it important for the house to have equity in it?

    Also, when you bought the house, did you pay all cash?

    Thanks for sharing your experiences. Much continued success to you!

    • James Vasquez

      Dan, thanks for your comments. I paid cash. In a wholesale type of transaction, the end buyer needs to have equity in the deal to earn an acceptable RIO, otherwise they wouldn’t have any desire to buy the house from the wholesaler.

  7. Interesting approach for sure. Thanks for sharing!

    As a PA Realtor and an investor myself, I guess the question I have would be regarding the disclosures, as you mentioned in your response to Devan. As a Broker/Realtor, don’t you have a fiduciary responsibility to the seller from initial contact? I guess what I’m getting at is, as a broker/agent, aren’t you ethically obligated to list his house at $134,900, rather than buying it first (at 107,00) and doing exactly what you could have for him? Perhaps not if he contacted you at a “we buy houses” phone number/email instead of a brokers phone number?

    Also, you said to Michael Borger, “The Net Profit was not luck or a guess, it was based on thorough analysis of comparable sales.” I’m assuming DOM (Days on Market) of those comparables was a key factor in determining how quickly you’d get an interested buyer?

    If you can shed light on the disclosures (how you stay straight, honest, and legally protected) and your analysis criteria for the comparables to determine your estimated carrying costs, I’d appreciate the knowledge. Thanks so much.

      • Michael, my post was positioned as an inquiry, not a statement of information. I’m not sure what it is you disagree with (my questions or his quote?) aside from what you’ve already referenced in your above comments to James. I actually agree with most of your replies in terms of new investors staying true to a formula, increased risk via this strategy, etc.

        However, regardless of strategy, I think we all agree, one can only invest in the housing market based on the information available at any given time. Most flippers would be in another line of work if not for calculated strategic analysis of said information. While it may be MORE risky to take his approach, it is, indeed, an approach. I was just trying to determine the underlying factors that convinced him to take the ADDITIONAL risk. What significant factors led him to believe practicing outside the guidelines of the formula would be successful? Realistically, no one has a crystal ball, we all work off the the data at hand, the only difference is risk tolerance.

    • James Vasquez

      Dan, thanks for your questions and comments. I’m located in Texas. I don’t know what the laws are in PA, and I also want to make sure that everyone understands that my answer to your questions are in NO WAY to be construed as legal advice. In my business, there is No Representation, so there is no fiduciary responsibility to the seller. Had that property been my clients listing that I purchased, then immediately resold at a higher price….then that would be a different ball game. They are not my client and I have them sign a disclosure stating that fact.

      Low Days on Market and loan type were my basis for my estimated holding period. However, I was prepared to hold it for several more weeks, if needed, because the RIO was still there. I was able to negotiate a quick closing with agents as offers came in, because of the attractive price.

      Hope that helps,Dan.

  8. Jeff Brown

    I have no clue about any of the backgrounds or expertise levels of any of the commenters here. I will make a couple observations, exclusively from my own firsthand experience.

    First, if an investor can’t see profit like this one, and know what the subject property is actually worth, they’re not nearly as good as they think they are, and absolutely haven’t reached pro status yet. The exception would be a market in transition, though the market in this post doesn’t appear to be in that status.

    Second, if the professional, flipper or not, sees a property that can be bought for $107k that’s worth $150k minus a few minor adjustments, and doesn’t buy it for a quick profit? I’d wonder about ‘em. ;)

    What you did here, James, was a no-brainer.

  9. I think the major issue most new people, and many veterans, will have here is the cash to close the deal. It is a lot more common to hear about a new Wholesaler talk about how they don’t have more than $150 a month for marketing than it is to find one with $110k burning a hole in their pocket.
    So one problem would be to get funding and still make a reasonable profit. On the 2nd point if you did hard money you probably reduce the profit $3-4K with the same timeframe.
    profit will drop fast if the hold is longer.
    The other issue is the lenders usually use silly formulas too, so deals like this don’t usually fit their criteria. Hence you might not even get a chance to risk all the profit by holding it a few months. :)

    Great deal and congratulations on doing so well!

    Shaun

  10. You definitely have to buy them right, but if you are not offering enough, you can’t get in. There are a lot of ways to buy property cheap, if you look. I have a post on my blog for tomorrow about one of my flips I recently did. $26K in 3 months, with minimal work.

    It’s good to know about the seasoning thing. I know about it, but never really thought about it. Cash or conventional makes sense.

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