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.
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.
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.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.