Re: Investor Advice for Starting Out

14 Replies

Good Afternoon,

I am a teacher interested in entering real estate. I have a two year goal that I have set for myself to save a least $40,000. However, a colleague of mine recently advised me that she was told that money up front was not necessary in order to turn an immediate profit. She mentioned to me that an individual that she met advised her to get a list of foreclosures, contact interested investors, and simply act as a "middle man" between the investor and the homeowner. She would be responsible for securing the transactor for the investor and helping to relive the owner of the soon to be foreclosed property. She would be able to "write in her transaction fee" for 10k or so dollars. Is this true? This sounds rather too easy, and if so, why aren't there many other investors participating in this sort of deal?

Thanks in advance for your feedback! It is greatly appreciated!

Hi Dominique, and welcome to the site! What you're referring to is called wholesaling, and it can work approximately as described. The trick is FINDING all those wonderful properties, and at such a price that an investor will purchase it from you. Investors want to pay (ideally) 70% of what the property would be worth fixed up, minus repair/update costs. In reality, that percentage fluctuates a bit, but that's the rule of thumb. As you can imagine, if someone owns a home worth say $100K that needs $20K to fix it up to that level, they may or not be inclined to let you have the house for $50K-ish ($100Kx70%-$20K repairs). Wholesalers help people with their individual situations and generally require a certain type of seller, thus the challenge of finding properties. Check out the BP Podcasts and look for ones regarding wholesaling; in addition, there is a TON of good information here on the site if you dig around. Again welcome, best of luck, and have fun!

not as easy as it sounds. 

I have bought many houses, with many different methods, mostly cheap houses. I did buy a house recently that might interest you. Just to show you what can be done. I had an acquaintance that said he was thinking of selling his small house(moving back in with his wife). He asked if I was interested. I said yes but I had a sizable apartment deal working and had no major cash available. He said for some down, he would take payments. That is just what I wanted to hear. It is a nice rental in good condition, with most of his good  quality furniture and all the appliances. He even didn't want more than it was worth to me. I offered $5000 down and the balance at 10% interest on a 48month amortization.  We will rent it for $550/month. Payments of $450/ month. Not a major cash cow, but for babysitting the house for 48 months it is mine. Then $5000/ year income. That is how you build wealth. My renters will pay for the house for me.

Welcome! I agree, this is not as easy as it sounds. The most challenging part is finding the homes to wholesale. The information above is all in Texas you must also add the overlay that the transaction fee (whether $2,000 or $10,000) MUST be disclosed on the you need to disclose to the sellers what you are doing for them (e.g., avoiding foreclosure, getting them needed cash quickly, etc.) and that the investors will pay you a fee of X. This way there are no surprises to the seller at closing that could cause issues.

You are smart to start this while employed still.  Many an investor has started to acquire rental properties (and cash flow) and flip homes wholesale until the income is enough to quit your job.

Best wishes in your endeavors!

Agreed! You need to not only be able to support yourself while you grow your wholesale deal, but the deal itself will require capital for advertising  (primarily) and many other expenses that come with business start up. It sounds like you're on the right path though (especially by starting out on BP)!

One thing that nobody has mentioned yet (how did 

@Bill Gulley  miss this thread) - you have to be very careful in how you behave as the "middle person", since that sort of activity is considered brokering and requires a real estate license. There are some approaches that do not require a license, but many who do this act in ways that really is limited to licensed real estate agents. 

Been having BP site problems Steve, but there is so much bad stuff posted it's hard to keep up.

@Dominique Myles  

you got some poor advice, not only does TREC hammer unlicensed RE activities, targeting foreclosures is really a bad idea for newbies. Recent federal law targets those who advise or offer some method or to buy properties to save the owner from foreclosure after notice has been given. Only an attorney or someone with a HUD credit counselor license may discuss or advise owners in foreclosure.

Banks are involved, any attempt to delay or interfere in any way with a bank foreclosure is another violation of federal law.

Consider what can happen once a bank finds out that the copy of the contract they got was bogus, from someone who didn't have the ability to buy, that attempted to assign that contract. The bank sees that as interference and it is, while a lender won't really stop the FC process (but they might) knowing the property is to be sold, they will change how they treat the matter and their FC process, that ends up being additional work, time and attention.   

99% of investors I see on here talking about chasing foreclosures seem to be totally mislead. Guess it's based on the perception that borrowers are desperate (they may be) but that doesn't mean there is a deal there. They also have no clue as to what a lender does in the FC process which means they have no clue as to what to do and not do that may interfere.

If you don't have cash to buy or are certain that you can obtain cash within the timeline required, you will be interfering.

Besides, most foreclosures don't have enough equity in them to make them the deal gurus like to impress you with. Once you contact that owner and begin your ploy, you'll likely be in violation of law before you ever find out that there isn't enough equity to mess with it, if that owner talks to their attorney about you being interested, you can had before you even contract!

As a teacher, you don't need to be charged with a felony! Even if you don't get the max of $100,000 in fines and/or 10 years in federal prison, just a plea deal that lets you off easy may well cost you your job!

RE is serious business, newbies need to stop treating the business with such a casual approach as if they are selling widgets out of the back their your car. :)       

@Bill Gulley   thanks for that post, as I was contemplating some foreclosure mailings myself. I don't do the guru thing so I'm not sure how they pitch it, but it struck me as a demographic which could use an out. Just goes to show. Anyhow, I'm curious if you have a nutshell version of dealing with foreclosures or even contacting them whatsoever that is legitimate (read legal), or is it all wrapped up in law now? I was hesitant to ask for fear of some of those storm clouds heading over my way, but better to know ;-) Thanks Bill.

In my experience I've noticed that property owners in foreclosure, don't sell.  They cease making the monthly mortgage payments on the property, and continue living in the house for free.  In New Jersey the foreclosure process can take years, so the property owner has absolutely no incentive to sell or vacate.  If they were to vacate, they would have to spend money on rent, whereas if they continue living in the subject property under foreclosure, they can live there rent-free for years until the court system legally permits the Lender to evict them.  I won't waste my time on foreclosures.  Just my humble opinion.

Originally posted by @Chad Clanton :

@Bill G.  thanks for that post, as I was contemplating some foreclosure mailings myself. I don't do the guru thing so I'm not sure how they pitch it, but it struck me as a demographic which could use an out. Just goes to show. Anyhow, I'm curious if you have a nutshell version of dealing with foreclosures or even contacting them whatsoever that is legitimate (read legal), or is it all wrapped up in law now? I was hesitant to ask for fear of some of those storm clouds heading over my way, but better to know ;-) Thanks Bill.

Seriously, foreclosures are not that lucrative! 

The advantage is that owners are motivated, most of the time, not always.

Yes, the law recognizes that motivation and vulnerability and has "wrapped it up" to protect lenders and consumer/owners. There were too many operators preying on owners in foreclosure, so the vice has tightened.

Many fail to understand the ramifications of their conduct, how owners respond, what they may do thinking they are selling a property, how they may spend their money and what they may enter into under the perception of having sold their home.

What you say or what you allow an owner to even think by implication can lead to trouble (that's true in all RE deals, 10 times more so in FC deals). You need to avoid the "I can help you" stuff, you're not helping them as the benefit of them dumping a property isn't really that great as their credit is already dinged, you may save them a couple more years of being avoided by lenders, but you're really hoping to profit of the situation.

Frankly, by the time you add full and complete disclosure of trying to flip a FC deal, you'll be interfering with the FC process and you'll be seen as acting as an unlicensed broker. You're damned if you do and damned if you don't.

The ONLY way I would get involved with a FC now is being prepared to buy it myself! I would not attempt to do any wholesale deal with a FC and my knowledge is far beyond that of newbie wholesalers. I know the FC process, how lenders react, what owners may do, what the credit issues can be, I have experience in doing FCs and the psychology of the owners and I know compliance as well as the RE side......and if I wouldn't try it, I don't see any prudent person attempting to do so. You're blind folded with your hands cuffed behind you in a rattle snake den.

I can tell you that anyone who sells under the threat of FC is not a happy camper 30 days later, there is resentment, they wonder if they got taken, their credit is already dinged, usually they are moving to a less desirable home and some want revenge even if it was all their fault. It can be a traumatic experience. Doesn't matter if their position is really justified, usually they will not happy. You can have groundless claims of predatory dealing or other claims after the fact, just IMO that once they learn of recent legislation they might go there, the danger is not over at settlement. 

I also know most are thin deals, no real upside for the risks taken without a license or walking with an attorney through the deal.

It's much better to hookup with a HML or a money partner and go to the FC sale.

Another alternative is get with a good short sale Realtor and have them approach that owner.

In pre-notice situations where an owner is in arrears, late and slow pay situations can be negotiated, catching up payments, reinstating the loan and then various strategies might be used, but after notice has been sent, my advice is to stay away unless you actually intend to buy. :)     

@Bill Gulley  , ah the reality, it burns!!! In all seriousness, thanks for that explanation, always good to avoid excess liability. To clarify one statement, I do know a realtor who's been dealing with short sales for quite some time, is it ok to pass on the contact to that realtor after a Notice? 

I suggest you not even talk to someone who has notice of FC much less contract with them, find a SS Realtor, sign a buyer's agreement, then take them to an appointment to make first contact with an owner, let them lead you through that contract process.

Also, didn't mention, sending mailings to FC folks is targeting them, absolutely a bad idea, all they need to do is turn a letter over to their Realtor, attorney, advisor and you get turned in. Send letters to everyone on that block and don't even hint that you know their situation, then if they call you can ask if they are current, they may or may not tell you, but you would know, line up an appointment without mentioning FC matters and get your Realtor on board.

Have no idea why folks are obsessed with FCs, they are not that profitable, the risks are high, they take time, they are a PITA and they are involved transactions requiring advanced knowledge. There are mush better deals out there than chasing FCs. :)

Thanks @Bill Gulley  , appreciate the info, good stuff. I wouldn't say I was obsessed with them; was just about to get started looking into them actually, so thanks for saving me the time. Nothing worse than getting a ways into something and realizing it won't work out. For the record, I am one day going to stumble across one of your "oh, that's actually awesome"type posts; from what I can tell, only about 17,724 more of them to review ;-)

Thanks for all of the great advice. It has been duly noted.  I will continue my research in order to find the right avenue suitable for my needs in order to enter RE.

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