1st wholesale deal....

6 Replies

I've been working really hard to get my first wholesale deal done. I got to use spare time, because of a 65+ hour work week at a job and family. But hey! A guy can only do what he can do right!?

My phone rang yesterday with a guy that wants to sell a 5,000sqrft. 4 plex. He asked if I was interested. Yep, so send me the deal. It's an old church built in 1900. Converted to the current state. He wants 69,000. I offer him 30,000k. Here's why.....

A city assessment of 15,000k. Over 9k in back taxes. The taxable market value is 60k.

He says no to my offer. I don't feel comfortable offering any more.

So my question BP, did what I do make sense? Do I have cold feet? Or am I trying to screw the guy? I really don't think I am though.

Thanks!

1 more thing! If all I take away from this, at least my phone rang with a lead!

The back taxes are irrelevant. Most contract say something like "Seller to provide free and clear title" That means the seller is responsible for the back taxes and will come out of his or her proceeds. 

The tax assessment or tax value is also irrelevant. It could be way low or way high. 

What maters is what are the rents and what is the condition, and what are comparable properties selling for.

You are not trying to screw the guy. You just don't know how to evaluate a deal. You need to learn how to evaluate deals. There is a ton of information here on BP to help you do that. The free Beginners Guide under the learn tab above probably has some tips. Also do some searches here.

you will learn a wealth of knowledge on this site...but yes he is correct evaluation is key even I just picked up some new info on those back taxes.

@Ryan Johnson Always make it a point to remember whether you are trying to buy the asset, the debt or the equity.

Thus is your first deal. Your analysis us starting off correctly, however you're forgetting which hat you're wearing.

When you buy the asset (the property) you typically use an escrow and title insurance which offsets debts via payment from your side of the transaction crediting you and debiting seller. In other words, you pay X, certain bills and liens are deducted and you get the property with those obligation having been satisfied out if sellers proceeds at closing.

I occasionally buy the equity position of sellers, namely heirs. In that case, I pay a fixed amount for their equity and I'm responsible for the debt balances and the asset value.

When I buy or create debt, my role is to have my debt sufficiently protected by adequate equity of the collateral such that the borrower has enough skin in the game that they don't want to walk away from their equity.

Originally posted by @Ned Carey :

"The back taxes are irrelevant. Most contract say something like "Seller to provide free and clear title" That means the seller is responsible for the back taxes and will come out of his or her proceeds. 

The tax assessment or tax value is also irrelevant.

What maters is what are the rents and what is the condition, and what are comparable properties selling for."

Please elaborate on the irrelevant portions. The property cannot be assigned until those taxes have been paid in full?

Or does it go like... 

Closing table, property is assigned to the buyer, and then the seller is responsible for whatever is pre-owed on the property after the conclusion of the contract?

@Alex Rector

Closing table, property is assigned to the buyer, and then the seller is responsible for whatever is pre-owed on the property after the conclusion of the contract?

Yes if I understand you correctly. All the bills owed on the property, mortgages, back taxes, various city or county liens etc. get paid off at the settlement table. The title company takes all the money from the buyer, holds enough money to cover the bills mentioned and then whatever is left goes to the seller. The title company then goes and pays off the bills the next day and records the deed.

IF the sales price is not high enough to cover all the bills owned on the property, the seller must bring money to the settlement table. Or perhaps the property just doesn't sell.

Of course the back taxes are important, and have to be paid. However they don't have to be paid BEFORE settlement. They are paid at settlement.

If this is not clear just ask again.

@Ned Carey

Thanks for the clarification. When looking for distressed properties, which seems to be the norm for wholesaling properties; it would seem more times than not that there'll be some type of "owed debt" against the property. I come to this conclusion as from thinking about why the property is vacant and is distressed. Is this true?

Should the middle man in the transaction (me) conduct searches against the property to properly account for those debts as due diligence?

Or...

Should I proceed anyways (which I would intend to do) and allow that information to surface at the closing table with the cash buyer ready to take ownership?

If I was the cash buyer and all of a sudden these hidden fees arose, I might walk away from the deal if the profit range has dried up quite a bit.