Posted over 10 years ago

Profile of a Million Dollar Middleman

In every city, there is a secret subculture of real estate investors who never incur risk, never use credit, and never own anything; and some of these real estate mavericks make a fortune.

 

Ownership vs. Control

A common misconception that many real estate investors have is that in order to make money in real estate, they have to own real estate. Buying rental real estate to hold long term, or perhaps buying and selling properties are certainly two time-tested ways to make money in real estate. However, each of these investment methods involves property ownership, which carries certain financial and legal responsibilities that can sever experienced investors from profits, and frighten potential investors away from real estate investing altogether. Let’s face it: no investor wants to be sued by a tenant or a rehab contractor for any reason; nor does an investor want to be responsible for paying multiple mortgages on investment homes that tenants have either trashed, or vacated. These are the risks traditional investors take by owning property. A belief that property ownership is the only way to profit from real estate causes many ambitious investors to buy numerous properties too quickly. This usually results in overleveraging, depletion of cash reserves and in many cases, foreclosures or bankruptcies.

Enter the Million Dollar Middleman. As an intermediary between buyers and sellers, Million Dollar Middlemen (MDM for short) view the business of real estate through a completely different lens. They gravitate towards controlling other people’s property rather than owning property. Million Dollar Middlemen network with investors who have multiple properties available for sale at a discount (wholesale). The MDM usually builds a database of these discounted sellable properties and markets them to new investors looking to become landlords or in some cases, home buyers looking for their first home. The Middleman generally charges a fee to the seller, which is usually proportional to the price of the home being sold. Selling other people’s property blocks the legal and financial risks that are normally associated with property ownership. Commonly called a “bird dog” or “transaction coordinator”, the savvy Million Dollar Middleman combines his mastery of real estate finance with various marketing and sales techniques to influence buyers and sellers. While property ownership brings with it the possibility of a financial loss, it is impossible to lose money as a middleman; and this is exactly what drives them.

The secret world of the middleman

Middlemen are creative entrepreneurs and often flirt with what many legal experts would consider real estate fraud. They fly under the radar, accepting pre-negotiated commissions from sellers, buyers or sometimes double dipping by accepting commissions from both parties when a transaction closes. Though it is not considered illegal to sell other people’s homes for a fee, Million Dollar Middlemen often “cross the line” by sharing hefty commissions with their buyers. This “cash out of closing” technique, in fact, is one reliable marketing engine to draw buyers. This technique also explains why a Middleman’s buyer doesn’t mind paying a fee to the Middleman; the buyer makes thousands of dollars while purchasing a piece of property because the MDM showed them how to do it.

Middlemen have financial expertise in real estate, usually developed from time spent as loan officers. All Million Dollar Middlemen work closely with several loan officers in their day to day operations; this keeps their profits rolling in because their knowledge of current bank financing guidelines for potential buyers determines how each transaction can be structured. When a seller is having trouble selling a home or a buyer can’t meet the financial qualifications necessary to make a home purchase, it’s usually the Middleman who can work between both parties, structure the deal and close it based on the premise of conquering various loan guidelines. Because much of what a MDM does isn’t documented on contractual real estate paperwork, the invitation is there to facilitate crooked transactions. This doesn’t mean that being a Middleman is always a precursor to fraud; it just means that many Middlemen can easily profit from real estate fraud because they usually don’t get caught. Think about it; if a buyer and seller work together to falsify documents and obtain loans (extracting cash out of close in the process) on homes that eventually go into foreclosure, the bank, in combination with law enforcement, will investigate each deal and clearly identify the buyer and seller as the perpetrators because everything is documented on paper. However, the MDM who structures “cash out of close” deals that eventually wind up in foreclosure, usually doesn’t pop up on the radar screens of bank investigators or law enforcement because there is often times no paper trail linking them to the transaction. Please don’t get confused though; while some Middlemen operate fraud operations in complete secrecy, reaping pretty nice annual profits, many others are legitimate businesspeople that run airtight real estate operations and provide legitimate transaction gateways between buyers and sellers.

MDM’s are simply marketing machines

Sophisticated intermediary investors such as Middlemen know they don’t need to own real estate to make money; they leverage other people’s real estate holdings, market them to scores of buyers and craft financing terms that most sellers are unaware of. This is what keeps Middlemen turning profits; and also makes their services so hard for buyers and sellers to turn down. The Middleman knows he doesn’t have to have good credit, stable employment or cash to make money in real estate; he just has to meet buyers and sellers, listen to their needs and close deals based on his knowledge of real estate finance. Making money in real estate quickly by finding high equity deals and eager buyers is what Middlemen are masters at. By charging sellers, buyers or both parties on each deal that closes, Middlemen build significant cash reserves. Cash is what ultimately gives this genre of real estate investor the power to step into property ownership when the time is right; having built a safety net of solvency through selling other people’s deals over time.

Many Middlemen only become such wise investors as a result of initial business failures stemming from buying multiple properties too soon without understanding proper landlording procedures. Other Middlemen are downright scared to own real estate and choose to lay back in the cut while selling properties for profit that other people are taking ownership risks on. Middlemen know that the method to make a lot of money in real estate fast is to sell properties that other people own; usually properties belonging to other investors.

Million Dollar Middlemen market to find buyers before trying to sell any properties. Knowledge of current loan guidelines from a wide array of banks gives a MDM options for exiting potential deals before talking to a multitude of sellers. Once a pool of buyers and an understanding of loan guidelines have been established, the fun begins for the MDM as deals begin to precipitate by creating relationships with sellers. Middlemen do this through newspapers, social networking sites, internet chat rooms, and public realms which allow a MDM to assemble databases of properties. Deals are structured based on the financing terms a buyer can obtain (based on each buyer’s personal financial and credit scenarios) and how much equity a seller is willing to kiss good-bye. For example, a MDM may have a seller willing to sell a property for $100K that is worth $150K. To keep things simple in this example, let’s assume the buyer has a required down payment of 10% and there are no closing costs including property taxes. If the buyer qualifies for a 90% loan to value (LTV) home loan of $135K, then the Middleman has a number of options depending on the level of sophistication displayed by the buyer. The Middleman could mark the seller’s bottom line price up $6K, which is his eventual commission, and close the deal at $106K. This scenario leaves plenty of equity in the house to the buyer. A scenario like this mirrors what a licensed real estate agent does on a daily basis and is good for everyone involved, especially with properly executed contracts. Another option a Middleman could choose to exercise would be to mark the price of the deal up to $135K, cut $20K back to the buyer and keep $15K for himself. This is a very liberal, but common practice among middlemen to entice buyers who, more often than not, let the homes go into foreclosure without a care in the world. Please note: this article isn’t about what’s legal or moral; it’s about what really goes on in real estate. This is what street-wise Middlemen do every day.

Middlemen that don’t pull any financing “tricks” involving bank loans and only deal with cash buyers looking deploy their own exit strategy on properties they buy are commonly called property “wholesalers”. While more inexperienced MDM wholesalers complete “onesie-twosie” deals, expert Middlemen wholesalers wedge themselves between banks, hedge funds or other large corporate level sellers and sell homes in bulk fashion (sometimes hundreds of homes at a time) to cash buyers. Generally speaking, the larger the deal, the more time it takes to structure and reap a profit from.

The safe bet if you elect to be a Million Dollar Middleman is to be a wholesaler who usually works with cash buyers looking to buy ugly homes. The Middleman’s secret is to work backwards; marketing to find buyersfirst before finding good deals to sell to them. Taking ownership of real estate before you know how to sell other people’s real estate using various marketing strategies is perhaps the number one cause of failure in this business. Just ask any Middleman.


Comments (1)

  1. i would like to thank you so much for the great information that share with me.

    Do I need a signing contract to the sellers and the buyers for each deal?