I’ve noticed a few BP members swear that you cannot make money in lower income neighborhoods. Or that you should stay away from these kinds of houses. I personally think that lower income areas have multiple advantages. They are easier to get owner financing for, easier to justify a low cash offer on, and a great way to get good returns if you are willing to put up with some extra headaches. I normally encourage new wholesalers to start marketing in lower income neighborhoods because you will find very motivated sellers. That’s how I got started, but you can pretty much find motivated homeowners in any neighborhood. Now I will address lower income neighborhoods in major cities with strong economies. If you are located in a depressed economy, then some of this won’t apply to you.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Buying a House in a “War Zone”
I am located in a major city with a booming economy. Right now on the MLS, there is a shortage of houses for $30k and below. In other words, on houses that I used to be making $2k-5k, I can now make $10k-15k. There was recently a house that I wanted to pick up for $17k. The owner would not budge from $20k. I decided to take the risk because the numbers were not bad. However, the house is in a “war zone.” It’s usually a particular type of landlord who likes these properties. I like them because of the high returns, and I outsource the stress to a property management company. However, most landlords run from these types of properties. I even see a lot of newbies walk away from these — yet these kinds of properties are a large part of my business. Walking away from this type, you are literally leaving money on the table for a decent wholesale fee.
Alright, back to the story. I contracted this property for $20k. I offered it at a local real estate club meeting for $25k to anyone who would bite that day. I had about two people interested, but nobody would commit. I decided to list the property on the MLS. In my state of NC, there is an option on the MLS that states, “Seller does not own yet.” This option is not available in all states. Please check your local MLS laws. I then did a flat fee listing with an agent.
The price for a flat fee listing will vary state to state. Now, with a flat fee listing, please keep in mind you will still have to pay the buyer’s agent commission. In my state, the buyer’s agent commission is 3%. But if your MLS buyer is willing to pay more than your traditional investors, that 3% is well worth it. I listed the house at $31k. The second day, I got a call from an agent wanting to pay $31,500. I accepted, and we signed contracts and sent everything to the attorney.
Now, please keep in mind if you do a flat fee listing as a wholesaler, you will still have to require a cash buyer. That means you cannot accept financing. But your flat fee agent should be able to mark that section on the MLS “cash only.” Besides, most of our houses don’t qualify for a loan. One of the only hangups is explaining what’s going on to the buyer’s agent. I’ve done assignments and double closes before. Be sure to explain to the agent, “The only way this deal will fly is if we use my attorney.” And if the agent pushes back, offer to pay for the closing costs as a incentive if they use your attorney. The reason is that their attorney might not do assignments or double closes.
This is another tool to put in your toolbox. I only recommended using this on vacant houses. I don’t recommend doing this on owner-occupied houses, houses with tenants and vacant houses where the family members live in the area. You do not want the real estate agent to start talking in front of these people. Take my word for it; it’s never a good thing. When it works, using this strategy is a great way to maximize your profits and to sell lower income houses that your traditional buyers might pass on.
Wholesalers: Do you ever target properties in lower-income neighborhoods? Why or why not?
Let me know with a comment!