I get frequent calls from investors looking for funding for deals. Sometimes the conversation might go something like this:
Borrower: Hi, I’m looking for funding for a great deal I just found in Methuen, Ma. I want to make an offer, but I have to line up a hard money loan first before I submit the offer, because I took some hits on my credit during a divorce. I’m willing to offer a percentage of the profit as well
Lender: Ok, great, tell me about the property.
Borrower: It’s a bank-owned property in disrepair, listed on MLS for $179,000. It needs $80,000 in rehab and will be worth $325,000 when it’s done. Closing, financing and carrying costs will be $35,000. My maximum offer will be 160,000. It’s a 3 bedroom 1 bath single-family home in a decent neighborhood, which we will improve with a new kitchen, an additional bath, and various repairs.
Lender: (thinking: “he doesn’t have it under contract, just hopes he can get it for that price”) “Sounds like a good project if it happens. So, if you don’t have much cash, do you have any at all? We have a new program that requires very little cash.”
Borrower: “Well, I have about $2,000 total.”
Lender: (thinking “that’s pretty much zero skin in the game”) “Ok, what’s your background in managing major rehab projects?”
Borrower: “I have never done any rehabbing, but my sister’s boyfriend’s neighbor is a part-time contractor and he said he could do it for $80,000 no problem.”
Lender: (thinking “Oh-oh. That’s a project that might take WAY too long and go WAY over budget”) “Hmm….What is your exit strategy?”
Borrower: “My girlfriend is getting her real estate license next month and will list it for sale for me for only 2 percent commission.”
Lender: (thinking: “boy, those buyer agents are going to jump all over that 1% co-broke, it will stay on the market for months.”) “Alright, let me make sure I understand: You found a property on MLS and you want to make an offer. You are short on cash, and have no experience in construction, construction management or marketing the property for sale. You recognize that you don’t have the money or experience, and so you’re willing to give up part of the profit in the deal. Does that sound about right?”
Borrower: “Well, yes, I guess that’s right.”
Do you think we can fund this project? Well, $2,000 won’t even cover closing costs, and there isn’t a deal yet. He has no signed offer or P&S.
You see where I’m going with this, don’t you? The caller brings no cash, no credit, no contracting experience and no marketing experience to the table. In fact, he’s not even bringing the deal into the mix, because he doesn’t have it under contract and it’s on MLS for anyone to purchase.
So here is what I suggest:
- First, sit down and make a list of what resources you bring to the table, whether they are money or skills.
- If you don’t have cash, credit or experience, then finding a great deal will go a long way. Wholesaling means finding deals for resale to a rehabber. Most of the time, these deals are not on the MLS, you need to market for sellers just like a real estate agent would. There are courses available to help with marketing, or you can work with an experienced wholesaler. Offering your services for free could go a long way toward convincing an experienced wholesaler to help you learn.
- Save up your cash. And yes, I know it’s not that easy to do. If it were, you’d already have the cash.
- Get your real estate license so that you get training from an experienced broker.
- Look for partners who have the skills and resources that you lack, and focus on your deal-finding skills. It’s the most important part of the business.