Module 1 What is Wholesaling? Part 3

by | Mar 13, 2019

There were two brothers, investors. One was running for city council. The other was a real estate agent in the same company as me. They had come across an estate sale. The heir of the estate—the son who took over the properties when his parents passed away—was left controlling three properties. He wanted to sell them all together.These two brothers got all three properties under contract, but they only wanted to buy two of them. They just couldn’t afford to remodel three properties, and do all that kind of stuff.

They knew about me, but we’d never seen each other before. (It was a big company.) Someone said, “Hey, you should call Gary. He’s a good guy and he knows what he’s doing, easy to work with, and will give you a good deal.”They called me up, and I was intrigued. I looked at the property and was pleasantly surprised.This place had all new siding, all new windows, and a beautiful front porch.The interior had all original hardwood floors, crown molding,chair rails, trim around the windows and doors—just a beautiful place. Everything was completely wrapped in aluminum. In other words, on all of the window and door frames on the exterior, there was no exposed wood (which means it was as close to maintenance free as you could possibly get on the exterior). It also had a giant beautiful front porch.It was on a corner with a double lot.

This place was a real charmer. The interesting thing is that it had one gas line but two separate electric meters. Its location was right on the edge between one area that was more owner-occupied and another that was more tenant-occupied.I thought to myself, “What a great place for a duplex.”With a duplex, you typically get tenants who are more long-term, especially if you have three bedrooms or more. They’ll have children and they’ll want to stay a long time. They want to be in a neighborhood where other people have children, which is typically an owner-occupant neighborhood. It had a nice long drive to the back with a garage, the whole nine yards.What I thought as I was walking through was, “My gosh, this thing is set up perfectly to split into a duplex.” The way the rooms were laid out, where the bathrooms were, the plumbing, it was perfect. I could easily turn a second floor smaller bedroom into a kitchen, which is exactly what I did. It already had a bathroom upstairs, and another floor with three bedrooms.It had a living room, dining room, kitchen, bathroom, and three bedrooms for the second and third floor. The first floor would make a huge beautiful one-bedroom apartment that had a giant kitchen, and its own bathroom. The kicker was that they only wanted $16,000 for the property. In other words, the entire cost would be $16,000 to me.

The brothers were just going to transfer the funds over to the current owner. As you might imagine, it took me about 0.001 seconds to accept the terms. I took the property for $16,000,spent another $16,000 adding the second kitchen, separating the gas, and adding a second furnace and water tank. The electric was already separate.

The way the building was laid out, it took very little to provide separation of units on the interior because it was literally separated by a floor. I was able to keep everything intact, the original foyer, the hallway, the stairs. I provided a locking secured access to the first floor, interior and exterior. The exterior was in the back off the kitchen. The interior was off the front hallway. That was their front door.It was an easy split, an easy separation. Literally I spent a total of $32,000 doing this, went to a bank and said, “Just appraise it whatever you want. I don’t really need a lot out of this. I just want to refinance it and pay myself back.” At that point, I was doing everything with cash.

I knew the place was worth probably $100,000 but I expected the bank to be very conservative.They came in at 75% of the street value. This is what banks were doing at that time. They were being very conservative. Appraisers were going low because everybody was scared.A huge fear was cast all across America. I took an 80% loan on that, which means I borrowed $60,000. Remember, I only had $32,000 tied up in the property, so I put $28,000 cash in my pocket, after paying for the cost and rehab. And I still had $15,000 in equity.

Here’s how that breaks down:

Assessed value: $75,000 Loan amount: $60,000
Less 80% loan: ($60,000) Purchase price: ($16,000)
Equity: $15,000 Rehab cost: ($16,000)
Pocketed cash: $28,000

Remember, that $15,000 equity is according to the bank. I actually had more equity because I knew if I sold the building on the open market, it would probably sell for $100,000. So I effectively built about $40,000 in equity, $28,000 in cash, and I was earning around $1200/mo rent, all because I bought a wholesale deal for $16,000.This is the kind of potential that’s out there for all of us when it comes to wholesaling.This property ended up making me so much money over the years it was ridiculous.Right out of the gate, I made nearly 100%—$28,000 cash out on $32,000 cash in. If you just look at cash-on-cash basis, that’s probably like a 90% cash-on-cash return.That doesn’t even include the equity or the cash flow from renting the place out. Do you follow what I’m saying? If you’re not investing in real estate, don’t hesitate anymore. Just get involved.Communicate with us and we’ll help you do it.That was pretty much it. The guy who had lost his parents wanted to sell the properties. I was invited in to take one of the three properties so I became Party C. Party A was the seller, and Party B was the brother, the investor who took two of the other three properties and didn’t want this third one.

Wholesaling has served me well, and has served a lot of other people well throughout their investing lives. For me personally now, I focus on building a portfolio and acquiring large rental properties. I don’t get involved anymore with single families, duplexes, or things like that. I buy large apartment buildings but I would not be able to do this if I hadn’t started doing what I just described to you here.

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