Consider these parameters for a real estate deal:
Property Value: $250,000
Purchase Price: $160,000
Repairs: $2,500
If you analyze the numbers, you see that the equity available in this deal is $87,500 (Property Value minus Purchase Price minus Repairs).
So here’s a hypothetical question for you: Assuming that the information above is accurate, and the property is located in an area that you view as acceptable and/or favorable, then:
If I offered to give you this deal in exchange for $10,000 in cash, would you do it?
Remember – this is hypothetical. The real question here is this:
Would you exchange $10,000 in cash for $87,500 in equity?
For most smart investors, the answer is: Absolutely YES!
And this is called “Wholesale Real Estate Investing” – the process of buying a lot of equity at a very significant discount from another real estate investor who has already done the hard work of finding a deal and getting it under contract.
Just think about that – consider how easy real estate investing would be for you if you had a network of real estate investors in your area (and maybe all over the country) who, several times each month, offered you the opportunity to purchase significant amounts of equity for a severe discount…
…It would be quite easy to become wealthy, wouldn’t it?
The answer is: Yes, it will.
You’ve got to admit – it will be a pretty wonderful thing when you know how to find great real estate deals in which you can trade a small amount of cash for a large amount of equity without even having to find the deal yourself…
…and that’s exactly what wholesale real estate investing is all about.
Wholesale real estate investing is conceptually very simple. Here’s how it works:
First, “Investor A” finds a great real estate deal with a lot of equity. Typically, Investor A will have spent a significant amount of time, money and expertise to find the deal, negotiate the term and get the property under contract. By putting the property under contract, Investor A now has control of the property, and the equity in the property.
(For this example, imagine that Investor A has found a property worth $200,000 and has set a purchase price of $115,000 and he also knows that there are $15,000 in repairs, which leaves an equity position of $70,000).
Second, “Investor A” finds another party, “Investor B”. Investor B recognizes that the contract that Investor A has established is worth $70,000 in equity, and so he strikes a deal with Investor A to turn the deal over to Investor B in exchange for some amount of cash (we’ll use the value of $12,000 in this example).
So Investor A is giving up $70,000 in “potential” profit in exchange for $12,000 in current profit. And Investor A is paying $12,000 because he believes he can make more than that on the deal since there’s a full $70,000 of equity.
This deal between Investor A and Investor B is called an “Assignment”, because Investor A is assigning the contract to Investor B.
Third, Investor B does his “due diligence” to confirm that the deal is as good as he thinks it is.
Finally, Investor B closes the purchase of the property, and Investor “A” receives the assignment fee from Investor B.
This is, obviously, a simplification of the process. But this is essentially how it works – not so difficult, is it?
ABOUT THE AUTHOR: Robert K. Lear
