Your realtor may have access to a number of off market properties. However, the thing that you have to consider, is that Off Market Properties, especially those that come from wholesalers, operate differently than on market properties that you can find on the MLS. 

With properties bought from wholesalers, you are buying a pre-existing contract. These properties are sold as-is. 

• There is no home inspection contingency. The seller is not making any repairs. That's why the property is offered at a discount. 

• There is no appraisal contingency for the most part. So make sure you have strong comps. 

• There is typically no financing contingency

• Failure to close on the property most likely results in you losing your Earnest Money Deposit. 

• The wholesaler typically already has a relationship with a Title Company that you must work with the buy that contract. The title company's job is to make sure that property is free and clear of loans. 

Summary: Here are some differences between buying On Market vs. Off Market Properties (wholesale or auction). 

• Buying On Market Properties (These are Properties that are Listed on the Market by a real estate agent who is representing the seller)

  • You pay a higher price

  • Sellers are open to paying your agent's commission

  • Sellers are open to paying a portion of closing costs.

  • Closing can take around 30 days

  • Sellers are open to an Appraisal contingency

  • Sellers are open to a Home Inspection contingency

  • Your Agent drafts and negotiates a contract on your behalf

  • Must provide pre-approval letter or proof of funds

  • Sellers are open to a Financing contingency

  • The more contingencies you have, the more your Earnest Money Deposit is protected.

• Buying Off Market Properties (These are properties listed by Wholesaler or Auctioneers).

  • Property is typically listed below market value

  • Buyer pays all of their own closing costs

  • Buyer pays their agent's commission

  • Wholesalers and Auctioneers prefer Cash offers (But they are open Hard Money loan offers)

  • They prefer quick closes - less than 3 weeks

  • No Appraisal Contingency

  • No Home Inspection Contingency

  • No Financing Contingency

  • Since you don't have these contingencies, Failure to close on the property will most likely result in you losing your Earnest Money Deposit. 

  • The wholesaler or auctioneer already has the contract written. You just have to sign it. There are no negotiations, because you are already getting the property below market value.

  • Properties go quick!

  • Oftentimes you must provide Proof of funds before you can go see the property.

EXAMPLE of Buying Off Market Properties:

The property may be worth $175k, but it needs work. A wholesaler negotiated the purchase of that property for $70,000 from the owner with a $10,000 assignment fee. In this scenario:

• the seller gets $60,000 of the purchase price

• The wholesaler gets $10,000 of the purchase price

• You (the buyer) get to purchase a $170k property for $70,000. 

Reasons why sellers may sell their home for half of what its worth:

• The property needs a lot of repairs and they don't have the cash to fix it up.

  • • This is an opportunity for you because you may have the cash or access to hard money funds to fix up the property. 

• The property is owned by an out of state owner, and they want to cut their losses and run. 

  • • This is an opportunity for the buyer, because the buyer may be able to update the property and sell it for a profit, rent it out, or move in it. 

UPFRONT COSTS that Buyers typically Pay for Wholesale Deals. (typically these costs are non-negotiable).

• Earnest Money Deposit: $2500 - $5k+

• Buyers Realtor's Commission: Can be a percentage or a flat rate (e.g. $5000+)

• Buyer pays all closing costs 

• Buyer pays all transfer and recordation taxes

• If using hard money, then as a part of the closing costs the:

  • Buyer pays:

    • Loan commitment fee

    • Attorney fee

    • Points

• If paying cash, then you pay the entire $70,000 upfront, plus closing costs and realtors commissions. Once the property is up and running (ex. rented out), you can refinance at 70% - 80% of the value; or Sell the property.

Carrying Costs

• Property Taxes

• Home Owners Insurance

• Construction Insurance if you are doing a major renovation

• Monthly mortgage (if you used a loan to buy the house)

• Utilitis (Gas, water, electric)

Why does buying wholesale off market deals make sense?

• SCENARIO

  • If the property is worth $170k then lets take a look at the numbers: 

    • • • • • Given the scenario below you will pay around $30,100 upfront + $14,400 carrying cost + have $10k saved to get you through the 1st parts of your renovation before you get your draws) = $54,500 

      • Purchase Price $70,000 (includes the wholesalers assignment fee of $10,000)

      • Upfront Costs ($5,000 + $4,200 + $3,400 + $17,500) 

        • • Realtors Commission $5,000

          • Closing Costs: Typically around 6% of purchase price - $4200

          • Hard Money Fees: $3200

            • • • Loan Commitment $1,100

                • 2 pts = 2% of the purchase and rehab price (ex. 2% of $70k = $1400)

                • Appraisal $600 - $700

          • Down payment 25% of the Purchase Price + x% of the Rehab funds  -- For this example, let's assume your loan is set up similarly to how my loan was. This would mean you would need $17,500 for your down payment.

            • Note: Each hard money loan is different. 

              • • Some require 25% down payment of the combined purchase price (ex. $70k) and the rehab estimate (ex. $50k). In this case your down payment would be $30,000 cash. 

                • Others may only require 25% down payment of the purchase price (ex. $70k) and the hard money lender will finance the entire rehab costs (ex. $50k). In this case your down payment would be $17,500 cash.

                • The down payment can range from 20% - 30% (or more or less, depending on your flipping experience, the type of deal it is, and your past relationship with the hard money lender)

      • Estimate Rehab: $50,000

        • • What to consider when estimating rehab costs? Create a checklist by looking at pictures or videos of the property and ask yourself the following questions. Does it need: paint, new floors or carpet, electrical upgrades, plumbing upgrades, roof repairs, any demolition, dumpster rental, junk removal, exterior repairs, HVAC upgrades, window upgrades, kitchen upgrades, bathroom upgrades, lawn care, etc.

          • When figuring our your savings for rehab costs, make sure that you have funds saved up for your upfront renovation costs. The way that hard money rehab money works, is that they will reimburse you for the money that you spend. You can tell them how many draws you want. 

            • Ex. 6 draws - You pay a fee for each time you make a draw from the rehab budget. For example, you would pay a $100 fee for each of the following draws from the $50,000 rehab budget. After you show proof that you completed each phase of the draw, then you can request the funds and move on to the next phase.

              • DRAW 1: $5,000

                • Architectural Drawings

                • Permits

                • Interior Demolition

                • Dumpsters

                • Site Preparation/Clean Out 

                • Trash removal

              • DRAW 2: $10,000

                • Roof

                • Windows

                • Staircase

                • Framing + Carpentry

                • Trash removal

              • DRAW 3: $10,000

                • HVAC Rough In

                • Plumbing Rough In - including tubs

                • Electrical Rough In

                • Trash Removal

              • DRAW 4: $10,000

                • Insulation

                • Drywall

                • Interior Doors

                • Exterior Doors

                • Cabinet Installation

                • Vanity

                • Countertops

                • Mud, Sand, Paint

                • Exterior work (repairs, siding, stucco, etc. fence)

                • Trash Removal

              • DRAW 5: 10,000

                • HVAC Final

                • Plumbing Final - 

                • Electrical Final

                • Flooring

                • Tiling

                • Trash Removal

              • DRAW 6: $5,000

                • Appliances

                • Touch Up Paint

                • Deep Clean

                • Landscaping

                • Trash Removal

      • 6 months of Carrying costs: $14,400

        • • Monthly Estimates

            • hard money interest only payments: $2,000 x 6 months = $12k = (this number varies based on your loan amount, interest rate, and how much of your rehab fund you have used. For example, your first payment might be $800, but your last payments might be $2k if you've used all of your rehab budget).  I'll just use $2k as a general estimate.

            • Draw fees: $100 x 6 month = $600

            • Insurance: $100 x 6 month = $600

            • Utilities (gas, water, electric): $100 x 6 months = $600

            • Property Taxes: $100 x 6 months = $600 (typically paid in lump sums twice a year. But make sure you set aside savings for this).

Important notes:

• When buying from a wholesaler, you typically use an LLC to purchase a property. It can be a newly formed LLC.

• You must do your own diligence and research the property. When you buy a property, you are also buying all of that properties problems. 

• You typically don't get access to the property until settlement. 

• If a tenant is currently residing in the proeprty, you have to go through legal eviction proceedigns if you want to evict them. (That can take 4+ months)

• If showings are offered for the property, you have to coordinate based on the wholesalers schedule. Also, they will not show you the property unless you provide proof of funds (e.g. copy of bank statement, line of credit, committment letter from a lender)