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Wholesaling Real Estate in Los Angeles - Introduction
If you are like the many of us, you have wanted to get into real estate investing as you see other investors getting large returns on their investments. While this next statement is not true for everyone it applies to the majority. The first hurdle in acquiring a property in Los Angeles is coming up with that down payment for a loan on a property.
Generally, one will go out and research out which areas are best, what the rents are, property taxes, etc and then start looking for a property that will give a return on investment (ROI). You find that property and now see that you need actual cash to remotely be considered for a loan approval for that property. Sellers rarely will even look at an offer if there is no proof of funds. This is where one either gives up or finds a way to make cash quickly to get procure the down payment. Some have gone the route of finding investors to front the down payment or scrounge the money together somehow through family and liquidating assets, but is there another way to quickly acquire property?
Taking the above and combine that with the great city of Los Angeles and you will soon see that this “down payment” is more than the average price of a whole house in the majority of other areas of the United States. Here is a quick story of what happened when we (myself and my business partner) got started in real estate in Los Angeles.
As laid out above, we searched for an ideal area that would give us a good market to look for a property in (not the best part of town but not the worst either). We found a property for $750,000 which is an average price in Los Angeles (I know…). It was a multi-unit property which would give us the most rent money each week. We calculated that we would come out on top each month. We were pumped. We go to a bank and ask about getting a loan. We soon find that getting an FHA loan would be tough unless one of us wanted to live there and even so it takes a while to get that loan. So a conventional loan was the other option. This is usually 20% down payment for a single family home, well this was a multi-family so it was 25%. This comes out to $187,500. Well you can see where that went.
Determined to figure out a way to invest, my business partner brought up that he heard about this thing called Wholesaling. This is where this article really begins!
What is wholesaling? Wholesaling is the process of finding properties which are deeply discounted, generally due to the seller needing to sell it right away. These are called Motivated Sellers. They usually have some issues and cannot keep up with the payments, are moving out of town for a job and cannot hold two mortgages at the same time so need to sell, etc. The reasons are endless. Once you have located (we will get into how to find these) this seller, you would then negotiate a discounted price with him/her and get an “assignable contract” between you and the seller. This is important that the contract is assignable as you will see shortly. This contract basically says that the seller agrees to sell you the property for X amount and that you have the option to assign this contract to someone.
Now you have a contract but no money to buy this house. You then find a cash buyer who is looking to buy a property at a great discount and you assign this contract to the buyer. This is done with an assignment agreement. These two documents (contract with seller and assignment agreement) go to the escrow company and the deal is closed. The buyer pays you an assignment fee (this will be thousands of dollars) and the house is sold for cash and you make your money.
The key to wholesaling is finding that motivated seller. If they are not motivated they will generally want too much money for the property for you to be able to sell it at a price that will interest a cash buyer. Also the properties generally need some fix up (they do not have to but generally speaking). The advantage of selling to you is that there are no realtor fees, no closing costs, no repairs need to be made by the seller (large incentive for most motivated sellers), no lengthy bank processes of the buyer getting a loan. It is just a simple transaction for cold hard cash.
Now you are probably loaded with questions at this point. How do I find the seller? What does the contract say? Where do I find the buyer? Why would the seller sell so cheap? What about realtor fees? Is this legal? Do you need to be licensed? These are all questions we had when we started and while the answers are out there scattered on the internet or in paid mentor services. I will answer each question and any questions you comment below in upcoming articles. The above is the gist of wholesaling. We have found also that there are specific things to note in regards to wholesaling in Los Angeles specifically as it is a huge city with the highest cost of living. You will hear other cities selling houses for 20K, 50K, 100K, etc which is unheard of in Los Angeles! You can’t even buy an empty lot for anywhere near that.
Look out for our next article coming soon where we will dive into the first step of wholesaling (marketing for motivated sellers, the crux of wholesaling). See you soon and feel free to leave any comments below.
Co-Founder Dynamic Estates