Rehabilitators who invest in real estate buy properties that need repair. By making the necessary repairs, investors create equity in the properties when they are sold to end buyers who live in them. Buy well, sell well and the money will flow, won’t it? In addition to the usual problems of paying too much for a property and rehabilitating it excessively, there are other “problems” that an investor faces that can kill their business.
Below is an example of a continuing real estate buyer, or so-called “whale” buyer, investing with seemingly endless supplies of money. Generally, they buy properties to rehabilitate and sell to retail buyers, rehabilitate and rent them, or simply wholesale them to other investors. I classify a whale buyer as anyone who consistently buys 2-10 properties a month.
This whale was a businessman who cashed in on his unrelated business and was looking for a new business to start. He saw what was happening with real estate prices and became interested in the business. He did just one rehab, made $ 50,000, and was hooked. He was a “business student,” which means he believed he could make any business work and systematize it at an ATM. After all, he did it once before, why not again?
In his old business, it was easy to sell his service, but it was labor intensive and made small profits. The rehab seemed to fulfill the business plan of his dreams: using others for the labor force, making big profit per deal, having a hungry audience for his product, getting government loans for his buyers, being able to rehab quickly and making a profit like a crazy.
A couple of houses on the plan, he decided to start filling a warehouse with the necessary rehabilitation materials. He bought materials in bulk and then found himself on the road to a real estate recession, caused not by house prices, but by conventional lenders who did not lend money.
What you forgot to understand is that lenders control the retail housing market: – no mortgages – no sales. There are exceptions such as seller financing or subject to mortgage acquisitions, which are being reduced by regulation. However, his biggest Achilles heel was that his bank appraisals were going down, so his profits dissolved in minutes.
Lenders control sales prices by choosing what percentage of the appraisal they will accept. Your buyers had acceptable credit to buy a property a couple of years ago, but new, more stringent requirements from lenders have removed 60% of those people from buying homes.
Your business plan called for a specific amount of sales per month with specific profit margins to cover your purchases of labor and materials, not to mention that you had to have cash to buy the properties as lenders would not consider lending you money as a real estate investor. . .
So this whale is now sitting in a bunch of houses that it can’t sell because it will lose money on them. He died completely in six months as a whale buyer. Your only hope is to rent the houses until the market returns in 3-5 years or you find private lenders financing end-buyers who have good jobs but bad credit because they are coming out of foreclosure. You could take a loss on what you have already rehabbed and gradually reboot. This is highly unlikely due to human nature of not wanting to admit that you are wrong.
You should not assume that because you have money or are using someone else’s money that you will be successful in real estate investing. You can buy and manage rentals, rehab and retail or just wholesale deals to make money on real estate. I had suggested wholesaling to him when I first met him so that he could establish a monthly cash flow, but he felt he wouldn’t need it. The wholesaling of properties offers advantages that rehabilitation does not, so it should be considered in any real estate investment business plan.
Don’t let the experience of this whale investor happen to you. Even if your goal is to make tons of money by rehabbing and retailing, consider wholesaling to generate cash flow each month. The added benefit is that you can choose the best deals to maintain and rehab. The beauty of wholesaling is that it requires little to no money, no credit, and has no market risk, unlike cash-intensive rehab.