All Topics / The Treasure Chest / Which approach- buyer 1st or house 1st?

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  • Profile photo of EKfourEKfour
    Member
    @ekfour
    Join Date: 2002
    Post Count: 35

    OK, I’ve decided to get off my butt & learn by doing rather that sitting on the couch & reading. I know there are 2 approaches to wrapping:

    1. Find the buyers, and get them to look for the property they want to buy & then you wrap it to them. Problem is you can’t buy below market, and they’d know how much you paid. Lower potential profit.

    2. Find the house, and then the buyers. Problem is you can’t guarantee that a buyer will come up. High potential profit.

    I’ve been using approach 2, which limits me to looking for properties which will be cash positive just in case the wrap doesn’t happen successfully, for whatever reason. This has severely restricted the number of offers I can make, since a lot of properties aren’t cashflow positive just as a “buy & hold”. Also, I think a lot more research needs to be done by using this approach; demographics, population growth, unemployment, etc etc. With approach #1 it seems a lot less stressful. A trade off for potential profit I guess.

    What are people’s experiences? Steve, you seem to take approach #2; have you been successfully in marketing EVERY single property? I’ve been talking to a lady who uses approach #1, and she claims the buyers are easy to find- prequalifying them is a bit harder. Then again, her approach allows the buyer to buy what THEY want, rather than forcing them to “take it or leave it”.

    Appreciate any inputs. Thanx!

    Cheers
    Wei

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    Hi,

    Time for a bit of Friday night posting!

    You ask:

    quote:


    I know there are 2 approaches to wrapping:

    1. Find the buyers, and get them to look for the property they want to buy & then you wrap it to them. Problem is you can’t buy below market, and they’d know how much you paid. Lower potential profit.

    2. Find the house, and then the buyers. Problem is you can’t guarantee that a buyer will come up. High potential profit.


    You are correct here. When I began investing in real estate I would adopt approach #2 and seek to find the right house and then run classified ads to attract people interested in the wrap concept.

    Later though, I realised that this was not an efficient way to leverage my time and sometimes the houses that I purchased well were nevertheless unattractive to potential buyers because of cosmetic reasons (ie. the carpet was the wrong colour etc.)

    Further more, from my experience I realised that clients who selected their own home were much easier to enrol in the idea of owning it – simply because they chose it!

    That’s when I modified my approach to finding people, empowering them to find properties up to a certain figure that ensured their repayment remained affordable and then getting them to do all the searching! I started buyingn properties from the comfort of my own office desk.

    I don’t agree with your statement about buying below market. With my wraps I often buy at market and then sell above market.

    I’ve found that adopting a policy of total honesty and full disclosure means that people aren’t upset that you make a profit when you don’t try and hide it. And those that are are people you don’t want to deal with anyway.

    I simply say “Look – I’m an investor. Does it seem unreasonable to you that I am going to make money from providing you with this opportunity considering that I’m going to work as hard as I can to make it a win-win for the both of us?”

    For me, approach #1 has been the far better.

    Regards,

    Steve McKnight

    ***edited to correct my mistake of having the nos the wrong way around!***

    Edited by – [email protected] on 20/07/2002 6:31:13 PM

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of EKfourEKfour
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    @ekfour
    Join Date: 2002
    Post Count: 35

    Hi Steve,

    Thanx for replying, although I think you’ve got the numbering mixed up. Nevertheless…

    I’ve read John Burley’s Blueprint for Success, and it mentioned that the approach you took (at the start anyway) was to find the houses, then the buyers. OK so you’ve realised this is not the most time efficient way.

    Would you advise me as a newbie wrapper to follow your later approach right from the start, ie. to get the buyers to find the house that they want? I was thinking that although it’d save me a lot of time, I do not have a track record yet, and may be unable to answer some of their questions, etc.

    And finally, what is a reasonable deposit to ask for, or does it vary from case to case? Basically I want to do as high a LVR as possible to stretch my (very limited!) dollars for as many deals as possible. Just read your other post regarding being too highly geared- I’d worry about that later!

    Cheers
    Wei

    Profile photo of montomonto
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    @monto
    Join Date: 2002
    Post Count: 8

    Hey Wei,
    Although I will see you tomorrow afternoon, I thought I’ll still try to answer your question with my theoretical answer. To me, the amount of deposit shouldn’t be too little. The chances are, if they can’t save at least $5000 they might have trouble makeing the payments down the track. It’s not how much money they have that’s important, it’s how much commitment they put into owning their own house by showing how much they’ve saved.
    There is also the FHOG you should be able to get from them, at the end of the day you shouldn’t have to fork out too much of your own cash for each deal.
    I am also in a reading and searching mode, please correct me if any of my assumptions are not quite up to the reality.

    Profile photo of FergusGartlanFergusGartlan
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    @fergusgartlan
    Join Date: 2002
    Post Count: 7

    Hi Wei,
    I have been using the “find the person first” approach by advertising.
    Then I check their refs etc.
    After investing in Steve’s WSR library, I decided to just place an ad and see what happens, and panic then if anyone called.
    Well they did call, and I started to put together info and application forms to send out.
    Onr particular couple actually pushed me through the barriers I had on starting to do wrapping.
    It must be because it is such a win-win thing to do that had its own momentum and energy.
    When the 1st couple found the house they wanted, it had just come on the market, and would not last long (as it obeyed the 11 second rule).
    I sat in my office staring at an “offer to purchase” fax I had filled in.
    My thoughts were “OH My Gawd!, I’m about to fax an offer to buy a house I have never seen, I must be maaaaad”
    But then I thought “well am I actually going to do this?, or am I going to sit in this office for the next 25 years working for someone else?”
    I decided to run with my gut feeling and start the road to finncial freedom.
    Worst case I could rent it out for more than the mortagage.
    So I faxed it, and when the agent called to say my offer had been accepted, I didn’t know whether to celebrate or throw up.
    This property settles next week, and I have learned heaps on the way that I would not have if I had not taken the plunge.

    Since that scary experience, I have bought 2 other properties, where the prospects found it first, and I am loving it.
    I also have 2 other qualified prospects looking for properties.

    Ideally my prospects are entitled to te FHOG $7,000, and then on top of that I have learned to ask for a deposit of 5% of the cost of the property they want to buy ($50,000 therefore deposit $2,500)
    I am looking at charging a higher interest rate for prospects who cannot make the 5% deposit as they are more of a risk to me.
    I explain this to them and it’s OK.
    The contract of sale between my company and them states what my mortgage/repayment on the property is (I think this is the law)
    The trick is not to be backed off on telling them.
    I hope this info helps you start if you have not already.
    I use “what’s the worst thing than can happen?” to remind myself that I cannot lose, as long as I am helping people.
    Do well
    Fergus

    Profile photo of EKfourEKfour
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    @ekfour
    Join Date: 2002
    Post Count: 35

    Thank you all for the encouragement. It’s much needed during this crappy phase of my life… [:)]

    Cheers
    Wei

    Profile photo of ADAD
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    @ad
    Join Date: 2002
    Post Count: 636

    Question for Fergus…. which part of the world are you wrapping in. What price range are you wrapping ? Always interested to find out what others are doing ??
    Thanks

    Enjoy
    AD[:0)]

    Stumbling blocks are merely stepping stones for the successful.

    Profile photo of FergusGartlanFergusGartlan
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    @fergusgartlan
    Join Date: 2002
    Post Count: 7

    Hi AD,
    To answer you question, I am doing this in the La Trobe Valley.
    The value of the houses are ideally $45,000 to $60,000 as that will keep the weekly repayments close to what people are paying in weekly rent.
    Today I spoke to a lady who wants to buy the house she is renting from her Dad (he owns it) for $60,000.
    She convinced him to loan her $3,000 as a deposit (5%) which she gives me plus the FHOG for a total of $10,000 which should cover most if not all of my buying costs and deposit.
    She and her 4 kids get a house, and I get another happy customer.
    Hope this helps.
    Fergus

    Profile photo of darrenbdarrenb
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    @darrenb
    Join Date: 2002
    Post Count: 71

    Well done Fergus. Its a much safer deal if they have hurt money as a deposit. Stick to your guns and wait for the right people to come along who have a descent deposit of their own.
    I have done wraps both ways and I would say I prefer buying the house first. Call me cynical, but I dont believe I get the best price for a property if the agent knows whats going on.

    Profile photo of EKfourEKfour
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    @ekfour
    Join Date: 2002
    Post Count: 35

    Fergus,

    I’m assuming you’re adding 2% to the spread? What kind of cashflow are you getting from a $60k property? And what’s the back end profit margin that you add on when they cash you out, in other words, what do you sell a property that you paid $60k for? Thanx!

    Cheers
    Wei

    Profile photo of TerrywTerryw
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    @terryw
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    Good post Fergus

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of EKfourEKfour
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    @ekfour
    Join Date: 2002
    Post Count: 35

    OK this one’s for you Steve. If you’re getting buyers to find the house that THEY want to live in, and you get some “hurt money” from them, why should you even worry about the 11 second solution? Shouldn’t matter if rental returns were 5% or 10% should it? I assume this should only matter if you intend to find the property, and THEN the buyer?

    Cheers [:)]
    Wei

    Profile photo of FergusGartlanFergusGartlan
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    @fergusgartlan
    Join Date: 2002
    Post Count: 7

    Thanks Darren for your help in tghe past.
    To answer Wei’s question, I add 10% to the $60K for my buying costs.
    I then add 20% to that for the margin, so I sell the house for $79,200.
    We subtract the FHOG and $3,000 hurt money deposit from that and get a loan of $69,200, which is what I get paid out if they refinance.
    I have been adding 3% to the interest rate and have the loan over 30 years.
    The repayment ends up being about $135 per week for this customer who was paying $150 per week rent.
    My repayment on my loan is about $75 per week on $54K (90% of the $60K).
    So the spread is $60 per week and the lady with 4 kids gets to own a house she could never afford otherwise.
    I would say the 11 second rule applies regardless so that worst case I can rent it out and it would still be positively geared.
    Cheers,
    Fergus

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    Wei,

    The 11 Sec solution is a filtering tool for properties that you see advertised to determine in a few secs. whether or not they stack up.

    It is not a ‘be all and end all’ property investing solution, but is designed to be a time management tool.

    Cheers,

    Steve McKnight

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of EKfourEKfour
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    @ekfour
    Join Date: 2002
    Post Count: 35

    Thank you all for replying to this post. This is one of those from which I’ve learnt heaps, and triggered a lot of thinking. I’ve just thought of something that I’d like to share with you all. Instead of getting the buyer to find THE property they wanna live in, ask them to go look for 3-5 that they would like to own equally as much. That way you can just pick the one that you can buy for the most value, and wrap that one to them. What’s everyone’s thoughts on this one?

    Cheers [:)]
    Wei

    Profile photo of DavidUDavidU
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    @davidu
    Join Date: 2001
    Post Count: 101

    Wei

    I think that’s what most people do, I cerainly do. It also saves time as I don’t have to waste too much time negotiating on just one property. If I can’t get property 1 at the right price, then NEXT, on to property 2 etc…

    If I didn’t do this, my buying efforts would be stalled if I couldn’t get the one and only property they have put in front of me at the right price.

    Cheers

    David U

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