Be Careful Out There

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I’m on a safety and protection kick this month, so going to roll with it.  This time, let’s talk more about liability protection for your awesome rehab.  This is especially poignant right now because it’s a little difficult to find general contractors (they’re all booked solid), so the natural instinct is to find anyone that can fog a mirror while operating a worm-drive Skilsaw.

I know, I’ve been there.  It’s frustrating, the clock is ticking on your rehab and you can hear the money flowing out of your pocket into your private lender’s.  Not that you don’t just love your private lender to death, it’s just that you want to get on with the next one and keep things moving, right?

Here’s the potential problem with hiring Ted & Ed’s Most Excellent Carpenters, Inc. for your project.  You may have scored a good new find for your projects, but each and every time that you get a new contractor on your projects, acting as a general or a specific trade, you have to check a couple of things.

First, make sure that YOU write the contract between you and your contractor(s), otherwise the terms will all be in favor of the contractor.  If S/he refuses, hard as it may be, you should walk.  You have not experienced pain as difficult as having your contractor not showing up on your job site because s/he has taken on other jobs along with yours and there’s no contract language.  Tick-tock on that private money.

That’s a whole world of discussion and exploration to talk about contractor agreements; we spend an entire class session discussing it in our REI Blueprint Course.  But the one thing that you must have and must follow-through on is your contractor’s liability insurance or bonding, along with that of the subs.

The best first step to get this assurance is that your agreement makes it clear that your relationship is an arms-length 1099 sub-contractor arrangement, and that no one is your employee.  Then you must act in this manner – you can’t go buy materials and drive them to the job site.  This is a no-no and can constitute an employer-employee relationship if things go bad and lawyers get involved.

Secondly, you need to require (a) proof of Wisconsin licensure as a Dwelling Contractor, and you can check this yourself at the DSPS website at https://app.wi.gov/licensesearch.  You should also require that your contractor provide a copy of his or her liability insurance for your project files.  Make sure that you check the expiration date.

Wisconsin requires that Dwelling Contractors show proof of insurance or file a $25,000 surety bond with the state as proof of financial security.  Your best bet is to require that liability insurance certificate, because a surety bond will not do much good if someone falls off the roof and breaks a leg.  When that happens, people tend to sue everyone in sight, and you need to be protected from that.

This also calls into play how your company is organized and the protections that you have set up, including your own liability insurance.  If you’re in an LLC (typically recommended), be sure that the operating LLC for your rehabs is not the same company that’s holding any rental properties, or they are potentially exposed to reach-through liability if something happens in the rehab company.

As always, I’m not a lawyer or an accountant and, even though I’ve seen them on T.V., I wouldn’t dare advise you on what to do except to tell you to go get a good attorney and accountant to set all this stuff up for your company or companies.

If you’d like to find out more about all this stuff, drop in on our Real Estate Investor Blueprint informational dinner meeting on September 20th where we talk about the topics that we cover.  Go here for information:  REI Blueprint Intro

 


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Shifting Gears a Little

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We’ve been talking about safety over the last couple of these little chats, which is under the risk umbrella of “liability”, so I’ll hang here under that cover for a little bit.  First of all, if you’ve got an established entity, probably an LLC, you’ve already started the basic requirements of liability protection.

If you’re touring a vacant OR an occupied property and “something happens”, your first level of defense is going to be your LLC which, by the way, assumes that you are visiting that property as someone doing business in that LLC.  So what kinds of things could possibly happen during a property visit?

Wow, well – any number of things, many of which you may not have caused, or inadvertently so.  Like turning on a light, but the fixture is shorted out and wires heat up and a slow-burning fire begins to smolder,  only to burst out long after you’re gone.  Did you do that?  Well, yeah – but did you cause it?

Or you test a kitchen sink and it’s difficult to turn on the faucet.  Finally, you get it to turn, but no water comes out, so you shut if off again.  However, something broke inside that faucet and long after you’re gone, water starts leaking and eventually turns into a massive flood.  Did you do that?  Cause it?

As you can see, there’s an unlimited number of wacky things that can happen that someone can attribute to your carelessness or neglect, and property owners may be looking for someone to blame.  Now, in these simple examples, homeowner’s insurance should cover it all, but what if there is no insurance, or the property is bank-owned or corporate-owned without that kind of insurance?

Another area of concern with occupied properties or properties that may be in a probate situation is that there may be valuable possessions in the property.  If you are someone that has gone through the property then something turns up missing, you could be called out, questioned, or charged with theft.

So having that LLC protection is a good start, but it may not be enough.  Talk to other investors and ask them about their Business Liability Insurance – who do they use and what kind of policy they have.  It may be something you’ll want to look into.

Over and above these “instruments” of protection, nothing does it better than common sense.  For example, while it may be fun to take friends and family members through properties that you are looking at, if they are not part of your LLC, it may not be a good idea.

And it goes without saying, but I’ll say it anyways – you absolutely need to be above reproach when it comes to integrity and honesty.  It doesn’t matter if the property has been vacant 4 years and all of the owners are long gone, do NOT ever remove a single thing from a property until you own it.  Yes, we often see cool stuff just lying there, but until you own it, it’s still someone else’s stuff.  Period.

If you maintain the highest level of integrity and ethics in your dealings with everyone, whether they are watching or not, your business will be far better off.  And you’ll sleep better knowing that’s how you do things, whether it’s YOU or someone that works for you.  Be safe, be honest.


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Danger, Will Robinson!

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A select few of you will immediately know that unobscured reference to a favorite television show of the mid-to-late 1960’s called Lost In Space.  The show’s helpful robot was programmed to protect the young man of the family, Will Robinson, from the dangers around in their space travel.

But what if the only space you get lost in is that trashed-out vacant property?  Well, I’m here to tell you that there’s plenty of things to watch out for – plenty of danger – to you and anyone named Will in your party.  Continuing with the thread we started last week, let’s talk about a few more ways you need to be alert and careful when looking at these kinds of properties.

This warning does not generally apply to properties that are inhabited, as any dangers there would likely already be identified and, if not fixed, at least marked somehow.  So, we’ll focus on vacant properties that you may come across in your travels through space.

One of the most prevalent dangers of a vacant property is mold and toxins.  It’s remarkable how fast a property degrades when people leave, and many times this is because when humans move out, critters move in.  Most critters don’t abide by proper bathroom etiquette, so their biological output goes just about anywhere, and frequently everywhere.

When these bad boys and girls move it, they generally don’t knock either – they love chewing through soffit, fascia, or even roofing to get in.  Of course, that kind of damage also lets something else come in quite freely – the rain.  And soaking wet drywall, studs, carpeting, and other building materials are ideal breeding grounds for black mold.

Mold is everywhere, but when it’s allowed to proliferate and grow, it’s starts showing up as dark spots on surfaces.  I once toured a property where one wall by a leaking roof looked like it was wallpapered with black fur.  Yes, that is quite frightening.

You can protect yourself to a large degree from these things by wearing a respirator.  If you get into a property where basic respirator technology is insufficient – get out.  In particular, and this is really important, if you find yourself in a Meth lab property, run – don’t walk – to the nearest exit.  The only remediation for a Meth property is complete demolition and soil-incineration.

In many cases, a particulate nuisance mask like a 3M 8200, cat N95 is sufficient for dusts and light mold if you’re going to be in a property for under 30 minutes.  If the airborne toxins are strong or really offensive, you may want to step up to a cartridge-style unit like the 3M 6191 cat P100 that has two screw-on discs on either side of your face.

Any of these half-face style masks only protect you against inhaled irritants; they will not stop gasses or vapors, and if you encounter a property that would require something serious, you should reconsider even looking at that property.  There are plenty more in better condition, and the costs of repair of such properties may be prohibitive.

The bottom line is simply this: use common sense when walking through vacant properties, and be vigilant for lurking dangers like mold, animal feces, structural problems or that cunning Dr. Smith.


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Solid Kitchen Floor Danger

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I was looking for something in my old properties folders when I came across a couple of gems that made me smile and, at the same time, made me thankful that no one was killed in the process.  Now, before you think I’m being all dramatic, let me explain what one of these two properties was all about.

This was “back in the day” when most of the properties that we acquired came off the MLS.  Life was so much simpler then.  Banks would foreclose on properties in default, many of which had been long since abandoned, then they would take them back into REO inventory and have a REALTOR list them.

We miss those days of so-called easy pickin’s when banks had no intention of touching the properties, they just wanted them GONE to eliminate the “non-performing asset burden” on their books.  Now there are “programs” and “PMI” and other things that can make holding these assets lucrative.

We all thought it was weird when a bank would come in, strip out carpet, spray everything in sight with a bad flat white paint, carpet the floors, and then list the property at a price as though it was newly remodeled.  It was truly lipstick on a pig in the strongest sense of the word.

So, let’s talk about property 1 – it was pretty trashed and had that special brand of homeowner uniqueness to it – one step up into the living room, one step down into the kitchen, two steps into the main floor bathroom, etc.  You get the idea; an ADA nightmare.

But we noticed something interesting about the kitchen – the floor was rock-solid, but all the surrounding floors (one and two steps up and down) were regular-sounding wooden subfloors.  The kitchen sounded like it was “flat on grade”.

When I got to the basement, I was looking up at the floor joists and noticed a severe sag across all of them in one area, and there were some makeshift timbers stuck in random places to hold up that sag.  Then I realized that this was under the kitchen floor that we thought was so solid.  Really confusing.

After more investigation, I determined that a previous homeowner had poured about a 3” slab of concrete directly on the wooden sub-floor of the kitchen.  He must have been pretty pleased with how solid that floor was, and I wonder at what point the joists started sagging.

It would not take much for that entire sub-structure to collapse under all that weight.  As the joists sag, they pull away from their connection points, either nails or joist hangers, until there’s nothing there to keep them up, then – boom.  Because part of the kitchen was on an outside wall, this could have caused failure of that wall, collapsing all the way to the roof.  If there were people inside, they could have died.

Once I realized this, we carefully got out fast and I reported all of this to the listing agent.  Who knows if anyone ever did anything about it.  And I have no doubt that many other investors toured that property before and maybe after me.  Everyone was at serious risk of death for just walking around.  Just imagine someone thinking the kitchen floor was really cool, then jumping up and down on it to feel the firmness.

So, the take-away is this:  If you’re touring vacant properties, especially those in REO, learn what possible hazards could exist and look for signs of those hazards as you carefully move through the building.  You should have a good familiarity about generally-accepted building practices so you can identify things that are potential life-threatening hazards.

We’ll take some time in later installments to talk about the most common hazards for you to be aware of as you’re touring properties, and as you’re preparing to rehab a property back to usable condition.


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Real Estate Investing and Brain Surgery

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I hate flying.  Not only do my arms get tired, the whole process has become encumbered with ridiculous charges and even more ridiculous assertions – like the fact that 3.5 ounces of shampoo has the potential to bring a Boeing 777-300ER widebody out of the sky and smash 396 passengers into the dirt.  Really.

Sorry for that “arms tired” pun – too much CaddyShack, I guess.  I used to fly so much that I had one of those super frequent flyer special god-like cards that often whisked me into first class.  Trust me, it’s not all that glamorous, flying is just annoying and stressful; even more so now.

So, we drove to North Dakota last week, and the nice thing about a couple of real estate investors driving in the car is that we will often detour through interesting neighborhoods – because we CAN – with a fair amount of ooo’ing and ahhh’ing and the frequent exclamation of “send ‘em a letter”.

It made me think – how much different is real estate investing in Bemidji, Minnesota than in Madison, Wisconsin?  Well not much, but the devil’s in the details.  True, there are distressed properties and, more importantly, distressed owners, and the real estate law is similar, so what’s different?

For one, real estate investing is a contact sport, and what you need to play are lotsa contacts.  From contractors to REALTORs to title company to attorneys to suppliers – all relationships that need to be built and nurtured.  You can come into an area and start from scratch, but it takes time.

It’s one of the reasons in our coaching program that we introduce students to the people they will need to work with.  So, no matter where you are, find someone that can introduce you to the people that you will need.  A reference is 100 times better than cold-calling – on both sides of the equation.

The other thing about real estate being “local” are all the small nuances that you learn when you live and work in an area – the state of the real estate market, local customs, character of neighborhoods, building inspection processes and, of course, where to get the best coffee and tacos.

Where people looking at real estate investing have a disconnect is in knowing what this profession is all about.  True, there’s lots of moving parts and technical aspects related to, say, rehabbing a house.  But we can (and do) teach that over a period of 8 weeks, 3 hours a week.  It’s all the other stuff that matters.

One of my favorite analogies is to liken real estate investors to surgeons.  Not that this stuff is brain surgery by any stretch, but both the surgeon and the real estate investor are practitioners.  The best way to see what I mean is to get on Netflix and watch Grey’s Anatomy from the beginning.

Grey’s interns come out of 4+ years of intensive book-learning in pre-med and full med programs at a university, and they still don’t cut anyone open until they’ve had a LOT of time in the O.R. with an attending surgeon that shows them the nuances to put their book knowledge into practice.

So, don’t focus entirely on the book knowledge – for sure, get some good schoolin’ – but focus more on finding your “attending investor” and let his or her knowledge and experience guide you and help navigate you around the mistakes and pitfalls; some of which can be costly (or cratering).

These things all contribute to the notion that real estate investing is local.  It’s not the houses, it’s not the state of those houses, it’s not the distressed state of owners.  It’s about resources, understanding, developed skills, and the support around you.  If you don’t have that support yet, go find

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Property Tour #3 Is Only a Few Weeks Away...

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One of the favorite features of the Madison REIA Blueprint Series is the property tour.  For those enrolled in the program, we do 4 live property tours in and around Madison every year.  Why do you suppose these venues are so well-attended and loved?

Well, let’s see – the first thing that comes to mind is the “HGTV Effect” as we like to call it.  This is where people really love to see a distressed property that’s essentially been left for dead, abused, and misused for many years, inhabited by raccoons and their relations and generally just trashed.

Yes, we’ve got plenty of those on the tour (good thing we provide masks).  Also inside the HGTV Effect is the re-building phase, where people get to see how our rehabbers have chosen to bring a property back to life, what updates they’re doing, and how they are proceeding with the process.

During all this, of course, we stress the educational part of the process – it’s what the REI Blueprint is all about.  So we have participants use their Rehab Estimate Worksheets to arrive at a rehab cost, and we analyze that work right on site of the properties where we do this.

Property Tour #3 is coming up on Saturday, August 26, 2017, so if you’re a bit of a real estate geek and this sounds like a fun thing to do all day Saturday, you’ll want to check out the REI Blueprint Series on our website.  CLICK HERE for more details on this event and the REI Blueprint.


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Pay What?

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We’re often asked how to figure out what to offer for a property, and it’s one of the earliest things that
we teach in our Blueprint Series and are constantly reinforcing in our coaching program. Many people
think that the approach real estate investors use is just to “low-ball” the price and see what happens.
Besides being deceptive and an unfair business practice, “low-balling” rarely works, and it creates a poor
reputation for ethical and honest real estate investors. Let’s take the high road and show you exactly
how to arrive at a fair offer price, then stand behind that price and how you calculated it.
The very first thing to do is to determine what the house would be worth completely fixed up and in a
move-in- ready state. The most accurate way to do this is to use the Multiple Listing Service (MLS) to
look at what similar houses have sold for nearby and recently.
The catch there is that only real estate licensees like a REALTOR or a real estate broker is granted access
to the MLS, and only through a real estate brokerage. So, if you’re not a licensee, your best bet is to
hook up with one who is willing to work with you and perhaps be paid by selling your finished property.
The process of finding these comparable properties is often called “getting comps”, and it is part science
and a lot of art. The art is in having a good working knowledge of neighborhoods and having a sense of
where the market is heading. In other words, being good at reading tarot cards might be a useful skill.
Let’s say that you arrived at good comps of $225,000 for a property. We call this the “After Repair
Value” or ARV for short. The seller needs to get out, and the house is in rough condition; no REALTOR
would list the house as it is; it may not be financeable by a bank for many reasons (that’s another post).
You visit the house with your handy-dandy Rehab Repair Estimate Worksheet (oh, you need one of
those? Then CLICK HERE) and you get to work. Yes, using this worksheet is also part science and some
art as well, but with a little practice, you get good at it.
When you run through the worksheet, we’ll say that you came up with $53,000 in repairs. Not an
unusual number for a house in rough shape; this stuff adds up fast. Now the (simple) magic begins. To
figure out what to offer, you multiply the ARV by 70% and subtract the repair costs. Done.
In this case, 70% of $225,000 is $157,500, less repairs of $53,000 yields $104,500. That’s what we call
your Maximum Allowable Offer, or MAO. We use 70% because the difference, 30%, is what we need for
things like holding costs (utilities, insurance, etc.), closing costs, and your profit. It’s a solid number.
There are other schools of thought that have you doing extremely elaborate calculations, including
things like the actual cost of utilities and insurance, closing costs, etc., but in the end, they all tend to
average out to 30%. You could say that’s one weird little trick, but we won’t. It just works.
It’s important to stress the VALUE of your service to the seller. They can be DONE with this problem in
as quickly as a week, and they will pay no commissions, have no repair or even clean-up costs, and walk
away with a check. Fixing it up and using a REALTOR can be costly both in time and money.
So the key to being an effective, ethical real estate investor is to have a process and a plan for
calculating your offer prices, stick to that plan, and show your seller what he is up against and why you
are a great solution to his problem in the long run.

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From Distressed Properties to Distressed Owners

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Back in the day, which was a Wednesday, investing in real estate pretty much meant that you bought a property and rented it out.  Sometimes it was a duplex, sometimes a single-family house, sometimes a 4-unit, and up from there.  The goal became to have as many “doors” as you could get to increase your income.  This worked swimmingly for quite a long time, and then something new appeared – on TV.

Bob Vila and the gang came along with “This Old House” and started the rehabbing revolution.  At the time that he was doing it, the owner of the house was right there playing the game with him.  Then someone else came along and discovered that you could buy so-called “distressed” properties, fix them up, then re-sell them on the open market.  A new practice was born; they called it “fix-and-flip”.

Early on, “distressed” meant houses that were in pretty bad shape that the bank had foreclosed on and taken back into their “Real Estate Owned” (REO) inventory.  The interesting thing was that REO inventory was toxic to a bank – the rules used to be that the bank had to set aside seven (7) times its “non-performing asset” value in liquidity (cash) that it could no longer use for loans.  Consequently, if the bank had, say, $500,000 worth of REO inventory, it had to keep $3.5 million liquid that it could not lend to customers.

This could quickly crater a bank; whose lifeblood is the ability to make loans.  So, it was with little surprise that it was relatively easy to acquire these properties from the bank at severe discounts.  They were grateful to have them gone.  Now, this explanation is a bit trivial and used for illustration purposes only; it does not go into new liquidity coverage requirements (LCR) and all the changes that have occurred since the 2008 crash and the introduction of Dodd-Frank.  And we’re only talking about portfolio loans; those that are held by a bank.

But back then, foreclosure was not common and REO inventories were exceptionally small.  It’s only when banks relaxed lending requirements (some say to the level of the ability to fog a mirror), that loan defaults became rampant.  The resulting explosion of REO inventory was astounding.

Fast-forward to today and this is no longer a good way to acquire property for a real estate investor.  All the banking changes have these non-performing assets (REO inventories) exerting less impact on bank operations, and with the high demand for housing, banks can afford to sit back, put lipstick on a pig, and get retail prices for properties held in REO.  This does not work for real estate investors that need to acquire at a discount.  And banks are also selling off low-performing and non-performing loans to note brokers, getting them off their books without foreclosure at all.

That last piece has the effect of reducing the appearance of housing foreclosures because, while the note may be sold at a loss, the bank skips the whole foreclosure process.  Some say that this may have been engineered to give the appearance of a rebounding economy in the housing market.  And it seems to have worked.

So, where are we today with all this?  Well, a real estate investor that is looking to acquire properties is working directly with the distressed owner to solve his problem on the front-end long before the property ends up as an REO.  And in many cases, “distress” simply means not wanting to list a property with a REALTOR and endure that whole process.  As a result, the marketing practices of a real estate investor have shifted dramatically away from dealing with banks and empty, distressed properties to working directly with distressed owners and active properties.


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Flipper and Other Mutations

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If you're a sci-fi geek and you just stumbled on this tome, I'm sorry to disappoint.  I'm not talking about people walking around with a third arm protruding from their chest or additional eyes on the back of their head, although in some instances, I would personally welcome such appendages.  If you've ever worked on a residential construction/rehab project or have children, you know exactly what I mean.

Instead, let’s look at how the media has mutated the public discourse on the perception of Real Estate Investing and Real Estate Investors.  I don’t just mean TV and print media here – there’s plenty of accountability to be passed around to social media and so-called “real estate gurus” as well.

There was a point in time not too many years ago when the term “Real Estate Investing” referred to the purchase of properties for rental, creating income.  The person who did this was a Real Estate Investor. 
President Dwight Eisenhower kicked off the whole real estate investing thing in this country with the 1960 enactment of the Federal Real Estate Investment Trust Act (REIT).  But Real Estate Investing as we know it today got its launch in 1980 with PBS Television’s This Old House from WGBH in Boston.

By the ratings explosion, it was clear that the creator, Russell Morash (who also introduced Julia Child to the world), had stepped into a surprising phenomenon.  People loved this stuff.  They loved doing it, but they really loved watching it on TV.
Fast-forward to today and cable networks such as HGTV, TLC, and DIY and countless web sites owe their existence to this phenomenon.  Here’s just a couple of ways that they have contributed to the mutation:

For those of a certain age, “Flipper” referred to a lovable bottlenose dolphin whose antics and social message aired weekly on NBC.  Today, a “Flipper” is anyone who rehabs houses.  But, technically, a “house flip” is a wholesale deal – where you control a property with an accepted offer, then “flip” it to someone else to fix up.

How the term rehabbing became flipping is T.V. shenanigans.  The term is really “doing a fix-and-flip”, which is where a rehabber purchases a property taking title to it, repairs and renovates it, then sells it on the retail market to someone who’s going to live there.

But the word “flip” is catchy in T.V. show titles and commercials, so flipper, flip, and flipping became shorthand.  Flipper is turning over and over and over in her watery grave, no doubt.

The term “Investor” conjures up notions of using one’s own money to do a deal, but that is rarely the case.  No, today an investor is someone that invests, time, money, or other resources into a real estate project.  Most of the time, that’s time, resources and OPM - Other People’s Money.

And because of the proliferation of so-called “real estate gurus” that fly into town, sell people the dream and completely focus on making money at any cost, investors are frequently portrayed as “low-balling scum” – the kind that offer a ridiculously low price and strong-arm little old ladies into selling.  Sigh.

And it’s no coincidence that the groups flying into town are the ones buying time on the networks to air their flipping shows.  Oh - you thought that the network was just featuring them?  Nope, those shows are paid for with money that’s being taken from people who want to be just like them.

So, the message, grasshopper, is to do your due diligence, learn exactly what this industry is all about, get the terms right, and learn how to contribute to the betterment of the community with your very visible work.  Stop in at the Madison REIA and they’ll show you how.  Tell ‘em Flipper sent you.

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What is Wholesaling?

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There is a lot of confusion out there with newbies and some seasoned investors as to what exactly Wholesaling means.  The easiest way to describe this is to look at the Minnesota State Statue: 82 REAL ESTATE SALES REGULATIONS Sub 55 Definitions. Condensed Version: You cannot sell a property for another for a fee without a real estate license.  So the question is, as a wholesaler, what are you selling?  If you have a property under contract, you can sell your rights to the contract, not the property.  This is done via an assignment agreement which allows the assignee to step into your place as the buyer.  That is the basics of wholesaling. 

Some states actively go after real estate investors for incorrectly wholesaling.  These investors get themselves into trouble because they can’t explain legally what they are doing and therefore say the wrong things, like I am trying to find a buyer for the seller.  That shows intent, and as the previous FBI Director James Comey famously explained, it comes down to intent.

The problem is that your true intentions may not reflect your stated intentions because you don’t understand the legality of what you are doing.  If you just change what you are saying, to reflect your true intentions, then you will avoid a lot of aggravation and harassment from the state. Read More...


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