Real estate investors often insist that you earn your profit when you buy, not when you sell.
Not literally of course — you don’t actually pocket any profit upon purchase. But you set yourself up to either earn or lose money on the property when you buy.
That goes beyond “buying low.” You could acquire a property at half its market value, but if you can’t sell the property because it has a cloud on the title, you have a problem.
Before you ever put an investment property under contract, you should have a plan for disposition. In fact, you should have several contingency plans for disposition, in case Plan A falls through.
Understand your options and the process for disposition before you start buying, to lay the groundwork for profit when it comes time to sell.
Disposition is the opposite of acquisition: the process of unloading or “disposing” of properties in your portfolio.
In most cases, that means selling. But it could also mean donating the property to charity, or transferring the property to your heirs (either before or after you kick the bucket), or to some other third party.
Real estate flippers and wholesalers each have a clear plan for disposition. A long-term cash flow investor may plan to hold a rental property for retirement income, and pass it to their daughter as part of their estate. Another investor might do a seller-leaseback as a long-term flip, holding for two years before selling the property back to the original owner or buying them out.
All make for sound disposition plans, especially if you have a backup plan in case the first option doesn’t pan out.
Professional real estate investors and wholesalers have a detailed strategy and process for finding distressed properties or other great deals (acquisition). The best investors follow a similarly detailed process for disposition.
Broadly speaking, that process includes the following steps.
What’s the current market value of the property? If the property needs some TLC, what’s the after-repair value (ARV)?
Real estate wholesalers and flippers need to know both numbers before ever putting a property under contract. But long-term investors likely don’t know the precise market value of every property they own — so they need to pinpoint it to make an informed decision about whether to sell now or hold longer.
They also need to know whether any updates or repairs would boost the property value by more than their cost. In other words, which improvements would deliver a positive return on investment (ROI). If spending $5,000 on new carpets and paint would add $15,000 in value to the property, it’s a no-brainer.
Bear in mind that if you want to sell fast, you should set your price and expectations accordingly.
As a final thought on valuation, many income properties are valued based on their net operating income (NOI). You need perfect accounting to show off a property’s NOI, which REsimpli helps you automate and track among team members.
Before you start marketing a property, make sure you understand who your target market is.
Real estate wholesalers generally sell to other investors: flippers or BRRRR buyers looking for a bargain on a fixer-upper. Flippers, in contrast, typically target homebuyers willing to pay top dollar for a newly renovated home.
It takes different messaging and marketing strategies to reach each of those target buyers.
For instance, wholesalers usually invest effort networking with investors to build an email list of buyers. Flippers usually sell by listing on the Multiple Listing Service (MLS) with a real estate brokerage.
While hardly an exhaustive list, common marketing strategies include:
Not to brag, but REsimpli can help with many of these strategies. Beyond maintaining a marketplace for off-market properties, REsimpli also offers point-and-click marketing website setup, easy automation through tools like minimum acceptable offers (not displayed to buyers), and “Buy Now” offer prices. Just sayin’.
Wholesalers in particular need to maintain a robust buyers list. I’d go so far as to say that building a buyers list is one of the two core tasks of successful wholesaling (scoring great deals on properties is the other).
Every day you should invest time in growing your buyers list. Put in the work up front, so that when you put a property under contract, you can flip that contract in a matter of hours by sending a single email to your list. Also stay in touch with your list about inventory or pricing updates, special discounts, and the like.
Don’t think of your buyers list as a cold, anonymous group of names and email addresses. Foster individual relationships with each investor on your list. Hop on calls with them, invite them to coffee or happy hours, do video tours of properties for them. The better they know, like, and trust you, the more likely they are to buy from you at a moment’s notice when you have a deal for disposition.
Just as you need a system for managing acquisition leads to score great deals, so too do you need a system to manage disposition leads.
Who has expressed interest in buying? When? Did they make an offer, verbal or written? What’s the best way to contact them to negotiate further? Can your team access all this information at a glance?
Just like helping you manage your acquisition leads, REsimpli can also help you manage sales leads. After you post a property listing or add it to your marketing website, our CRM software tracks all leads and communications from prospective buyers.
No matter what system you use, make sure your system keeps everyone on your team aligned with the same up-to-date information.
An offer came in, and now comes the fun part: negotiating terms.
While outside our scope here, learn everything you can about real estate negotiation. If there’s one thing I’ve learned about negotiation over the years, it’s to avoid falling into the default roles of adversaries.
Instead, tailor all your communications to be collaborative, not combative. If a prospective buyer makes a low offer, try replying “Hey, I want to build a long-term relationship with you, so I want to work with you as much as I can. The price you offered isn’t within a range we can accept for this property, but we’re happy to sit down and try to work out a price that works for everyone. And if we can’t find a price that makes everyone happy for this one, that’s fine, we’ll try again on the next one.”
And remember, negotiation doesn’t just involve price. It can also involve concessions, timing, financing, and other variables, so consider giving ground on an area important to the buyer in exchange for ground more important to you.
Don’t pop the champagne just because you’ve signed a contract of sale. Until pen goes to paper on the deed and money changes hands, you have little more than a yet-to-be-fulfilled promise.
Someone needs to stay in communication with the buyer, with the title company, with the settlement officer. If you work with a team, several different people might pick up the ball over the weeks before closing. Which is precisely why it helps to use a real estate CRM system, whether ours or a worthy competitor’s.
Set a timeline for when you expect certain milestones achieved. For example, the buyer’s appraisal should be completed relatively early in the process, and the title reports cleared later in it. Consider tasking a specific person on your team as the transaction coordinator to ensure every step is completed on time. They can log it in your CRM software, and stay on top of both the buyer and other support services.
As touched on above, the process for flipping a contract as a real estate wholesaler looks a little different than flipping a house or selling a long-term income property.
Many wholesalers never actually take legal ownership of the property. They simply assign the contract to the end buyer. But that doesn’t mean their work ends once they sign an assignment contract — they still need to ensure the closing actually happens. Stay on top of the buyer, the title agency, and anyone else involved in the settlement to see it through. After all, you’re still the buyer listed on the original contract of sale.
Some wholesalers conduct a double closing, rather than using an assignment contract. They actually close on the property in one settlement, and then turn around an hour later and sell it to the end buyer. It adds several wrinkles, most notably that you need to actually fund the initial purchase. And it leaves you holding title, in the event the end buyer falls through at the literal last minute.
Still other investors practice “wholetailing,” where they buy the property, perhaps do a little minor cleanup, and then sell it for full as-is value to other investors.
Each of these strategies come with their own risks and rewards. Read more about the nuances of disposition in real estate wholesaling if you plan on building a business around it.
I’ve owned dozens of properties over the years, and invested passively in dozens of commercial properties. Every time I got in trouble disposing of a long-term investment, it was because the property didn’t cash flow.
When an income property actually, you know, produces income, you have far more options for disposition. In a bad market for selling, you can simply hold the property longer, even if that requires refinancing out of a bridge loan. You can wait out a weak real estate market, and sell a few years later in a seller’s market.
Or never sell at all, holding the property indefinitely for cash flow to fund your lifestyle and retirement.
Properties that lose money every year back you into a corner. You have to either sell now — even if it’s for a loss or slim profit — or keep throwing good money after bad just to keep the property out of foreclosure. At that point you own a liability, not an asset.
Finally, properties with strong cash flow open the door to creative disposition options that you might not otherwise be able to pull off.
Sure, you can do things the same way everyone else does, listing properties on the MLS or email blasting your buyers list. But that doesn’t always work, at least not for the pricing or timeframe you want.
Some investors get more creative with their property dispositions. They might offer seller financing to attract buyers that can’t secure traditional financing for some reason, but still present an acceptable credit risk. Perhaps they take extra collateral from the buyer, that an ordinary lender couldn’t accept.
Or maybe you work out an installment contract, where the buyer doesn’t actually take title now, but they take possession and agree to a future purchase price and timeline. The buyer might put up a deposit to reserve that purchase price, and in the meantime they make monthly payments.
The entire deal could be structured around the original seller’s financing, such as a seller leaseback with a wraparound mortgage. When they buy the property back from you, they might take their original loan back over, and find some other way of paying your fee.
Typical steps for property disposition are all well and good, but there’s no one-size-fits-all in real estate. Get creative to get deals done — and always aim to have contingency plans for disposition if something goes wrong.
Real estate dispositions aren’t always cut and dry. In fact, it’s a rare real estate deal where everything goes smoothly.
Selling or otherwise disposing of properties involves a lot of moving parts. You or your team need to stay on top of the buyer, their financing approval, property inspections, the title work, the settlement date.
Use a CRM to manage leads, inquiries, pending contracts, and settlements. If you want your dispositions to settle on time, you need to take responsibility for every step in the process. It’s your profit on the line, so embrace accountability and actively manage every disposition.
