Real Estate Wholesaling
By Scott Costello
1. Company Information
Scotty Buys was formed in July 2008 in order to help distressed property owners in the Morris County, New Jersey area. We are a company that specializes in purchasing properties from motivated sellers in order to wholesale them to rehab investors and landlords. Scotty Buys is owned and managed by Scott Costello.
2. Management Information
Scott Costello grew up in the desirable Morris County, NJ area and currently resides in Hanover Township. Combining his familiarity with the area and continued research into the investing market will give the company a distinct advantage . Scott is working towards obtaining his PHP (Professional Housing Provider) certificate by attending numerous events sponsored by the Garden State Real Estate Investor’s Association (GSREIA). Scott has worked in the finance field as a software developer to help manage project budgets. His experience in dealing with people and solving complex problems will contribute greatly to his success as a real estate investor.
3. Company Objective and Purpose
Scotty Buys purchases residential real estate in the Morris County, NJ area, specifically Morristown, Cedar Knolls, Whippany, Morris Plains, East Hanover and Parsippany. Our focus is on single family homes that can be acquired and renovated at a cost of 65% or below of the current fair market value. Due to the seller’s circumstances, Scotty Buys is able to obtain the desired discounts, which will insure a profitable future. The after repair value (arv) of these properties will range from $250,000 to $425,000. While our main objective is to make a profit, we are also aware of our responsibility to the communities we do business in, and our role in the betterment of these communities.
4. Company Summary
Scotty Buys invests in residential real estate by purchasing distressed properties below 70% of fair market value. Our strategy is based solely on making sure the profit is made at the time of purchase and not on speculative appreciation months or years down the road. Our profit for the first year is expected to be low because we are in the early stages of the business cycle. As we gain more experience we expect our profits to increase. As we develop our business we will put in place a solid group of people with defined roles that will ensure our success such as Realtors, settlement attorneys, contractors, and bankers. As with any business we will continually evaluate each member’s role and contributions and make necessary changes
5. Strengths and Weaknesses
One of the strengths of Scotty Buys is we are a small company which will allow us to run efficiently, enabling us to make quick and educated decisions. We are local to the area of our investment properties which gives us a distinct advantage in knowing the market and being able to locate profitable investment properties.
Our weakness is our lack of relationships with industry professionals, thus making initial deals more challenging. As we move forward and gain more experience these relationships will develop and become a strong source for referrals and contribute to our success. Being a small company we will have to pass on certain opportunities and only focus on taking down the most profitable deals. However, we’ve acknowledged our shortcomings, and will address them by outsourcing things such as book keeping to qualified professionals.
Over the course of the next year, our goals are to establish relationships with banks, realtors, accountants and other investors, and to build a marketing campaign that will lead to a steady flow of leads. In our first year we hope to wholesale two to three properties with the understanding that it will be a challenge until we build our relationships.
7. Start-up Summary
Scotty Buys will receive initial funding from its principal in the form of capital contribution and short-term loans. The start-up expenses will be approximately $10,000. These expenses are related to legal services, marketing campaigns, office supplies and equipment, and working capital.
In the beginning our sole efforts will be focus on generating a steady flow of leads from prospective sellers. Out marketing plan which is outlined later in this plan will be implemented and measured for its effectives.
II. Market Analysis Summary
Scotty Buys invests in distressed residential real estate. The main target areas will be those areas that are in high demand by first time home buyers in the Morris County area. These areas are Morristown and Morris Plains to name a few. They have stable resale values yet provide sufficient amount of opportunity. Once the target property is acquired it will be quickly resold to a rehabber or landlord for a $5,000 to $10,000 profit. The wholesale of a property take 30 to 90 days.
1. Market Segmentation
Scotty Buys plans to wholesale most of its properties; however, as we progress and our profits allow it, we intend to begin rehabbing to sell for retail as well as holding select properties as rentals for the long-term investments. The cash flow generated from these holdings will be reinvested into the business and pay down the mortgages. With this strategy we believe we can sustain ourselves through real estate down cycles.
2. Market Strategy for Acquisitions
The properties targeted by our company are affordable single-family homes in predominately first time homebuyer neighborhoods located in Morris County. The resale value of the homes ranges from $250,000 to $400,000.
Due to our limited marketing budget, we will focus our efforts in finding motivated sellers in a smaller, more local area at first. We will market to Notice of Defaults Pre-foreclosures (NODs), For sale by owners (FSBO), For Rent By Owners (FRBO), Expired Listings, Free and Clear, Center of influence, Probate, Divorces, Bankruptcy and vacant land in need of repair.
We will obtain these leads by searching public records for Morris County, as well as from our relationships that we’ve created through our networking amongst other Real Estate Investors and professionals. For networking with other investors we have joined a local real estate investors association and attend all their meetings. We have established relationships with investors, who obtain more leads, then voice their interest in buying and we pay them for the properties that we actually purchase. This will help us keep our marketing costs down in the early stages.
3. Market Strategy for Sales
We will market our homes to other investors who are looking to rehab the properties for resale or renting. To find these investors Scotty Buys will do the following
· Offer the properties to investors on our buyers list that we have built up through networking.
· Advertise online at Homes.com, Harmonhomes.com, Homesandestates.com, NJMLS.com., GSMLS.com, Activerain.com, Zillow.com, Trulia.com, Realtor.com, Googlebase.com, OurNJHouse.com, ExitGolden.com, Exitrealty.com, Postlets.com
· Advertise in local news papers The Star Ledger and Daily Records
· Present the property at our monthly Real Estate Investors Association meeting.
· Bandit sign out in front of the house
An added bonus to our marketing is that we will identify potential buyers for any future properties we wholesale. This will enable us to target areas/properties that we know our buyers are looking for.
4. Competitive Edge
Our Contracts get accepted even when they are lower than the competition because they have none of the contingencies that are typically associated with real estate contracts. In addition, we offer quick settlements, usually less than 30 days.
III. Implementation Plan
A. Marketing for Purchase
* Send out Mailers to our distressed home owners ever month
* After receiving calls from potential sellers we will determine motivation over the phone by asking leading questions and listening to what they have to say.
* If seller is motivated enough we will setup an appointment to look at the house and evaluate them.
* Before appointment we will do our due diligence on the prospective property.
* At meeting with home owner we will determine a repair estimate
As of right now Scott Costello is responsible for marketing and purchasing properties. It is the goal of Scotty Buys to follow up on all leads within 24-48 hours.
B. Pre-Purchase Duties
Once we have the property under contract we immediately contact our settlement company to order the title work and schedule a settlement date. During this time we contact our lender and forward all of the necessary information to them so that a file can be opened and the financing process can begin. We will also start to market the property to our buyers list in order in order to find a buyer before we even settle with the seller. If we were to rehab this property this is where we would contact the contractors and set up a scheduled base on our closing date and also call the insurance company to obtain the appropriate insurance policies.
3. The Rehab Process
At current time we do not plan on rehabbing any properties, but it will be one of our backup exit strategies in case we are unable to wholesale to another investor. There will be a separate business plan for this situation.
4. Office Management
In the beginning, office tasks will be minimal, but as time goes on there will be many more tasks that will be begin to keep us in the office rather then in the field obtaining deals. Tasks such as filing, paying bills, collections, answering the phone, scheduling appointments, etc. When the appropriate time comes we will hire a capable book keeper who will work a few hours a week to free up our time. In addition to a book keeper, we foresee needing to hire an administrative assistant to take on many of the other office duties, answering phones, filing paper work and other office functions so we can deal with more profitable tasks. We will pay well for this position as it will be imperative for them to be competent and hard working.
IV. Sales Strategy
Upon locating a property that meets our criteria, we will immediately market it to our buyers list in order for us to have an investor already to buy the property before we even close with our seller. We developed our buyers list by networking with rehab investors, landlords, other wholesalers and owner occupants looking for fixer-upper type homes. Having the buyer ahead of time will all but guarantee a profit because we will know what they are willing to offer and thus be able to determine what our price point needs to be. If we do not have a buyer from our buyers list lined up we will market the property by
o Advertise online
o and more
o Advertise in local new papers
o The Star Ledger
o Daily Record
o Local penny savers
o Hanover Eagle
o and more
o Offer the property at our monthly Real Estate Investor’s Association meetings and on the GSREIA’s yahoo group message board
o Place Bandit signs around the neighborhood
This advertising will also contribute to our buyers list for future wholesale deals. We, however, do understand we may come across a handful of properties we cannot wholesale to other investors. In such cases we have several exit strategies in place that will allow us to recoup our investment over time.
#1 Fix and Resell
We will close on the property ourselves with the intent to rehab it to a resale buyer. During the first 2 weeks of the rehab, during planing and clean up, we will continue to market the property to investors in order to keep our options open. We anticipate a holding period of 3 to 6 months. We will list the property with a Realtor to make sure the property receives maximum exposure. We will not sell the property ourselves and instead will rely upon our Realtor and all the other agents that have access to the Multiple Listing Service to bring us qualified buyers. Our goal is to sell the property quickly to lower our holding costs and maximize profits. We feel our time is better spent finding deals.
#2 Fix and Rent
We would close on the property ourselves to rehab it with the goal to rent the property as a long-term investment drawing positive cash flow, or until we find a resale buyer. The minimum for long-term investment is at least $200 a month positive cash flow using the formula, After Repair Value (ARV) * 70% – Repairs. We would refinance the property to payoff liabilities such as mortgage or line of credit and other expenses incurred during the rehab process and then take some of the profit, if possible.
#3 Lease Option or Rent to Own
While the overall conversion rate (lessee to owner) in the Morris County area being below 25%, this method is still a viable alternative due to the popularity of the area with first time home buyers wanting to purchase a home and do not have the upfront money for a large down payment, which is usually required in this market. This method will provide us with cash up front, higher rent, and an opportunity to sell the property sooner without additional expenditures on such things as advertising.
V. Sales Projection
In our first year we plan to complete 3-6 transactions, taking into consideration the learning curve involved in wholesaling and building up our network. We plan to profit $5,000 to $10,000 per deal in year one, while increasing that to $10,000 to $15,000 by year two. In year two we plan to wholesale 10 to 20 houses, netting us between $100,000 to $300,000 in profit. As we gain more experience we will look to increase the profit for each transaction instead of increasing the number of transactions done.
VI. Projected Profit and Loss
Scotty Buys is a newly formed company that plan to purchase and wholesale 3 to 6 houses in year one with a net profit of $7,500 on average. In year two we plan to purchase and wholesale 10 to 20 properties with a net profit of $12,500 per deal.
VII. Financial Plan
We plan to use hard money and private lenders to gain access to cash quickly. It is very important to have access to cash for deals that require a quick close. For that reason, we keep a list of private money-lenders who can provide such funding on short notice. The acquired property will serve as collateral for the in loan. It is our desire to be able to obtain short term loans of up to $300,000, which would be sufficient to buy the property and quickly resell it to another investor. This process would take 30 to 120 days depending on circumstances.
IX. Important Assumptions
We assume that the real estate market will continue to slow and that interest rates will rise. This market leads to many distressed home owners who need to sell their properties.
It is our goal to establish a good name as soon as possible so that deals will come to us through other investors, individuals and realtors. Our expansion plans are realistic and achievable. We are confident that we have the right people on our team and the right process in place to achieve our goals