Simply put real estate sourcing is the process of finding real estate you can buy at a substantial discount, helping investors to place the property under contract by signing a purchase agreement with the seller. The difference between the “substantial discount” you buy at and the “discount” you sell at is where you make your money. Here’s the reason why sourcing works…
The truth of the matter is that there are a lot of deals out there it just depends on the mindset and your ability to negotiate. With that being said, a good wholesaler can find you find incredible deals, while a bad one can cost you a lot of money if you’re not careful.
There’s this saying I heard from a few investors that goes something like this “If the first offer you make is accepted there is a good chance you left money on the table,” and that’s not necessarily a good deal either.
Every so often I get someone telling me that they can’t find any good deal. If deals could just be found by calling the first agent on Property24 than we would have an unlimited supply of leads.
Brandon Turner from Bigger Pockets has an acronym to describe the buying process: LAPS. LAPS stands for lead, analyse, pursue, and success. Each stage of the process eliminates a considerable amount of work from the previous.
You start by analysing a large number of deals, lets say 100 leads. From that, you select the 20 best leads. From those 20 deals, you make offers on 10 deals and if you are lucky you will get at least one good deal accepted. The majority of the work is done at the top of the funnel.
Good sourcing agents are doing the first 3 stages of LAPSE. They pursuing, analysing them, making offers, and provides the opportunity to get the deal under contract. When you buy from a sourcing agent, you only have to complete the last portion, close (i.e success).
Good sourcing agents have already done the work to find, analyse, research, and negotiate the contract. If you are lucky you will step right in and take over the contract.
Deals are not found, Deals are made
I have encountered a few investors new to real estate who simply want a deal with no clear strategy in mind. Simply rushing into a deal because you have heard that the returns are great simply never leads to quick returns. I found that having those expectations leads to a “NOW” mindset and can be an emotionally draining exercise.
There are few basic principles in real estate one being that it’s an asset class that is illiquid, which means it can’t be cashed out immediately like shares in the stock market. So if you bought a bad deal you stuck with it for a while. Then there’s the part of managing expectations. Dealing with expectations and emotions is a full-time job so don’t go in thinking you going to get it right because just because you a paid for an expensive weekend workshop.
My first advice in dealing with sourcing agents is to have a clear idea of what strategy you are using, what return you expect and have the finance ready when the opportunity arises. There’s nothing worse than an investor that can’t fulfill their commitments due to bad planning. Reputation is everything in this business, more so to sourcing agents.
Deal or no deal
The biggest risk you take when buying from a sourcing agent is that you buy without representation. In these transactions, you don’t have an agent representing you, and neither does the seller, and neither the seller and the sourcing agent have a fiduciary duty to your interest.
When doing business with someone you should verify everything. Make sure the comps and after repair value can be verified even if you have to use a third opinion from a trusted investor of a power team member.
What Sourcing Agents are Looking for
- Clear goals – Be as specific and detailed as possible. What ROI are you looking for? What area? What’s your strategy? how many deals you are looking for this year?
- Criteria – Being specific will provide the necessary incentive to sourcing agents to call you first. Investors move with speed, so make sure you have the cash available to close.
- Cash – Sourcing agents need to know cash investors are who they say they are. A sourcing agent is using a variety of methods to source deals, many of these sources require the sourcing agent to deal with their part of the deal which is to bring an experienced investor to the table. If real estate agents lose trust in the sources agent relationship is lost. Word travels fast and in the sourcing world. People who can walk the walk helps provide the sourcing agent with the incentive to seek more deals.
- Building relationships – Good sourcing agents are always on the lookout for serious investors. Part of being in real estate investment is the people you surround yourself with. That old adage your network is your net worth.
Let’s take a look at what a typical wholesaling transaction looks like:
- The sourcing agent locates a house owned by someone motivated to sell below market value because the home needs repair or for numerous other reasons.
- The house’s ARV (After Repair Value) is R1,100.000.00 but the savvy sourcing agent negotiates a price of R550,000 because of the condition of the property and you estimate the needed repairs to be in the neighborhood of R200,000
- The sourcing agent and property owner (Mr. Seller) agree to the price and you place the property under contract with a real estate purchase agreement.
- The sourcing agent then sends the property information to his list of house hungry cash investors and quickly finds one eager to buy it at the price of R600,000 (R550,000 sales price + R50,000 finders fee)
- The sourcing agent and the cash investor (Mr. Cash) sign a one-page agreement for an assignment fee of R50,000.
- Lastly, the real estate closing takes place and the sourcing agent walks away and moves onto the next deal.
Now obviously the example above is oversimplified but it’s meant to be so you get a very basic understanding of how the sourcing process works.
Important Wholesaling Facts you MUST understand
- Real Estate Agents (Realtors) and Brokers are licensed to sell real estate (sourcing agents are not) – The laws require Realtors and Brokers to meet certain education requirements and pay licensing fees to legally negotiate and arrange the buying and selling in real estate transactions.
- Almost always I see sourcing advertising a “house for sale”. This is completely wrong and could get them into hot water.
- Sourcing Agents make their money helping cash investors find the deal to get under contract.
- You do not need a real estate license to source real estate.
- Sourcing is a legal tight rope. So make sure you seek the advice of a qualified attorney before signing any contracts.
- Sourcing is a fast cash now strategy unlike flipping or owning rental properties.
- You don’t need cash or good credit to be a Sourcing Agent.