We discussed what real estate investors do and how they differ from real estate agents, but there are also different types of investors that play a role in the market. For this, we’re going to be talking mostly about the Houston market, since they are one of the largest when it comes to total number of real estate investors and events due to the size of the city (and of course recent events with Harvey).
The three different types of investors we’ll cover here are the wholesaler, the flipper, and the lender.
The wholesaler is someone that locates homeowners that are looking to sell their home quickly or just trying to get rid of a home that’s a burden for them. Wholesalers find their leads through various means, including bandit signs, direct mail, flyers, foreclosure / tax lien lists, Facebook ads, SEO, and referrals, among other things. Companies that do wholesaling are often referred to as a we buy houses company or a home buyer company. When a wholesaler finds a deal, they put the homeowner under a contract so that they can’t lose that home to a competitor. Then they will reach out into their network and find a buyer for the home. The buyer may be someone who’s looking to live in a home and purchase on the cheap, wants to buy and hold it for a long-term rental, or is looking to flip the home. Once a buyer is located, the wholesaler will essentially have what’s called an assignment fee, and this is what their fee is for locating the deal and pairing the buyer and seller together, usually ranging between $2,000 and $20,000, with outliers that can go a lot higher than that.
This is the most commonly noted investor. The flipper is someone who looks to buy a project home for a reduced price so that they can perform renovations or a remodel and put it back on the market for a profit. Generally, flippers find their leads through other means like bird dogs, their own marketing, or wholesalers, and will handle everything from there such as the closing of the home, the construction/remodel crew and performance, and then staging or working with a real estate agent who can find a buyer from the home now that it’s ready to go on the market. A flipper generally does not use a traditional mortgage since they don’t quite line up with what is needed in a cash deal, and also because bankers don’t quite like to invest in something they consider so risky. A flipper will have a list of lenders, hard money or private lenders, that they will go to in order to fund their projects. Choosing the lender depends on their preference in properties and the type of rates they are able to offer.
The lender is someone who has a cash store which allows them to lend out for real estate projects. Sometimes this is in accessible cash, and sometimes it’s in an IRA that is real estate investment friendly. The lender is usually someone that had a previous REI role, either they were a wholesaler or flipper, or both, and eventually made enough to switch into lending if they felt like it was a better fit for them. When an investor looks into a deal, they generally don’t like anything where the purchase price is more than 70% of the after-repair-value. As long as that magical 70% number is met, the lender will be interested in the deal. The lender has to take great care in assessing a deal and trusting the person that they are working with. Each lender will also have their own preferences in what kind of deals they’d like to take on. Some prefer single family homes while others like apartment complexes or RV parks. It really depends on what they are most comfortable with, what their risk tolerance is, and where they feel the best bang for the buck lies based on their market research. Additionally, sometimes the lender will have difference conditions on the money — such as a % of profit as well as different forms of interest or points.
With these three major different types of real estate investors, it would be important to start learning what each of them do in detail and who the players are in your local market. In the Houston scene, most of them can be found at the various REIA or real estate events, usually on a bi-weekly or monthly basis. Having a network in the real estate investing world is the most important thing you can build.