How Networking is the Key to Completing Real Estate Deals
In my conversation with Dion Johnson, who is in the process of closing on his first and second flip, he explained why he believes that “your network is your net worth.” By attending 3 networking events every week and surrounding himself with people that know more than him, he was able obtain his first two deals, one of which required him to have zero money out of pocket!
First Deal Through Networking and Lessons Learned
The first deal that Dion acquired was a lead from another investor that he met at a networking event. The investor didn’t have time to work on a handful of lead and offered them to Dion. After following up with the leads, he was able to get one of the properties under contract. When he initially ran the numbers, Dion believed that it would be a slam-dunk first deal. At a $152,000 purchase price, $15,000 rehab budget, and $250,000 after-repair value, Dion was expecting a profit of over $80,000! Unfortunately, like most first time fix-and-flips, there was a gap between the project expectations and the reality of the situation.
The main culprit for this gap was the fact that Dion had difficulties finding a general contractor. Many different “gurus” told him that he needed to find a contractor before securing a deal. However, he quickly discovered that unless he already had a project, contractors wouldn’t give him the time of day. Therefore, once he had the property under contract, he had to scramble to find a contractor. With only two weeks until closing and no contractor, Dion decided that he would subcontract out all of the work. As a result, the rehab budget more than doubled to $35,000.
Another lesson that Dion learned was the importance of conducting due diligence before diving into a deal. In doing so, you will save yourself a lot of time and more importantly, a lot of headaches. Dion didn’t perform his due diligence upfront, and went with the first hard moneylender that qualified him for a loan. He wasn’t aware of the lenders terms, so he didn’t realize until it was nearing closing that the lender would be the first position (for the purchase price of the property) and second position (for rehab costs) on the loan. This was a problem because Dion was utilizing private money to fund the loan, and the private money source wasn’t comfortable being in the third position on the loan. Therefore, Dion had to scrap the construction loan and pay for the rehabs out of pocket.
Dion didn’t have enough cash to handle the budget increase, so he had to leverage credit cards to purchase the materials and obtain cash advances to pay the contractors. The takeaway that Dion will remember moving forward: always talk to multiple hard money lenders, finding out their terms, rates, and down payment required BEFORE selecting a lender for a deal.
Second Deal Through Networking with Zero Money Out-of-Pocket
Dion’s second deal went much smoother than his first. For this deal, Dion partnered with an investor that he met through a networking social media group. He brought nothing to the table except the desire to learn and grow, while the other investor brought the deal and the funds. Dion was just responsible for managing the entire project from start to finish, including preparing the scope of work, managing the contractor, picking out the materials, and meeting with the architect on site.
They purchased the property via seller financing for $255,000. The seller had the property listed at $330,000 and was having difficulties finding a buyer. Dion’s partner found the listing and after seeing that it was on the market for a while, proposed a seller-financing offer – $255,000 purchase price to be paid at the conclusion of the fix-and-flip, plus monthly payments at 7% – and the seller accepted the terms.
The structure between Dion and the other investor was a joint venture agreement that was drawn up by their lawyers. According to the agreement, at the sale of the property, Dion would get 40% of the overall profits, all with zero money out of his own pocket!
Dion attributed his ability to successfully complete his two deals to:
- His ongoing commitment to attending networking events on a weekly basis
- Learning from the investors that were doing bigger deals than him
- His willingness to admit that he doesn’t know it all
Which of these three mentalities do you need to adopt today?