Scouts – Dealers – Rehabbers – Landlords

I have a few key methods of qualifying real estate investors to determine whether or not I want to work with them.  This has little to do with the amount of experience they have, and less to do with the amount of money they have then you may think.  These are both important factors in determining how I will work with an investor.  But the critical factor in whether to work with them is based in their commitment and integrity.

During my first interview or call with a new referral, I ask the standard questions about their experience, available capital and credit score.  More importantly, however, are the questions about their goals and intentions.  The way certain questions are answered, including was is NOT said, usually gives me a good indication about whether I can establish a mutually beneficial relationship.  With practice, you can learn these evaluation skills to qualify investors, and only work with those who will be good clients.

The first step in this learning process is to understand the Types of Residential Real Estate Investors.  This will allow you to differentiate between clients, customers and vendors as you grow your business through networking and marketing.  All investors will fall into one or more of the following categories.  Less experienced investors generally require more time, but more experienced investors will require more skill and knowledge to earn their business.  As always, the relationship must be a “win-win.” 

Types of Residential Investors

Scouts

Scouts, also known as Finder’s, are usually novice investors looking to get started in the business.  Many first time investors do this type of work because it does not require  money or credit to start. A scout’s objective is to source property leads for more experienced and capitalized investors.  Scouts gather information about potentially profitable properties and sell this information to another investor.  A good scout will include the following information in his or her report to the investor:

• Location of the property
• Owner’s name and contact information
• Condition of home, including pictures (recently taken)
• Estimated as-is value and remodeled value of the property
• Asking price on the property and current loan balance
• Estimated cost of repairs to the property
• Liens on the property or other applicable circumstances

The fee that a Scout charges for this information and/or lead is determined based on the value of the property as well as the estimated profit that the investor is likely to make.  This can run from a few hundred dollars up to a few thousand dollars on each property.

Many people want to start out in the business being dealers (wholesalers), but should learn by being a scout for more experienced investors.  The best scouts will succeed in the business, and eventually become Dealers.

Dealers

Dealers, also known as Wholesalers, are much like a scouts but with one significant difference.  They sign a purchase and sale contract and/or purchase the property to resell for a wholesale profit margin.  This level of control requires more capitalization and additional risk, so dealers stand to make a larger profit from the investment than scouts.  Typical dealer mark-ups are between $5-$25,000 per property depending on how “deep” it was purchased and if any additional costs or work are involved in selling the property.

You will often find people in the investment real estate business who are acting as dealers, but are really scouts.  Investors who contract a property but are not capitalized to close the property are not dealers.  They are often misleading the seller of the property (i.e., making a “cash offer” without any cash).  This is a tactic often taught in the “no money down” seminars and investment courses.   The difference between a dealer and scout is the dealer will close on the property purchase (or at least have the ability to close) before reselling to a rehab or landlord investor.  Scouts who act as dealers but are unable to close transactions often leave the unknowing seller with no buyer at the closing table.  This creates ill-will about the business of real estate investing and should not be done.

Most dealers will sell their properties “as is” to another type of investor, performing little, if any, work to the property.  In some circumstances a dealer may not close the property at all, or may do what is called a “double closing” or simultaneous closing.  An “assignment” means the dealer is selling the contract to another investor who closes the transaction.  In a “double closing” scenario, the dealer will only own the property for a few minutes between two closings.

More experienced dealers may perform major repairs to a property before selling it to another investor.  In this instance, the dealer will purchase a property, perhaps at a steep discount because of a structural problem, and do the “heavy lifting” of fixing a foundation problem or replacing roof and mechanicals.  This strategy involves the dealer making the property appealing to novice rehab investors who are looking for “cosmetic” type remodel projects.

Experienced dealers make excellent partners for your real estate investment business or investment oriented agency.  They often have deal flow and an inventory of properties that are not available through the MLS.  Good dealers understand the value of your role as a buyer or an agent working with investor buyers.  If you a rehabber or an agent working with fix and flip investors, finding and establishing a relationship with a dealer like the one described above is an excellent source of properties.

As with any business, there are talented and forthright dealers, and there are those who give the business a “bad rap.”  When working with dealers, be sure to get references and check local reputation centers like the Better Business Bureau.

Rehabbers

The rehabber is the most common (and famous) type of real estate investor, and so requires little explanation.  In the investment community they are called “retailers.” On TV and the internet they are called “fix and flippers.” Rehabbers generally purchase properties through agents, or from a dealer or scout.  The objective is to remodel and then sell properties to owner occupants at the highest possible “retail” price.  The rehabber puts the most money into properties and has the most risk.  Rehabbers also stand to make the largest profit if they are skilled at the trade.

Rental Landlords

Rental landlords are seeking properties that enable them to earn a profit on a monthly and yearly basis from rents over and above all expenses including debt service.  Rental landlords are generally the most sophisticated of residential investors because they are working on long-term wealth building rather than short term income.  A large percentage of landlord investors are not in the business of real estate; most have other income sources.  Investing in real estate is usually retirement planning and wealth building for landlord investors.  As such, they require the most knowledge and experience to work for as an agent.  For the experienced investor or investment oriented agent, landlords are very good long term relationship clients because they are usually well capitalized and buy multiple properties per year.

Balance Sheet Investors versus Income Investors

As you meet and qualify investors to work with in your business, you will gain a deeper understanding of experience and capitalization levels within the spectrum of investor types.  On a macro scale, I qualify investors as either Balance Sheet or Income investors.   In very simple terms a balance sheet investor has an amount of capital that he or she wants to grow on a risk adjusted basis for net worth gains;  an income investor is seeking current income from operating and selling real estate.  The difference to the adviser or agent is the level of legal and tax planning that is involved with the projects or investments.