1. What is the locator/investor strategy?

The locator/investor strategy creates opportunities for individuals to become involved in real estate and earn income even when those individuals have little or no capital. The strategy benefits both the participants and the community in which the strategy is employed. The strategy begins with an individual – whom we call the locator – who researches the properties located in an area with which the locator is familiar looking for distressed properties, distressed owners or real estate owned by banks that can be purchased at a price substantially below fair market value. When the locator locates a likely property, the locator negotiates and enters into a contract with the owner of the residence to purchase the contract. The locator then locates the investor who provides the capital needed to pay the costs of acquiring, rehabilitating and selling the residence. The locator either assigns the contract to the investor in exchange for a locator’s fee, normally 9 %, or forms a company with the investor to serve as the investment vehicle and acquire the property. The locator assigns the contract to the company, and the investor contributes the capital to the company. The locator normally receives a 1 percent interest in the company and the investor receives a 99 percent interest in the company. The company under the locator’s supervision rehabilitates the residence and then sells the residence to a third party. The locator receives an agreed upon percentage of the net profits, normally 40%-50%, and the investor receives the balance of the net proceeds.

In simple words, locator makes a choice between one of the two alternatives, either assign the contract to the investor and receive 9% of purchase price as locator’s fee or become a partner with the investor and receive 40%-50% of net profit on the sale of the property.

2. Who can act as a locator?

Any person can act as a locator. The locator does not need to be an attorney or hold a real estate broker’s license or satisfy any other kind of licensing requirement. The locator/investor transaction is the sale of a contract or an interest in the contract, and contracts are not real estate.

3. Many persons who would like to become locators may be short of capital to finance the locator/investor strategy. Will that shortage of funds prevent a person from beginning a career as a locator?

It should not. A locator beginning with a purchase directly from a homeowner can enter into a contract with the seller that permits the locator to assign the contract. The locator should negotiate a window of time in which to locate an investor, or the locator may have located the investor before signing the contract. In that case, however, the locator runs the risk that the investor will swoop in and make the deal directly with the seller, cutting out the locator. Assuming that does not occur, the locator can then sell the contract to the investor, pocket his fee and walk away from that deal. The locator can use the money made on the first deal to help finance the next locator/investor deal.

4. A locator with limited capital may not be able to make an earnest money deposit. Is there a way to resolve this problem?

The locator will have a period of time to complete the inspection and perhaps other due diligence. During that time period, the locator should be searching for investors. If the locator locates an investor during that period, the investor will pay the earnest money deposit. Another solution is to minimize the earnest money deposit so that the locator can pay it if an investor cannot be located within the inspection period. Another solution is to eliminate the earnest money deposit. This may be possible where the seller is very anxious to sell the house. However, banks and government agencies that own houses will insist on an earnest money deposit.

In some cases, seller may allow the locator to use promissory note in lieu of putting any deposit for the contract. A typical promissory note has been provided in our manual and also on our website. This promissory note contains the locator’s promise to pay to the seller the earnest money deposit. It can be used as a down payment when the locator either does not have sufficient capital to make the down payment or the locator has other reasons for not using cash to make the down payment

5. If a seller such as a bank insists on using its own form of agreement for the purchase and sale of real estate, how can the locator modify the form to include provisions such as conditions that the locator needs?

To add provisions or to modify provisions contained in the form, the locator prepares an addendum containing the necessary additions or modifications, the locator and seller sign the addendum and the parties attach the addendum to the contract. If the locator wants to delete a provision from the form, the locator can simply line out the provision, and the locator and seller initial the deletion.

6. What is an assignment of a contract for the purchase and sale of real estate?

An assignment is the transfer or sale by the purchaser of all or part of the purchaser’s rights, title, interest and obligations under the contract. In the locator/investor context, a person called the locator locates a residential property that can be purchased at a below market price and enters into a contract with the owner, whether the owner is an individual or a bank that has acquired the residence by foreclosure, to purchase the residence. Then the locator can sell the entire contract to an investor called the investor for a fee (a locator’s fee) or can enter into a venture with the investor to create an entity jointly owned by the locator and the investor and assigns the contract to the venture which in turn purchases the property. In forming a venture, the locator is selling the contract to the entity in return for a percentage of the deal.

7. How does the locator make the contract assignable?

If the contract is silent on the issue of assign ability, then the contract is assignable. Banks will not allow an assignment except to an entity in which the locator has an interest, such as a 1 percent share in a partnership.

8. Where should locators begin to look for properties to acquire for a locator/investor deal?

The locator should begin with areas that the locator is personally familiar with, such as his own neighborhood or neighborhoods he knows, such as where his parents live or where he goes to exercise. While traveling around these areas, the locator should be alert for signs offering sales by owners or for homes that appear to be abandoned or homes where the owner appears to have stopped caring for the property, such as mowing lawns or accumulation of trash.

9. What is the best type of deal for an inexperienced locator to undertake?

If the locator is inexperienced, the locator would be well advised to begin with the purchase of a single family residence from an individual seller. It would be easiest for the locator to enter into a deal where the seller is representing himself which avoids having to deal with very many third parties such as real estate brokers who are representing the seller and have to protect the seller’s interests. Also, properties owned by sellers who are representing themselves will not have been as widely advertised as homes that are listed on the Multiple Listing Service so there will be less competition among potential buyers. Deals involving the acquisition of real estate owned by banks or short sales are more complex and will take more time to complete.

10. What price range should a locator concentrate on?

Homes that range up to $500,000 offer benefits to the locator. There are many of them. They are more affordable by purchasers who are looking to buy a home. They can be sold more quickly than a $1,000,000 home. A quicker sale reduces carrying costs. The locator will be looking for a deal where a $500,000 home can be purchased for, say $350,000 which will have strong potential to realize a profit and therefore be more attractive to potential investors.

11. Should locators pursue deals with individuals who are about to go into foreclosure?

An individual on the brink of foreclosure is a motivated seller. Locators should always look for motivated sellers. They should be willing to sell at a price below market, and they are looking to complete a deal quickly. Closing such a deal will give the seller cash to move to a more congenial situation and preserve the seller’s credit rating. However, there are caveats. The house should be readily marketable so that it can be resold quickly. Otherwise, the locator will be purchasing a house that is subject to a mortgage that is in, or about to go into, default, and the locator will have to make the mortgage payments to avoid being foreclosed upon. There must be equity in the property for such a deal to make economic sense. If the property is underwater, it cannot be resold at a profit.

12. There is always the possibility that after a locator has entered into a contract, the locator encounters a problem, either with the property itself, such as the need for a major repair, or with the market for the contract, such as no investors having any interest in the deal. What can the locator do to protect himself from such contingencies?

The word contingency is the answer. The locator must include in the contract conditions that must be satisfied before the locator becomes bound to perform, such as review and approval of an inspection of the house or the locator securing financing or locating an investor within a certain period of time. Further, the locator will want a clause allowing him to terminate the deal if a material defect in the house is discovered after the inspection.

13. How can a locator protect his deal from investors who may try to take it away?

Once a contract has been signed, it is legally binding on the seller as well as the locator so the seller should not be able to deal with an investor unless the contract by its terms lets the seller off easy when the seller defaults. Further, the contract or a memorandum of the contract can be recorded in the land records where the property is located. Usually a memorandum is recorded to avoid revealing all of the terms of the deal to the public. To be recordable, the memorandum must be signed and the signatures notarized and the legal description of the property attached. The form of notary must be the form prescribed by the law of the state where the property is located.


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