Recently, I’ve had a lot of people ask me how, when and why I decide to do different things with each house flip.
I thought it was a great question and one that deserved a more thorough going over.
It’s not really a simple matter of buying, fixing and selling everything. If you’ve read through the 34 weeks posts where I show everything I am doing, you’ll see that I don’t just do that. There are a lot of factors that go into the decision on whether to birddog a lead, work the lead and either wholesale the house or buy it and fix it, or whether to sell with owner financing or just rent the place.
Today, I’m going to talk about what affects my decisions and causes me to do one thing over the other. This is just how I operate and is in no way saying you should do the same. Everybody’s situation is different. So what may work for me, may not be something you would want to do.
Consult your attorney because this stuff is crazy! No, just kidding. These are things investors do all day long. Just trying to spice up the post. 🙂
No Matter What, I Must Buy Cheap
No matter what I might decide to do with a house, I have to buy it cheap. Cheap, cheap.
I can’t stand hearing about all of these ‘new’ real estate investing techniques that sound like they were thought up by mad scientists. Mad scientists that had a thing for developing strategies that sound incredible on paper but are horrible in real life. A lot of times, when you add the human element (aka involving people in the mix when buying, renting or selling) things can go wrong really fast.
All of a sudden that strategy that was supposed to allow you to buy those houses for more than they were worth (or even just under what they were worth) is causing you to bleed money. Lots of money. There are too many things that can come up with an investment that these strategies are best left to people able to weather the storms and people that don’t mind losing a lot of money.
This is why I just like to keep things simple. Buy a house for super cheap and you will have a lot of options. You can even screw up big time and just not make as much as you’d hoped (this is not to say you can’t lose money – I’m sure someone somewhere has still managed to lose money on flip after buying for super cheap – yes, the finger is pointing at me – that’s a story for another day though).
So, even if a seller is willing to sell to me ‘subject to’ their existing mortgage (meaning they will sell me the house and leave the loan in their name with me responsible for their payments) but the loan balance is more than I would want to pay, I won’t do it. It’s just not worth it. Just because I can save some money on holding costs, doesn’t warrant me paying a lot more for the house.
Property Location And Price Range Is A Huge Factor
My decision to birddog a lead has everything to do with the location of the property. If it’s in an area I just don’t want to be in, I will ‘birddog’ the lead to another investor.
If the seller is asking a crazy low price, I am much more likely to try to just contract the deal and wholesale it though. If they are asking a so-so price, it’s an immediate birddog.
If the house is in a price range where my 65-70% percent of ARV means too big of a discount for the sellers but they are willing to accept a decent discount, I will typically birddog the lead.
An example would be a house that has an ARV (after repaired value) of $500k. At 65%, I would need to buy the house for $325k, minus whatever the cost of repairs would be. That’s hard to swallow for people that aren’t really motivated. If they would be willing to take something around $400k, there’s probably an investor willing to do the deal. It’s just not me.
When a house is in a lower price range area that is not real conducive to selling it on a new loan (buyer gets a bank loan to buy the house from you), I will consider buying it so that I can fix it and sell it with owner financing. This is one of our ‘retirement’ strategies.
We prefer owner financing over renting because the buyer owns the house and is therefore responsible for repairs, taxes, insurance, etc. We don’t get calls about broken toilets.
The only time I pick up rentals is when the house doesn’t need anything major fixed and there is a good tenant that has been there forever and wants to stay there.
My Workload Also Factors Into My Decision
If a deal might be decent, but I am swamped with rehabs and other things, I am often tempted to just birddog the lead. If it seems like a good deal (seller seems motivated and what is owed is low enough to provide a good deal), I will get off my duff and try to put it under contract to wholesale.
If I’m not busy, my intentions are usually to buy for rehabbing and re-selling. This is where we make the most money.
I do love wholesaling and would prefer to wholesale most of the time. I’ve talked about strictly wholesaling for years, but it’s been hard to limit myself to that. Rehabbing is just in my blood now.
Seller’s Circumstances Determine Purchase Strategy
We’ve always done purchases with cash, hard money/private money, or owner financing. There have been occasions when I could get a good deal AND the owner was willing to owner finance.
If you can get a seller to owner finance the house for you, you can usually get much better terms than you would from a hard money or private lender. I’ve heard of a lot of people getting 0% interest rates from sellers.
I’ve attempted to buy ‘subject to’ on several occasions but it never seemed to work out. I stopped trying because I just don’t like the idea of trying to hide the fact that the ownership changed from the lender. It has to do with the whole due-on-sale clause thingy.
Changing Exit Strategy In the Middle of the Flip
As I mentioned, if you buy cheap enough, you have the flexibility to change your strategy at almost any point in the flip.
I try to buy at 65% of ARV minus the cost of repairs, OR LESS. This usually gives me the ability to wholesale the deal (before and after purchase) if I choose to do so. This is because most investors will buy at 70% of ARV minus the cost of repairs. You can even find a lot these days that will pay more than that.
Even after you’ve fixed up the house, you might want (or need) to change your strategy. You may have trouble selling the house and decide you need to rent it. Of course, if you have a short-term hard money loan, you would have to do something about that.
Depending on the price range and rents for the area, renting the house can be a good option if you bought it really cheap. The cashflow generated might be something you decide works for you at the moment.
It’s good to have options.
Save Yourself Some Grief, Buy It Cheap
I’m gonna say it again. Buy your houses as cheap as possible. Don’t go paying more for properties because you think you got some other kind of terms that sweetened the deal. If those terms don’t allow you to make a good profit, even if you have to change up your strategy or sell the house cheaper, don’t allow them to convince you to pay too much.
This all gets back into making sure that you are a marketing machine. You have to have a lot of leads coming in so that you don’t fall into the trap of paying too much because you finally find a marginal deal.
There are a lot of awesome deals out there, you just have to work hard enough to find them. If you don’t believe that, good luck to you.