Bird-Dogging or Wholesaling Your Deals to Other Investors
As a real estate investor you have the unique advantage that others who buy real estate do not. Most residential properties are purchased as primary residences, not for investment firms. When someone buys their primary home they intend to live in it and in many cases, not only live in it but retire in it. Not you. You have options for your properties depending upon your financial requirements. Those options are:
Bird-dogging can be performed by anyone. You don’t have to be a real estate investor to be a bird-dog. In fact, you don’t have to own any real estate at all nor any intent to buy real estate. But if you’re thinking of getting into the real estate investment industry becoming a bird-dog is the perfect way to test the waters.
What is a bird-dog? A bird-dog is someone who finds real estate opportunities for others. Real estate investors can pay bird-dogs to constantly search properties for them on a full-time basis. Bird-dogs can find the properties for an investor or bird-dogs can put a contract on a property with the full intention of transferring that contract to the investor.
Bird-doggers can make $2,000 to $3,000 or more depending on the transaction but there are certain things you must absolutely master in order to become a sought-after bird-dog. Once you establish your reputation as a bird-dog, real estate investors will hear about you and come looking for you. You’ll need to do these three things well:
· Properly estimate repairs and costs
· Know how to evaluate comparable sales
· Understand price per square foot
Properly Estimate Repairs and Costs
This is perhaps the most important item yet all three traits are necessary in order to be a bird-dogger. One of the best ways when you’re starting out is to carry a checklist of items that need to be reviewed when evaluating a property. Home inspection companies can give you a list of what they cover during an inspection. You’ll want use that list and check off the items, one by one, as you go through the house.
If you note that there are some shingles missing yet don’t recognize that the A/C units aren’t properly placed or there are some hard-so-see foundation issues then you’ve made a poor evaluation. These lists track everything from top to bottom including structural issues, mechanical, plumbing, and electrical.
It’s obvious that you’ll never be able to exactly estimate repairs; even licensed contractors can get their estimates incorrect and often throw in a 10% “change order” variance when estimating a job. Often times once one item is completed it identifies another problem that was hidden. For example, a hot water heater needs to be replaced and when it is pulled you notice dampness next to the wall behind it, indicating a potential water or moisture problem. Once you tally your repair costs, allow yourself some room but don’t be more than 20% off your initial estimate.
You’ll also need to properly estimate both acquisition costs as well as selling costs. Acquisition costs are those outside of repair costs and include such important items as any finance costs, insurance costs for the property and interest charges.
As well, when the property is sold you’ll need to figure the costs to sell the property including agent commissions, title insurance policies, legal work and any other cost associated with selling the property.
Know How to Evaluate Comparable Sales
This skill requires you to research homes that have recently sold in the area and you’ll want to employ the same tactics that banks use when evaluating a professional appraisal.
Age of Comps
Homes that have sold within the previous six months are considered (ideally there are at least two) and two more that have sold within the previous 12 months. Homes that have sold more than 12 months aren’t considered comparable sales.
Location of Comps
First, the comps must be located in the same neighborhood as the subject property. You can’t go out of the neighborhood to substantiate a higher potential sales price. The homes that have sold that are the closest to your subject property are the comps you’ll need to use.
Type of Comps
A one-story home is not the exact same as a two-story home. A duplex is not the same as a single family residence nor is a condo. You’ll need to compare exact property types with one another in order to use the comp to substantiate a sales price for the subject. You’ll also want to consider homes that are more similar in size.
Adjustments are items that might be considered amenities or other factors that will impact a home’s potential selling value. For example, a home might have an incredible view of down town yet your subject property does not. That adjustment of a view will need to be considered as well as other tangibles such as a swimming pool, location or superior upgrades such as granite countertops or high end appliances.
Understand Price per Square Foot
By taking into consideration the previous factors you’ll need to take the square footage of the comp and divide it into the final selling price. The result is a price-per-square-foot which real estate investors pay close attention to.
Note that price per square foot includes livable square footage. Livable square footage is sheltered, heated and cooled. A garage is not considered to be calculated in the square footage number yet must be addressed as an adjustment when comparing a three-car garage with a two-car garage.
When bird-dogging, you can get compensated in a variety of ways, essentially whatever you and the investor decide but common ways to get paid include:
· A pre-determined fee from the investor upfront or upon delivery of an executed contract
· You can charge a flat fee
· You can charge a percentage of the purchase price
· You can charge a percentage of the net profit
The ideal arrangement for a bird-dog is to get paid upfront based upon a flat fee as you know what you’re going to receive on each deal. This may not always be the best arrangement for the investor yet if you’ve established yourself as a reliable bird-dog then an investor will be happy to pay you to bring in a deal you’ve evaluated.
If you decide not to be paid upfront or upon delivery of the contract make certain that whoever you assign the contract to will be the final investor. Sometimes an investor could take your contract and assign it to still someone else. If each party takes a percentage of the final sales price then ultimately it could end up that due to all the finder’s fees any profit is wiped out, along with your fee.
Good bird-dogs are always bird-dogging. They’re always looking. That means you need to be involved in local organizations that might provide you with business leads or help you identify potential future deals. That’s your number one job as a bird-dog, to find opportunities and hand them over to investors. Once you hand over a deal your job in that transaction is over. You’re done and can move onto other deals.
Many a seasoned real estate investor began their careers as a bird-dog. They were able to eventually train themselves identifying golden deals and after a while decided to forego the smaller per-transaction fee and make more money based upon acquiring, holding or flipping.
But the advantage of a bird-dog is you get real on-the-job training for being a real estate investor should you decide you’d like to investigate that possibility. You’ll also work with several different investors and you can have just as many different fee arrangements. You’ll be able to network with others in the real estate industry including agents, banks, contractors and other professionals as you perform your job.
Being a bird-dog means you’re your own boss. You can work when you want and at your own pace. You can find five properties a week and make $10,000 or you can find five per year and work part time. It’s up to you. But as word gets around that you’re a professional bird-dog; you can expect your phone to ring from potential clients…and maybe even future business partners.
The ‘flip,’ a term made popular over the past decade is for short term investing. You identify a piece of property that has promise with a few repairs or you find a gem that is ripe for a short sale and you buy it, repair it (if needed) and sell it, usually within 180 days yet Flips can occur as soon as can be made.
It’s not uncommon for a flip to be made within hours if you can identify both a property and a buyer at the same time.
Short term investing requires a bit more due diligence as well as a better feeling for the immediate real estate market is needed. Flips aren’t made for long-distance investors, that is unless the buyer has a trusted relationship with a local team of agents, contractors and service providers.
Flips won’t accumulate as much profit on an individual sale compared to a long-term hold but flipping can occur on multiple occasions throughout the year, even several at once given proper structure.
Flips are also best designed for those who have cash in the bank or have access to private funds to acquire the property then sell and pay back the private lender within the specified period of time.
You’ll need to know the real estate market like the back of your hand. This is accomplished by establishing a strong relationship with your agents. You’ll also need to employ the services of your partner service providers such as plumbers, roofers and contractors that can quickly evaluate a property and provide you with a solid quote on the cost of needed repairs.
Common problems might be things such as some roof repair or new carpeting. These are easily quoted and taken into consideration as to expenses needed in order to get the property ready to sell. Other issues however will bring you pause and cause you to walk from a property such as visible cracks in the foundation or tell-tale cracking next to interior doors and walls.
However, such major repair issues might do the opposite for you and identify better returns. If the house has some foundation issues for example, fewer buyers are going to consider that property meaning you’ll have less competition. Don’t run from a unit due to the possibility of major repairs but evaluate the opportunity like you would any other by subtracting your costs from the future sales price before proceeding.
Whatever you find, your acquisition costs plus repairs plus selling costs need to be deducted from your anticipated selling price. Also remember that unless you have cash you’ll need some financing as well as some down payment funds. Those funds will be tied up in the property until you sell; potentially holding you back from acquiring other projects.
When you consider financing a property and you don’t use a private investor remember that conventional lending guidelines will limit you on the number of financed properties you can have at any one time. Fannie Mae guidelines allow for up to 10 financed properties and if you already have 10 and want to finance one more you won’t be able to find a lender who will be able to approve the 11th loan.
In this instance, if you really want a particular property, try taking equity out of another leveraged property (or two) and paying off any outstanding loan balance on other real estate. If you can pay off a note and reduce the number of financed properties then you have more room to finance a new unit.
And don’t forget that obtaining conventional financing will take some time, upwards to 30 days or more in a normal market and you won’t be able to do any repairs or remodeling until the home officially becomes yours at the closing table.
Your agent partners are also critical when it comes to flipping. Unless you’re a pro at evaluating current market values of the neighborhood in which you’re about to buy you’ll need the services of your agent who will provide you with a list of recently sold homes, price per square foot, appeal, and so on in order to give you a good idea on what to expect when you sell.
If you’ve dedicated part or all of your business to flipping you’ll soon discover it’s a full time job. Flippers typically begin to acquire more staff, more partners and more property. And you can always change your mind with a flip. Just because you started out to sell the property you might find that you can do better by holding it and collecting the rent instead or holding out for a higher price sometime in the future. When you go in with a flip, you have options.
Wholesaling is a combination of both being a bird-dog and flipping. Yet when wholesaling a flip you’re buying the property at a lower price and selling for a higher price almost immediately to someone else at a predetermined price and most often a predetermined time. And it’s less “selling” than it is assigning the rights to buy a particular piece of real estate.
Most every product sold in the United States has a wholesale price and a retail price. This is true for any item you might purchase such as a sofa, refrigerator and even food products just to name a few. A furniture store will go to a furniture manufacturer and buy a sofa for $500 at wholesale and sell it at retail for $1000. There is no set retail price on things you buy, market forces determine what the consumer is willing to pay and what a business can sell their products for.
As well, in real estate there is no set retail price for a home; it’s negotiated just as the wholesale price is negotiated from your initial seller.
The reason wholesaling can be considered a cross between being a bird-dog and flipping is that wholesaling does in fact entail both facets. You are bird-dogging yet you are bird-dogging for yourself…actively searching for properties that you know you can turn around and sell to someone else without having to literally take full ownership, or title. Instead, you hand the sales contract over to your pre-selected buyer who proceeds to close on the contract you originally signed.
Here’s how all that works:
By using your “bird-dogging” skills you identify a property that’s for sale for $75,000 and you’ve determined that it will take another $25,000 to repair the property and after repairs the property would be worth $140,000.
Using the authorized sales contract for your area you sign your name as the buyer along with “And or Assigns” which means anyone you may eventually assign the contract to. Or, you can forego that option and have your title agent open title for you under your name with the understanding that you will assign the title to a third party prior to closing.
Give yourself some extra time on the contract if you haven’t yet lined up someone to transfer the contract to, say a minimum of 45 days. Longer if you think you’ll need it.
As mentioned in another chapter, real estate partners are vital in your business so don’t forget about having a title agent included in your referral circle. It’s not uncommon for houses that are sold under duress may have additional liens placed on the property for things such as back taxes, child support or judgments. If there are indeed issues with title and there are previous claims on the property, those claims will have to be paid off at the closing table before, reducing the equity in the property and potentially killing the deal.
Your title agent will also need to be skilled to close on assigned contracts. There is a bit more legal homework a title company will have to perform so make sure your title partner is skilled in these types of transactions.
If you don’t have a buyer lined up, from your database of clients you can begin contacting previous buyers and tell them that you’ve got another deal that they need to look at and you’ll assign the rights to that property to them for say $10,000.
Your buyer sees that he can buy a house for $75,000 plus $25,000 plus $10,000, or $110,000 for a property that will comp out at $140,000 after repairs. You agree on a deal and write up an additional contract between you and your buyer that will pay you the $10,000 at the closing table as an Assignment Fee.
Let’s quickly review this scenario. You found a solid deal at a low price. You determined its market value after repairs are made. You assigned the rights to the contract to a third party who has agreed to pay you $10,000. At closing, the title company prepares your check for $10,000 for your assignment fee and you move on.
Notice anything missing? Your down payment. You “bought” a house at a lower price and sold it at a higher price. You just bought property with no down payment. Unless you’re a qualified veteran of the armed forces and buy a primary residence with a VA loan, there is no such thing as a zero down purchase.
Where do you find properties that may be a candidate for a wholesale transaction and how do you find someone you can assign the contract to? You already know how to do both.
Since you’ve established relationships with local banks and national REO divisions, you can wait for the bank officer to contact you about a new property that just hit their REO department or you can start the process yourself by calling them first and inquiring about any new property you might be interested in wholesaling.
Your real estate partners including agents, contractors, loan officers and real estate service providers are always on the lookout for your next great deal. When you’re looking for your next wholesale transaction, give them a call or an email reminding them that you’re in the market.
You’ve strategically placed bandit signs throughout your market area announcing your intentions so buyers and sellers will contact you directly. Your signs read:
WE PAY CASH FOR HOUSES
WE BUY YOUR HOUSE, CLOSE FAST
MUST SELL THIS WEEK
3 BR 3 BD HOUSE MUST SELL TODAY
Wholesaling requires that you use all resources in order to accomplish your goals. If you don’t have a property you can’t wholesale. If you don’t have a buyer you can’t wholesale. If you can’t determine the market value of a property you can’t wholesale.
As a real estate wholesaler you can turn deals much quicker than if you listed the property yourself or acted as a buyer’s agent for clients and negotiated on their behalf. As a wholesaler, your clients are typically ones with which you’ve a previously established relationship so you know that they’re both qualified and motivated to buy when you bring them a deal. Your involvement in the purchase transaction is at a minimum when compared to buying a property and closing on it, then listing it then selling it again through traditional means.
While wholesaling is a relatively easy task, it’s only easy for those who understand the process. You don’t want to get stuck with sitting on a deal you can’t move. But by having a plan and thoroughly understanding the wholesale process you can turn deals faster and make more money!