If you don’t possess money to start out your real estate investment profession with, there are choices that you can take that will not demand money but will require time. One method that we are going to go over is called the Bird Dog.
If you don’t have money to execute the deal, you can definitely find the deal for another real estate investor and get paid at the same time. The way it works, in its simple form, is that you do the leg work to find a great real estate deal, get it under contract, and then sell that contract to a real estate investor.
Before you go on, let’s give you a little formula. This formula is used to figure out how much you should offer on a house. Do not exceed the percentage of 65%. The lower you go, the better chances you have at selling your deal to another investor.
ARV x 65% – Repair Cost = Offer
$175,000 x 65% = $113,750
$113,750 – $15,000 = $98,750
So let’s start going over this. Say for instance, you are looking for houses that can be rehabbed. Now, after doing some work and researching, you find a house that you can get under contract for $98,750. You did your homework on this house, and you find that the total cost to repair the house is $15,000. After making the necessary repairs, the value of the house will be $175,000. Because you either do not have the money or you do not have the experience necessary to successfully execute this deal, you will get the property under contract, and do what is called “flip the paper”. You will be selling a contract, not a house.
From a technical perspective, you can acquire a house under contract with only one dollars put into escrow. Even though this isn’t always the circumstance, a number of home owners may wish for you to place more cash down for deposit like $500 and up. Thus what you need to do, is you make your offer to the home owner to buy the property for $100,000, and you offer to put $300 or more into an escrow account. Make sure, and this is really important, that you set a clause in the contract that it is subject to inspection. What this means is, that at that time of the inspection of the property, you can actually pull away from the agreement if you are not satisfied with the final results of the inspection. Should you not have this within your contract, it means that you’re liable to lose the money that you put into escrow.
So now, you’ve got the right to purchase this house at $98,750. You’ll be making your cash simply by selling this to another real estate investor, but you’ll raise the price to make your money. Let’s imagine for example, you add $3000 to the purchase price for the investor. The investor’s cost to purchase the property will be $101,750, and the repairs cost $15,000, leaving the whole amount to purchase and rehab the property at $116,750. After doing the calculation, dividing the purchase price and repair cost by the after repair value, you will get the after repair value percentage. In this example, that percentage equals 66.7%. A number of investors will be using hard money loans, and hard money lenders usually like deals to be between 65% and 70%.
Now, there are a couple of ways that you can sell this contract to another real estate investor. You can either perform what’s called a double close at the escrow office, or you can use the clause “and/or assigns” next to your name on the contract. For example, on the contract it will say “Tim and/or Assigns” will be purchasing the house. That clause means you can assign the contract to anyone. If you only had your name on the contract, you must be the one to purchase a house. In that case, you’ll have to do a double close at the escrow office.
Now let’s go over how you can perform a double close. Not all escrow company are going to be able to perform a double close for you. Many people at the escrow office usually do not even know what a double close is. Say as an example, you did not use the and or/assigns clause, and you’ve got your investor prepared to purchase a property. What you do, is actually have the escrow business to draw up a purchase agreement for a purchase price of $101,750 (which will include your $3000 profit). So you are sitting at the table, and you have two contracts at hand. The deal is going to have to operate in this specific order: The real estate investor buys the property for $101,750, the escrow firm receives the cash, and next they use those funds to buy the house from the original property owner for $98,750. Which means that your real estate investor covered the property, so you subsequently pocketed $3000.
Doing a double close is a wonderful strategy whenever you do not want the real estate investor that is acquiring the contract from you to know the amount you will be really earning from the deal. Although it will not happen that frequently, some investors might be turned off and not wish to purchase the contract knowing that you’re making a great deal of money off of it. For example, in the event you found this same property for $88,750, and you are selling the contract for a profit of $13,000. Although the deal can still be good for the real estate investor, some could be picky and not want to do a deal with you. Thus in that case, doing a double close is ideal.
So that is really a general understanding of how to be a real estate property bird dog.
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