Real Estate 033: What is Driving for Dollars?

For investors who are just starting out, there are many great options to gain experience and get your feet wet with little to no money out of pocket. I recently attended a 3-day real estate investing bootcamp where they introduced various concepts from buy and hold, fix and flip, wholesaling to multifamily. One of the strategies mentioned during the bootcamp was "driving for dollars".

For those who are not familiar with the term, driving for dollars describes a method whereby investors drive around neighborhoods and look for properties that look distressed or vacant and contact the owner of the home to make an offer on the property. You may have seen these types of homes in your very own backyard. They may have broken/boarded up windows, tall grass, and no signs of tenants/homeowners. This is a very manual method of lead generation, and as you may have guessed, not the most scalable and time efficient method either.

Wholesalers typically may use lead generation software to identify non-owner occupied homes that are in foreclosure, financial distress, short sales, FSBO (For Sale By Owner) among others to conduct their direct mail campaign and qualify leads. However, sometimes people hire others to assist in their efforts. A subset of driving for dollars can be referred to as "bird dogging", where these individuals find the distressed properties during their drives, and send it to a wholesaler or investor willing to pay for that lead. 

Note: Please make sure you do your proper due diligence and check with local laws and regulation to ensure that what you are doing is allowable/legal. Varies by State.

Once you have found a lead, you now need to contact the seller to figure out their motivation and "qualify" that lead. Lead qualification can quickly be done with three questions:

  1. Tell me about your property - Let the seller do the talking, and you will realize they may sometimes reveal much more than you sought. I have often encountered sellers disclose the amount of debt (e.g. line of credit, mortgage) remaining on the home, personal distress (e.g. death, divorce, or health issues), and other information that will help you understand the seller's motivation as well as strategies to purchase the property. For example, a seller looking to quickly move to another state may entertain a buyer taking over the property "subject to" the existing financing. On the other hand, a seller needing to pay off an existing debt may consider a full payment of the existing debt, and owner finance the remainder of the equity.

  2. What would you like to be the outcome? - This question will reveal what the seller has thought of in regards to terms and price. If you listen attentively, you may find the seller negotiate against themselves and give you more equity that you thought possible. Remember we are looking for sellers that need to sell, not want to sell. 

  3. If we were to reach an agreement, how fast do you want to close? - This question will separate the tire kickers from the motivated sellers. If a seller response with "less than 30 days", this is a sign that they are willing to hear reasonable offers and proceed with the transaction. The last thing you want to be doing is deal with sellers who simply "want" to sell may throw out unreasonable terms or price that eventually waste your time.

Once you have qualified the lead and negotiated the deal, place it under contract and control the deal. Maintaining control of the deal is the most important part. Once you have a good deal in your hands, now you have the option to use various strategies such as wholesale, fix and flip, or buy and hold. Since you have performed your own lead generation efforts without a middle man, it is more than likely that there is extra equity in the deal. In conclusion, driving for dollars is a great way for people who are starting out to network with other investors by sending them leads, and or acquire their own property with little to no marketing costs upfront.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

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Real Estate 003: Picking a Strategy

Everyone is different. We come from different backgrounds, jobs, financial status, and most importantly, we have different goals. As mentioned previously, part of getting educated in real estate is clearly defining your goals and creating a strategy to achieve those goals. This is a very important step because a ship without a clear direction, is basically sailing towards nowhere. Note: As you continue to read books, network with investors, and listen to podcasts, your strategy, tolerance for risk, and method of execution may evolve, and that is perfectly fine.

There are a couple different strategies that I have seen that are used by investors on BiggerPockets and other successful real estate investors that you may have come across on Youtube or HGTV:

Wholesaling

There are many people who are getting educated on real estate but give lack of money as an excuse for not getting started. Brandon Turner, Co-Host of the BiggerPockets podcast, summed it up perfectly: "To succeed in real estate, you only need to have two of three things: Time, Money, or Knowledge." Wholesaling will require time and knowledge. Wholesaling real estate basically means placing a distressed (needs TLC or major rehab) property under contract and re-selling the property to another investor. You may have seen signs in your neighborhood that say "we buy homes, all cash". These are your wholesalers who typically purchase homes in cash, lines of credit, or other private funds. Wholesalers are not in the business of buying property, but to quickly re-sell them to investors for a profit (aka finders fee).  A good wholesaler will maintain an active buyers list and purchase homes that are in the buyer lists criteria and re-sell them prior to closing on the original contract. 

For example, let's say there is a house in Independence, MO that you put under contract for 30K. If the home has a repair budget of 25K and after repair value (ARV) of 80K, an investor may be willing to purchase the home for 35-40K. In this example, you would quickly sell the contract to the investor for 35-40K and profit 5-10K on this single transaction. Wholesaling is a great way to build your seed money if you are looking to expand into flipping properties or purchase buy and holds for rental income.

Flipping

Flipping real estate properties is a method of purchasing distressed properties (bankruptcy, foreclosure, REO), adding value through rehabs, and selling them for a retail profit. You may have been exposed to flipping on hit HGTV shows such as flip or flop, masters of flip, or brother vs brother. Normally, these investors purchase the properties from wholesalers, courthouse steps (foreclosures), or from banks for cash and "force appreciation" of the home through value add rehabs such as new kitchen, bath, backyard, rooms, paint, HVAC, etc. 

Using the example above, the flipper may purchase the distressed property for 35K and put in rehabs of 15K for an "all-in" cash of 50K into the project, and sell it for 80-90K (market value) for a 30-40K profit. This method is riskier than wholesaling and buy and hold due to the high usage of capital and the risk of properties not selling quickly in a downturn market.  Further, there is also a large risk of miscalculating the rehab costs that can quickly exceed the ARV, in which case the project is no longer profitable.

For example, the flipper buys the home for 35K with an estimated rehab of 15K. However, during construction, it is identified that the foundation needs work (10K), and HVAC needs to be replaced (5K) on top of the original estimate. Now the flipper has an addition 15K of unforseen costs for an all-in cash of 65K into the project. Their profit on this deal has now been cut in half.

Buy and Hold

This is my current strategy of working with real estate investments and if done correctly, this can be the most passive form to generate income and overall wealth. There are normally 5 different steps for this strategy, but you will notice that you don't have to be actively involved in all 5 steps. Like Tim Ferris emphasized in his book "4 hour workweek" you can outsource these steps, at a price, of course. Take a look below and decide the opportunity cost for yourself:

1. Pre-Approval/Financing: 
This is a key step in the real estate investing process. There are many ways to finance a deal: Savings (from W2, Wholesaling, Flipping), Private Loans, Syndications, Partnerships, FHA, or conventional financing (most common). If you are going the conventional financing route, it is important to be pre-approved with a lender who works with investors AND the market that you are investing in. Just because they are in that market, doesn't mean they have experience with the nuances with working with out-of-state investors, nor does working with investors mean they understand the market that becomes more important during the underwriting/appraisal process.

Pre approval is critical because as a buyer, you want to know your exact buying power, so that when you make an offer, the seller knows it is solid. You might wonder why the lender is asking for many documents such as tax returns, bank statements, etc. simply for a "pre-approval". However, this will eventually save you time in the back-end as these same docs will not have to be re-submitted.

2. Acquisition:  
You have many options when it comes to purchasing a property. You can find a realtor to represent you in the market you are analyzing (they have access to the MLS, and good realtors have built a network to obtain "off-market" deals, often at a discount), you can work with a "turn-key" company (more information below), or work directly with the owner/seller's agent to negotiate on sites such as Zillow, Redfin, Trulia, etc. I would highly recommend working with a buyer's agent as their commissions are paid by the seller and they can give you objective third party advice at no additional cost - more protection for you (note: some buyer's agent may have a broker's commision -  a fixed fee paid by the buyer, and other fees that will be disclosed to you prior to working together).

There are many subcategories to acquisitions: Neighborhood Class, Cash Flow, CapEx/Rehab, Cap Rate/Cash on Cash, Type of Property, Choosing a Market. I will discuss all of these in a separate post.

3. Rehab: 
Rehabbing might be fun for some, but a bag of worries for another investor. In my experience overseeing the rehab of my parent's primary residence, rehabs always tend to take longer than expected, and cost more than expected. If you are the type of person to loss sleep when you uncover unexpected costs or delays during a rehab, I would recommend you outsource this step to another party (i.e. TurnKey). However, if you want to build "sweat equity" and realize savings through your own rehabs or by using a licensed contractor, make sure you do your research and create an accurate budget with room (10-15%) for contingencies. Network with other investors in the local market from BiggerPockets, Real Estate Investor Association (REIA), or Facebook Groups and obtain recommendation for contractors with a solid track record and interview them thoroughly. I have heard too many horror stories on contractors running away with investor money, or providing pictures of rehabs of different houses, only to have the investor make a surprise visit and see that not everything was done as promised. I want to re-emphasize the importance of getting yourself educated so that you know how to ask the right questions and make judgments for yourself instead of relying solely on other people's advice. Remember, no one has your interests in mind like YOU.

4. Management/Maintenance: 
You will often hear that "investors live and die by their property manager". I think this is no doubt 100% true. The sales/acquisition/rehab/financing is only 5-10% of the overall picture. 90-95% of the time you will be working with the property manager to make sure that your investment is being properly tenanted and maintenances being performed.

You can manage your own properties if you are local, however, if you are investing out-of-state, this will be near impossible. Typically a property manager will request 8-12% of the monthly rental income. A couple key benefits for outsourcing property management is: 1) Not needing to respond to maintenance inquiries at all hours of the night/weekends 2) Not having to perform marketing for leases/screen tenants 3) Not having to perform timely bookkeeping/accounting records for tax purposes. I believe the 8-12% is well worth the above services. There are a ton of bad property managers, but there are good ones as well. Make sure you fully vet the property managers just as you would vet the realtor, turn-key company, or contractor. 

Final Thoughts

I will leave you with this final note. One of my favorite speakers/authors Tony Robbins said this: "The defining factor is not the lack of resources, it's your lack of resourcefulness that stops you from taking action" – Tony Robbins.

Whether you decide to wholesale, flip, or buy and hold, make sure that these strategies are aligned with your goals (building capital, or monthly cash flow). Please make sure you do your due diligence and talk to your CPA/Attorney/Financial Advisor before making any investment decision. 

Good Luck!

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