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How I Decide Whether To Birddog/Wholesale/Rehab/Owner-Finance/Subject-To/Sell/Rent

by Danny Johnson

How to decide what to do with a flip

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. :)
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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.

Danny
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{ 27 comments… read them below or add one }

Jim February 6, 2013 at 9:05 pm

We have already purchased four homes since December 9th and I agree, you make your money when you buy. You only pick up a check at closing. We are having a tremendous run on buying property currently that doesn’t need that much work and we are still making the spreads we like to see.

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Danny Johnson February 7, 2013 at 9:21 am

Jim,

That’s great! Where are you investing?

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Jim February 7, 2013 at 5:46 pm

Danny – We are investing in the Tacoma, WA area. We still see around 100 properties a week come up at the auction each Friday for Pierce County but only about 30 of those actually sell. We are a non judicial state so the banks have to go through motions and many go back to the banks each week.

Although there are many costs to go through the auctions (commissions, holding costs, fix up costs, etc.) I work hard at penciling each property, driving each property, and basically hedging my bets as much as possible. We are making a good living at it and I hope to get a baker’s dozen done this year!

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Danny Johnson February 7, 2013 at 5:54 pm

Not bad, Jim.

Sounds like you’ve developed a system that works for you. Keep in touch and let me know how things go. Thanks.

Danny

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ralph February 7, 2013 at 7:49 pm

Jim or Danny,
I’m a little familiar with the term hedging, but wanted to know if one of you could explain or give an example of the above mentioned. Also what about penciling each property– is that crunching the numbers to determine if it is worth it? Thanks again for all the great info!
Ralph

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Jim February 7, 2013 at 8:28 pm

Ralph – my use of the word “hedging” simply means that I am very conservative in how I buy my properties. For example, when I look at a potential purchase I will estimate my fix up costs in order to come up with a maximum bid at the auction. If those costs are conservatively going to be around $12k, I most likely will put in $15k in fix up costs into my overall bidding process. I do the same with holding costs. The hedging comes in if I buy the property and it needs a new furnace for example, that I was not able to figure out before the purchase. If that furnace costs me $3k, then I am still safe on making my projected net profit based on my initial numbers. Now the good news is, I like to think I am making $3k additional profit on the project if I estimate $15k in fix up costs and it only costs me $12k. That’s a good day for me.

And yes, “penciling” is just jargon for crunching the numbers for a particular project. Hope that helps.

Lubasha February 7, 2013 at 2:53 pm

Danny,

I know my question maybe not in tune to this article but I have this issue right now and see your mail, so I thought maybe you could give an idea what should be my next step.

I just bought house on foreclosure auction and found tenants in it. They are telling their landlord did not tell them anything and they don’t show understanding that they should move out. I left them notice that house is sold on foreclosure auction and according to court clerk they have right to redeem during 10 days after sale. I asked to handle this info to landlord but they don’t seem to cooperate. I found address and phone number of someone with owner’s name online but I don’t know should a care to call or write him since I am not sure it would be correct thing to do. Danny, please advise!

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Danny Johnson February 7, 2013 at 5:52 pm

Hey Lubasha,

This question should be asked to a local real estate attorney to find out what the laws are where you are. How to handle these types of things are different in different places. That’s probably not the answer you wanted, but it’s what you need to do to make sure you do the right thing.

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Lubasha February 7, 2013 at 6:36 pm

Danny, I understand about theory but curious if you had this kind of issues in your experience how did you handle it? For example I had once owners in property that I got from auction and I offered them cash for keys. It did work wonders but now I have tenants problem, not owners. I may try this method again but don’t want to see the owner showing up for his share.

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Danny Johnson February 8, 2013 at 10:41 am

We’ve taken back properties that had tenants in them. I don’t remember the details, but there is an issue if they have a valid lease. You probably have to honor it.

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Steve February 7, 2013 at 9:45 pm

Danny,

If you use a hard money lender to purchase a home with the intentions to flip it, but then decide to rent it out. Can you now just refinance the home without having to pay the 25% down due to it will be considered an investment property?

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Danny Johnson February 8, 2013 at 10:43 am

I think that depends on the lender you choose to refi with.

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Bailey February 8, 2013 at 4:43 am

Great post, Danny.

Jim, congratulations!

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Danny Johnson February 8, 2013 at 10:44 am

Thanks, Bailey

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@buyhousescheap February 8, 2013 at 8:16 am

I look at a property with the intention to fix n flip but I always come back to just getting in and out of the deal and just wholesale it. Danny dose profit spread ever factor into your decision to wholesale it or flip it?

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Danny Johnson February 8, 2013 at 10:46 am

Absolutely. That is why I have a hard time committing to just wholesaling. :)

Wholesaling takes out so much of the risk. I remember doing a deal very vividly that I could have made a huge profit on had I just wholesaled it or even just sold it as-is to someone to live in. Instead, I went for the gold and actually lost money. It’s a long story. I’m sure I’ll share it someday.

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Dave February 8, 2013 at 12:09 pm

Danny…love the post and I would have to agree with so many of the replies. I am up in Canada flipping houses full time. We mostly rehab but recently made a killing on a buy and wholesale deal. We were too busy to rehab the property so we listed it on the open market and made almost 20K for sweeping the floors and taking away some garbage. Now if I could only find them that cheap and profit that much every time….

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Danny Johnson February 10, 2013 at 5:11 pm

Hey Dave.

That’s a heck of a deal you did. I’d like to do those everyday also. :)

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ralph February 8, 2013 at 7:46 pm

Danny,
I wanted to know what type of terms you (or a REI) would offer on an owner-finance deal? Also, if that same property was purchased with private/hard money what do you do next?–would you then refi?
Thanks,
Ralph

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Danny Johnson February 10, 2013 at 5:14 pm

We typically offer up owner financing at about 10%, amortized over 20 to 30 years. We want at least $3,000 down payment and check credit.

Yes, if your loan isn’t set up for it, you would have to refi.

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jeff b February 9, 2013 at 1:42 am

Danny
Thanks for the real info on the way it is. Im grateful to have to opportunity to work hard and get paid. Trying to work smarter and keep up the energy and passion. We all need help along the way. Thanks for taking the time to share.

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Danny Johnson February 10, 2013 at 5:16 pm

Thanks, Jeff.

The energy and passion definitely gets boosts as you make progress and do more deals.

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Luxley Farrell February 18, 2013 at 10:44 am

Lots of great advise.You have help me see thing differently. Thanks

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Danny Johnson February 18, 2013 at 6:18 pm

Thanks, Luxley.

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Erica Hornberg February 26, 2013 at 3:17 am

I like your strategy for buying. It is good to have guidelines to direct your budget so you can stay consistent in your projects and ensure you are setting yourself up to make an investment that will pay off.

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Danny Johnson February 26, 2013 at 1:54 pm

Thanks, Erica.

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Brooks March 20, 2013 at 10:11 am

Really funny, because buying cheap should seem obvious. But after 4 years, it even left me scratching my head. I was wondering how these folks were teaching that you can buy up to 90% of the value. Or even 100% of it’s current value (obviously expecting an increase in value in the future). Sometimes I even doubted if we were leaving deals on the table.
But you helped me confirm. Nope. Stick to the plan. Buy cheap and you’ll come out a winner every time. Well, most times (I’ve lost money on a deal as well!)

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