IC Elesson: Interesting Business Models…
One of the great things about coordinating the OREIA National Real Estate Strategies Summit is that I spend most of July and August on the phone, interviewing potential experts about what they do, how profitable it is for them, how it’s working in today’s hot market, all that.
Some of these models don’t make the cut, because I don’t believe they’re working in the current market (like the guy who claims he’s still buying 20 bank-owned properties a year and paying 80% of value…that just doesn’t ring true based on my experience or that of anyone I know) or because I don’t believe they’ll work just anywhere in the country (like the guy that was trying to pitch me on the concept that only $1 million+ properties are worth wholesaling. He lives in California. I live in Cincinnati. Right now in Cincinnati, there are 83 houses listed at over a million dollars, and guess how many of them need updating? ZERO. Thinking his strategy might work better in a place where the median house price is $650,000.)
But others seem truly made for the current economic conditions: those are the ones that end up at the event. I thought I’d share a few of them with you, because they’re pretty fascinating, and gave me a lot of food for thought.
Prehabbing. Several of the wholesaling-related experts I talked to mentioned that they’re doing a lot of “pre-habbing” right now. This is the strategy of SLIGHTLY prettying up a property so that it’s more appealing to investors who aren’t experienced enough to see past filth and junk. Most of the folks I spoke to just clean out and deodorize the property; some also put a coat of paint on the inside.
This, of course, requires closing on the property, but that fits in with the other part of their strategy, which is to list it in MLS where it gets tons of action and, typically, sells at a higher price to one of those buyers who, again, isn’t all that experienced and doesn’t know how to find their own deals or even wholesalers with deals.
Drew and I are trying this on a couple of houses we just put under contract. One is a property that I would sell to my typical buyers for around $38,000, but which is in good enough condition that I think it might actually sell to a first-time homebuyer in the $60,000 range. If I’m right, that’s DEFINITELY enough additional profit to justify the additional cost of closing it, cleaning it, and paying a commission to sell it.
The other property, which is much rougher and unlikely to sell to a home buyer, is one we’d look to sell for $27,000 or so as-is to our current buyer pool. We’ll clean it out, list it for $45,000, and see what happens. The MLS is SO amazingly short on handyman’s special deals that there are no properties in this area including bank-owned properties that have sold for less. A buyer who can get financing at 5% interest (unlike my buyer’s list, which pays cash or gets private money at 8-12%) would do well on this house as a rental. I’m guessing it’ll sell. We’ll see.
“Cooperative Lease/Options”. This is a strategy somewhat akin to lease/option assignments, but the way Jim Aydellote does them, they’re more beneficial to the ‘seller’.
He focuses entirely on median priced + properties that are in very good condition, but which the owner wants or needs full price for. He arranges a lease/option with a tenant/buyer in which he collects a sizable option fee—around $10,000-$15,000—but then gives part of that option fee to the seller, and assigns his own option to buy to the buyer.
I’ve been sort of sour on lease/option assignments in the past few years for several reasons, one of which is that if the investor takes the entire up front fee and walks away, he’s leaving a lot of risk in the deal for the seller, without giving the seller much benefit. This solves a lot of that problem for me. The second reason they’ve bothered me is that they’re awfully, awfully close to practicing real estate without a license, since most practitioners tie them up with no money down AND NO PROMISE TO PAY, and have paperwork that goes on and on about how the investor owes nothing unless he gets a buyer. Jim’s solution was pretty short and sweet: “Get a real estate license. It takes a month and cost $1,000.”
Acquiring rentals with credit partners. We’re in a weird place in the market right now: institutional financing is incredibly cheap for investors (5% fixed for 30 years, anyone?) and rents are very high.
That means that people who can qualify for loans AND are willing to find, buy, renovate, and manage properties have the potential to make a lot of money. The problem is, that combination of ability and willingness is rare to find in one person.
So in my very favorite conversation of the summer, John Burley (a 30 year investor out of Phoenix) shared with me that his current strategy is to be the experience/work side of that deal and find people to be the money/credit side.
He finds deals in a handful of cheaper markets, stabilizes them, marks them up $10,000 (as a sort of finder’s fee), sells them to qualified buyers who put 20% down and get 15 year loans at around 5%, then has the investor sell the property back to an LLC that the investor and John own together. He gets about 20% of the whole deal—equity, cash flow, everything—in return for managing them.
He owns 20% of 2,000 properties, all of which will be paid off in 15 years.
See why I enjoy talking to successful people who are constantly figuring out the market, discovering what buyers, sellers, and money people want that the market isn’t providing, and then provide it for big profits in a low-competition environment?
You can talk to all of these folks, too. Just get to the 2017 OREIA summit. It’s only $157 when you register by September 1 at www.OREIAConvention.com. You’ll learn about a lot of very cool, lesser-known business models, including turning your rentals—regular rentals, not beachfront houses—into airBnB properties, authoring a book to increase your credibility, and much more.
I hope you make the decision to take those 4 days in November and do something good for your mindset and your bottom line.