If you do not have any money to start your real estate investing career with, there are options for you to take that do not require money but 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.
Technically speaking, you can get a house under contract with only one dollar put into escrow. Although this isn’t always the case, some homeowners might want you to put more money down for deposit like a few hundred dollars or more. So what you do, is you make your offer to the homeowner to purchase the house for $100,000, and you offer to put $300 into an escrow account. Make sure, and this is extremely important, that you put a clause in the contract that it is subject to inspection. This means, that during the time of the inspection of the house, you’re able to withdraw from the contract if you are not satisfied with the results of the inspection. If you do not have this in your contract, it means that you are liable to lose the money that you put into escrow.
So now, you have the right to purchase this house at $98,750. You are going to be making your money by selling this right to another real estate investor, but you are going to increase the price to make your money. Let’s say for instance, you add $3000 to the purchase price for the investor. The investors cost to purchase the house will be $101,750, and the repairs will cost $15,000, leaving the total amounts to purchase in rehab the property at $116,750. After doing the calculation, dividing the purchase price and repair cost by the after repair value, you’ll end up with the after repair value percentage. In this example, that percentage equals 66.7%. A number of investors will be using hard money lenders, and hard money lenders typically 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 on how to execute a double close. Not all escrow offices are going to be able to do a double close for you. A number of people at the escrow office do not even know what a double close is. Say for instance, you did not use the and or assigns clause, and you have your investor ready to purchase a house. What you do, is have the escrow company draw up a purchase contract for a purchase price of $101,750 (which includes your $3000 profit). So you are sitting at the desk, and you have two contracts in hand. The deal is going to have to work in this order: Your investor buys the house for $101,750, the escrow company receives the money, and then they use that money to buy the house from the original homeowner for $98,750. So your investor paid for the property, and you in turn pocketed $3000.
Doing a double close is a great strategy when you do not want to real estate investor that is purchasing the contract from your to know how much you are really making. Although it doesn’t happen that often, some investors can be turned off and not want to buy the contract knowing that you are making a large amount of money off of it. Like for example, if you found this same house for $88,750, and you are selling the contract for a profit of $13,000. Even though the deal will still be good for the real estate investor, some might be picky and not want to do a deal with you. So in that case, doing a double close is perfect.
So that is a general understanding of how to be a real estate bird dog. Happy hunting.