Novation Agreements Explained: SCALE Community Q&A

Mike DeHaan: [0:00] What is going on, guys? On today's Friday Focus episode, we have a recording that I did for the scale community. It was like a live call. We do those a couple times a week over there. And this one was specifically around novation agreements. It is a common topic that I would say is regularly misunderstood by investors. And if you're unfamiliar with novations, it is an alternative way to get some deals done with sellers that have, like, a more retail ish property, but aren't willing to accept the wholesale price. And so it's a way that you can work with them to go through the listing process, prepare the property to go on the market, and then ultimately sell it to a retail buyer and make a little spread for yourself. And it's an interesting part of the industry because I feel like a lot of gurus kinda hold it close to their chest because they don't wanna give away their, quote, unquote, secrets. But it is a great way to make a win win scenario with sellers that really just need some assistance but aren't necessarily distressed. And so I did this presentation for the scale community primarily just to make sure that everyone was doing it correctly and understood the appropriate times to kinda, like, pitch this with this with sellers. So it's a little bit of a longer Friday focus, but in this one, I go specifically through kind of when innovation makes sense, how exactly you structure it, the documents that are needed, how to pitch it to a seller, and then kind of how to tie it all together and what your options are to actually make money from it. So it was really informational. And since we do a lot of banter on the show these days, I thought it would be really, really good to have a heavy handing informational kind of episode. So, hopefully, you get a lot of value from this one.

Mike DeHaan: [1:27] I would love to know your thoughts on this kind of show. So if you could send me a DM on Instagram at Mike underscore Invest and just give me either a yay or nay, all feedback is great. And besides that, I hope you guys get a ton out of this one. So thanks for listening everybody, and enjoy this call that we did for the scale community around innovation agreements. I'd like to start us up with a quote. So you know everything you want in life if you help other people get what they want. And I felt like this was a pretty good quote for Novations because when it comes to these, a lot of the time, I feel like people use this Novation concept to try and, like, make more money out of these deals. When in reality, what it should be as a way for you to get the seller more like, something that disclosure what they want. Typically, it's a little bit more money. It's a different kind of of transactions, not as much time pressure. And so I think viewing these going in from a, like, growth mindset or, like, a mutually beneficial mindset is really, really important. Because otherwise, what can happen is if these always become not about what the other person wants or what you want, Innovations can tread on that ethical timeline really quickly because they can turn into, you know, I'm robbing grandma because of her ignorance. Especially doing these, I would say even more so than wholesale. Because at least with wholesale, you're providing, like, you're putting up the cash. You're taking an invested, a vested interest in the property.

Mike DeHaan: [2:50] With novations, there's a lot of room for shady stuff to happen if you're not careful. I also think that's one of the reasons they've gotten kind of popular is because people are able to squeeze more money out of suckers. And, unfortunately, that's a really common thing in our industry. So first off, what is innovation? Is it a way to make money into the opportunities? No. It's not that. Is it a backup plan when negotiating a wholesale price starts to get challenging? No. Right? Make sure that you don't use it as, like, a fallback for things. It's an opportunity to get a salary higher price when the wholesale fast cash offer doesn't make sense. K. So it's fundamental core. That's what it is. But in a legal stance in a legal sense, what innovation actually is, so you understand this. But, this is kind of a mouthful. But it's a legal process for an existing contract where a party is replaced with a new one. Right? And so it essentially nullifies the original agreement, and you both of the parties in the original agreement need to agree to allow this new contract to overtake the existing one. It's important to understand this so you know what's actually happening. We understand the concept of an assignment. We've got wholesale deals. An assignment is when you take the rights to your contract and you give it to somebody else. With innovation, basically, both you and the seller are agreeing to have an entirely new agreement overtake yours.

Mike DeHaan: [4:11] And the, arrangements of that and how you get basically compensated are agreed to beforehand. And so that's important because you need to understand that all of the original, like, safeties and your dropout clause and everything that you have in that original PSA, they'll longer apply to you once you do the innovation. So innovations make sense when a property is less than retail ready, but it's too high or the price is too tight to flip or wholesale it. If you're gonna get burned on the transaction cost and lending cost, you do a wholesale or a flip, a innovation could be a good candidate for that, especially if it's a fixer upper, but it's not, like, crazy out of control. You can do novations on, like, heavy fixer upper deals. Basically, you're just gonna be selling it to a more retail fix and flipper. Right? And this is something that is a common, I would say, misnomer with this is people always think you have to have, like, a retail ready property to do these. If the seller's desire is to maximize the money they can get for the property and they don't have a timeline, but the property is a major fixer upper, you can do innovation for those. You can take the fixer upper property, help them with selling it on the market to people that would be outside of your buyers list because they're retail, you know, realtor using fix and flippers.

Mike DeHaan: [5:27] The seller has time and flexibility in what they're doing. If they are on a quick timeline, Novation is not gonna be an option. If they have a super strict, like, I need to be able to sell and stay in the home and, you know, how all this stuff happened beforehand, Novation is not gonna be a good option. That's your job as a direct buyer slash wholesaler to deal with those kind of situations. Right? There's a mutual exchange of value in helping the seller get top dollar. Keyword being mutual exchange. If it's just value for you, probably not the best bet. That's where you're gonna cross into the ethical dilemma there. And then lastly, the selfish one is if you have time and money available to assist the seller in their needs. Don't let the desire or the drive or the opportunity with novations to restrict your own business cash flow needs. Right? If you're in a situation where you literally are not gonna be able pay your bills next month, but you have a a deal to that you can wholesale for $7 or you can do it for $30. It's gonna take you six months. You should wholesale that deal for $7,000 so you can pay your bills. Right? Don't do stupid stuff to try and make more future money. Right? Make sure that you're you're addressing your now needs as opposed to your future needs. And so going through the documents that are required for this process, I just have some snippets from, like, our one of our most recent ones that we've done just so you can see, like, the important pieces of it.

Mike DeHaan: [6:49] And so the first document that you need is a purchase and sale with the seller. It's outlined the arranged between you and the seller. The key points in this are we have the assignability and novation clause, which basically gives you the right to to novate this agreement to a third party purchaser. Right? You should definitely have this conversation. Don't just, like, surprise them with it. But this is outside of our normal PSA. We have a specific PSA for this that is on the drive. Right? And then in that PSA, should also have the specific terms of what you were going to do when you go and you find this third party purchasers. This is one that we did recently. And so it just said, we'll be entitled to $10,000 as a commission to be paid out of the settlement statement at closing regardless of the sales price of the property. And after closing costs are accounted for, all construction costs reimbursed through Elevate Spokane, that's our, our little entity, access funds above that amount due to the seller and $10,000 to elevated Spokane will be split fifty fifty. And so I go through at the end of it, like, the kind of different ways you can structure these to make profit. And this one, we're doing a fixed fee and then any additional profit above that after all costs are recovered, we're splitting $50.50 with the seller.

Speaker 2: [8:02] So this these contracts are specific to the properties with that those numbers and verbiage?

Mike DeHaan: [8:07] Correct. Yeah. These are specific to this this particular deal. All the numbers are in there. So this would that would change depending what you wanna do. First thing you do is purchase sale. Second, you get an attorney in fact or limited power of attorney, right, depending on situation and the state and talk to a closure about this. But they're very similar documents. But this gives you the ability to sell, to sign for the seller regarding listing the property and novading once a buyer's firm. K? So this is important because what you don't want is you agree to the situation, and now you're having to have the seller do all the listing documents, review offers, you know, do the entire realtor process. This gives you the ability to do it. And so in this doing document that we have on the drive, it says here that we have the specifically authorizes us to give permission gives us permission to put the property in the MLS for the purpose, marketing, selling the property, includes executing list listing agreements, signing addendums, disclosures, seller contracts, everything else. Right? And so this is basically gives us the right to go through that process, but doesn't take away their legal rights for the property.

Mike DeHaan: [9:12] You know? So we can't, like, go and steal the home from them or, you know, sign up to put solar panels, do anything weird. It's a limited power of attorney that gives us the ability to do explicitly what's stated here and nothing else regarding the property. And so on this one too, what's important is as you go through this, you'd see it on, like, the sample that's on Notion, but we specifically say which property it applies to. You know? So if there are concerns, it's a landlord, those sort of things, and they don't want you to, like, be able to do this for their entire portfolio. It's specific to the property and the situation. Number three is notice of interest. This is how you protect your interest in the property. Right? Especially important if you're putting in any renovation or holding funds for taking over their mortgage, paying off their water bill, you're paying off their taxes. Notice of interest, what it does is it, allows you to record your interest in the property, similar to putting on a a a cloud on title, but you can do it from at a financial level. Right? So you can say, we're going to be taking an interest for $15,000. This is a document that needs to get notarized.

Mike DeHaan: [10:13] Right? Otherwise, it becomes what's called a self serving document, which title companies won't like, and and lawyers technically won't like. But if you can get them to get this notarized, it will protect any financial interest in this property. It will also prevent them from selling it behind your back if you're concerned about that. Fourth one, it's innovation and indemnification agreement, and this is the one that you sign after your buyer's found. So after you go through, you put it on the market or you just find your other buyer, however you wanna do it. This is an entirely separate document that both you and the seller sign again. It terminates your obligations of the original PSA. It basically explains the agreement of the of how the new PSA is gonna work with the retail buyers. Right? And so the most explicit parts in this year, just stating, like, on this one that the seller, is going to actually have third party real estate purchase purchase agreement. So they understand they're now gonna be taking on this new purchase agreement from their new borrower, and that the existing one is being terminated and everything that's coming with that. And so there's a handful of other things in that clause, in that contract. It's like a couple pages. But this is one that both you and the seller sign, and this is what will allow the transaction with the new buyer to start moving forward.

Mike DeHaan: [11:26] So, basically, the step by steps here all laid out. The seller agrees to the price slash process, signs a PSA. The attorney in fact is signed, which gives you the ability to go and advertise and find this third party buyer. Notice of interest is signed and notarized. All these go to the title company. Right? I should say I should have added that in here as, like, step 3.5. Once you have all those done, they all go to the title company. Profit is listed on the MLS. If you're choosing to sell the MLS, you can also do innovations without going on the MLS. If you have, like, pocket buyers, things like that, better retail. But and that's all done by you since you have the attorney in fact. So your, your seller shouldn't need to be signing any MLS docs or anything you've done it correctly. Your third party buyer is found. You and the seller signed the novation agreement. You work with the agent, buyer, and seller throughout the transaction to make sure everyone's kinda doing what they need, and then you get paid as a line item at the closing. This is where transparency is important because your payment will show up on the line item on the seller side. Right? So if it's something where they're walking away with no money and you promise them all this stuff and you're making $50, they're gonna see that. And so it's important that you're transparent with these things.

Mike DeHaan: [12:33] Does that all make sense? Any questions on that? Let me move on to, like, the actual pitch piece here next.

Drew: [12:39] What do you guys do about, like, disclosures from the seller to list the property on the l MLS? I don't

Dave: [12:45] know if

Drew: [12:45] you have that in Washington.

Mike DeHaan: [12:46] But Yep. Yep. That's that's that's a standard thing. So basically all the questions about the property, what's what's the utility, when was kitchen update, has there ever been a flood? I highly suggest you have the seller, if they're available to do it. Set up time, sit down with them, go through, and you can also do the typical realtor slash investor thing. If there's anything that like, oh, I gotta figure that out. Don't know. That's why there's that box over there on the fourth column. So pitching innovation, make sure the sellers are match first off. And so we say the good kind of seller is gonna be they're put together someone that, you know, have a job. They know what they're doing. They're not a crackhead. Right? They're not an absolute mess. You'll kinda know in your gut if they're not a good fit. Right? They don't have a strict timeline. They could sell it next month or in three months. It doesn't really make any, difference to them. Typically, they could sell the property retailer on the market, but they need assistance slash want ease in the transaction. We do a lot of these with older people that that don't have anyone in their life to help them out. One of the ones I have a little case study at the end of this, and literally it's a guy who's lived up here. His wife died. He's trying to move to Arizona.

Mike DeHaan: [14:03] And the only thing that's stopping him from moving to Arizona is he has this house that needs a little bit of work and that he wants to get out of. Right? And he's like, I just don't really know how to do this. I don't know about it. He got, like, a couple quotes to fixing that were insane. He's like, I don't know know why I should have to pay this. And so we're taking the deal over. He's already moved down to Arizona. We're basically handling it for him. Right? So those are the kind of people that you want. And then money is the main motivator. If money is not a motivator, the cash purchase is typically gonna be better. You know, if they are if they need something a little bit quicker or they're just like, just want this thing off my hands. Even if you can make more money doing the innovation, it's a service based business. Right? Do what's going to get the person the result that they need out of the transaction. So bad matches will be seller of the basket case slash flight risk. There's somebody that every time you call them, you have to call them 87 times to get them on the phone. They don't respond to anything. Right? Like, you don't know where they are half the time. Sometimes they're, like, just not at their house for four days. You don't know why. Like, you don't wanna deal with that person.

Mike DeHaan: [15:01] If there's complex legal hurdles in the transaction that you're predicting, probate, pre foreclosure, divorce, those aren't good candidates for innovation because what's gonna happen is you're gonna get a retail buyer who's coming in and is, like, ready to buy this house, and then you're gonna face all the bullshit that we deal with on the wholesale side, but you're gonna have a much less patient buyer. So make sure that those problems are solved if you're gonna go this route. Seller has a deadline that's not negotiable. They need to close on a new house and they need the money. Sure. They might want retail price, but their closing is in three weeks. They need the money, like, by then. Not a good fit. They just got a new job in Wisconsin and they're moving here next month and they need to close before then, not a good fit. You can't control it. With wholesale, you control the timeline. That's kind of the value that we bring with a wholesale transaction. And then or if the seller needs to remain in the house after closing, again, not a good fit. Some of you guys are agents on here. Jake, you're on my screen right now. How fun is it when you have a retail buyer that comes in and the seller's like, well, I need an extra two weeks to stay in my house. Doesn't fly with a retail buyer, like, ever. No. Not without money. Not without money.

Mike DeHaan: [16:07] Exactly. Right? And this there'd have to be concessions. That's a whole other thing. But because you are the one that has the limited power of attorney on this, attorney in fact, you don't wanna have to be making those decisions on behalf of the seller having to open up those conversations. So it's best if it's a property that they're going to be out, doesn't have tenants unless it's being sold as a rental property. Right? And that that part is very, very clear. When you're pitching it, keep it simple. Don't try to explain what a novation is. Like, you like, it's a legal term. You start to bring up things like that with people. Their eyes glaze over. They're not real estate professionals. They don't care. We like to put labels on it. Equity protection programs, Eric Brewer thing. That's what he's always pictured as. We've actually been saying our fix and list program, which has been working really well. We actually just started putting together these new trifolds, and we actually got a deal off of these because we list our fix and list program in here. So our guy got one of these. He was interested in our cash offer. He said he was looking at our trifold later, he wants to know what our fix and list program is, a management of getting innovation signed around. Having this like a a sales offer right around it that is better than like, oh, you know, a why we have you this thing called the innovation. Basically, we partner up.

Mike DeHaan: [17:19] Do you, like, flip the house? Blah blah blah. Like, that sounds like work. People wanna do that. But if you have a designated program that you're a pro at, you know, it's your first one, it just feels better, right, to the seller. We like to pitch it as, like, a crazy idea after the wholesale offer fails. We always come in with a low price offer because the value of the wholesale offer or having the direct control of the contract, right, is you get completely unencumbered access to sell the contract, take control of the property, everything else. Once you do innovation, you kinda lose that. And so what we normally do with these, we always come with a wholesale offer. They don't like it. Don't wanna accept it. They can't. Whatever reason, then we'll have, like, a crazy idea of, like, well, we have this fixed on this program thing. And so I have, like, a little blurb here that's similar to what Cody's done with people. As you know, what we may be able you know what? We may be able to you more money on the open market if you don't mind waiting through that process. I know the place needs a little bit of work with our fix on this program. We can handle all the details and get you a top end price with no money or work required. Right? And so it's an offer for them.

Mike DeHaan: [18:24] They understand it's gonna take a little bit longer. It's not gonna create any more work for them, though, and that can be appealing. But we always gonna keep it as, a reserve thing. So do not pitch a novation just because there's resistance to your wholesale offer. This is probably the biggest issue I see with people that start to do this. I didn't realize how hard this is gonna be when they're big either to read. Is this is really hard too when you guys bring on AMs and they start to get a little thirsty for commissions is as soon as the seller is like, oh, well, you know, I don't really like your wholesale offer. They go, well, I have this thing. It's it's our fixing this program. We make way more money. So let's let's just do that instead. Right? If you don't wanna lose the deal, don't do that. Like, need to this is where the experience and the discipline comes in is you need to be sure that a wholesale offer does not make sense before you go down this route. Don't just do it as like a, I'm being lazy or I wanna avoid hard conversations. You know, make sure that it's actually net positive for you and the seller, not just you. So if it's something where they reject your offer and now you have this fix and list thing and they're gonna basically come out the same, but you're gonna make off like a bandit, that's crooked. Right? Don't be that guy. That's what gets our industry regulated and ruins it for everybody.

Mike DeHaan: [19:38] So ways you can structure them. So there's, there's kind of a lot in this phase on this once you guys can review this on the recording. But there are lot of different ways you can structure these kinds of deals. A lot of people tend to get like like some of these more than other ones, but, you know, there's there's a certain place for each one. Right? So you can do a get a fixed fee for the service. So basically say like, we're going to carry you through this and you're going to pay us $10,000 You can do a fixed fee plus any additional profit or say like, we're going to give you a floor pot, a floor price of $300. You're going to pay us $10 minimum plus we get everything else above that that's remaining. You can do a fixed fee with split additional profit. So, basically, you get the $10 or whatever you decide plus, you know, everything above that you're gonna split with the seller. That's a great way to incentivize them a little bit more to work with you on this. Even you know fixed fee, you get all the profits above the promised PSA price. So that's basically like, I'm gonna give you $300 and everything above that is for me. You can do a, no fixed fee with split profits above that. So you can say we're gonna give you $300 base, but everything above that we're gonna split $50.50, so you're gonna make more money for dealing with this.

Mike DeHaan: [20:47] And then you can do you can do an adjusted fixed fee based on your time and materials. This is kinda like a GC way to approach things. This is probably the last choice for most of you guys. But if you are, like, a construction heavy person, you have crews and you're, like, trying to balance out the cost for that, you can run it kinda like similar to a GC where you will get paid for time and materials plus profit outside of the closing. This is what people do in high end markets. If you've ever connected with any people that do, like, really high end, like buy at 3,000,000, sell for 5,000,000, put a million into it type of deals. Right? Probably even bigger than that. What they'll do is they will basically sub out a team that does all that work, and then they will get recon plus profit through the sale. But there's lots of ways you can structure it. And the way that you need to go about it is what's gonna be most mutually beneficial and appeals most to the seller. Right? And so what I typically like are if the deals are tighter, give yourself a fixed fee for the service. Or, like, if you're not as sure about the comps, write in your fixed fee so that you're gonna get paid no matter what. And then if they're kinda like a stickler, you can do like a fixed fee plus, you know, you split profit with them for bearing with you.

Mike DeHaan: [21:54] If it's a deal that's like a little bit juicier, but, you know, you wanna make sure that it's still ethical and everything else, the no fixed fee plus split profits can be a good way to go because then you're gonna be sharing in the upside with the seller equally. You just kinda need to, like, have this conversation with them and see what makes sense and then sort of read the situation. And if you're unsure, if you're looking at these and, like, I don't even know where to start, just write them in by putting in, a standard fixed fee for yourself. I think a good amount in most markets would be 10 to 15,000 for basically going through the process. K? So if you look at this and you're completely lost, that's why I would start, and then you can kind of explore the other ones as you go from there. That being said, if you're, like, in a lower price point markets and you guys are in markets where homes exit at, like, $1.20, $1.30, fixed fee might need to be lower or the, profits list might be a little bit more, kosher on those. Questions you should be asking, and this is not to the seller. It's kinda like just in general about the process. What happens if an innovation property doesn't sell in the market?

Mike DeHaan: [22:54] That can happen. We like to pretend like that will never happen. That can happen. We have seen this happen. We actually had one of these happen last year. Understand if that happens, that agreement is terminated. It now defaults back to your original PSA. So you were still bound by its terms and conditions in that PSA, and you may lose earnest money if you don't close at that price. Right? So understand that is the associated risk. What happens if a seller decides they don't want to sell or tries to sell to someone else? Sure. You've done all this documentation, everything else. Still can't control humans. They'll do weird stuff. That's where you're protected by the nose of interest. Make sure you record it. Right? And if things get weird, you can pursue it. We actually have one right now where we are in the process of, we just served a seller that she's getting sued, and it's a real weird deal, because we basically paid off her taxes for Then she goes to us completely. So we had but we had a notice of interest signed before that. And so we essentially recorded a lien on her. She got served. And then it's so funny how people get served lawsuits, and then all of a sudden they're wanting to talk to us again. But our attorneys, like, don't talk to her for at least three weeks because that's basically when the everything becomes official.

Mike DeHaan: [24:05] So, who pays the mortgage slash what happens if the seller stops paying their mortgage or defaults? This is why you should only do this when you have good sellers. Right? Don't do it with, like, heavily distressed people or kinda dirtbag people. You know, make sure it's mutually beneficial. If the seller is in a hardship so the very first innovation that we ever did years ago, the seller was in a hardship, you may need to pick take over their payments. You can re comp those at closing, but understand that there might be additional carrying costs that come with doing these deals. So when in the case of that, when we did that one several years ago, we literally just logged on to his mortgage account and set it up so that it drew from our business bank account for the three months service to do the deal. Right? Because I guarantee you that if we hadn't, he probably would have defaulted them. The law would have caused more problems. And then lastly, is it okay that I'm making 50 k on this innovation and the seller's only making 10? Your ethics are your choice. Right? Just like real, wholesale real estate, it feels slimy. It probably is. That's just sort of a good rule for life in general. Alright. So a little case study. So it's kinda like a wall of text.

Mike DeHaan: [25:05] I was, scrambling getting this one together before I hopped on. So this is one of the ones that we currently have. These are some photos of the property. Pretty retail property. And in Spokane, house needed minor exterior repairs and cosmetic cleanup. Estimated cost to do this is about $10. ARV is 370 k. After cost and repairs to sell would net about $3.26. That's including the sales cost here, the excise tax, and the agent cost here in Spokane as well as a 10 k estimated repair cost. Seller retired and eagerly the area. He has already bought a retirement home and just doesn't wanna deal with his house anymore. Our wholesale price or wholesale certain price was $2.60, and his response was, I'm not that desperate to sell these things. Like, I'll just deal with it if I'm gonna take that much of a haircut. But he agreed to have us help fix and list the property and manage listing suite and go and move to Arizona. The floor price for the sale was 300 k. Our minimum profit that we set was $10 because there are like, it is a little bit tied and there are, you know, some questions around the comms, especially with the neighborhood and everything else. So we raised and brought ourselves in a minimum of $10,000 regardless of the outcome. And then anything above $310,000 and us recouping our costs will split $50.50. Right? So basically, we're guaranteed $10,000 and to recoup our costs out of the bottom line.

Mike DeHaan: [26:23] But anything above the 310,000 will split with the seller $50.50. If it sells through what we expect at $3.70, we should make about $20 while the homeowner will make 55 to 60,000 more than our cash offer without having to do anything. Right? And so plan for us is for us to paint the garage, fix up the house, and list it. If we were to have gotten it at $2.60, we'd probably get a wholesale there for, like, high 2 sixties, $2.70. Right? So it's gonna take us a little bit longer, but we're make twice as much money. And then on the seller standpoint, he's gonna make 55 or $60,000 more than if he would have accepted our offer. There's no timeline constraints. We're not gonna take out debt. It's gonna work out pretty well. Right? It's very mutually beneficial all across the board. Makes sense?

Dave: [27:06] So did he give you, like, a bottom line what he was looking for?

Mike DeHaan: [27:08] He did. Yeah. It was the classic one, Dave. You've had so many of these conversations. Like, I'm not taking anything less than 300. Right? It was just to, you know, he he put that price out there. He act actually, he wanted originally wanted 320. And after we were at $2.60, he came in at 300. He had talked to an agent. He'd already kinda like done this math and figured out that that's where he would be. So we did have to talk him down a little bit, but other than that, he was open to the conversation. But a quick wrap up. They're a great strategy and tight market where sellers can't just list a home and expect an easy sale. If you go back to like 2021, innovations didn't really make a ton of sense because people could just, like, list cardboard boxes on the market and sell them for over asking price. Right? Now there's a very legitimate population of people that are put together people that have houses that are just less desirable, right, that they are going to need to sell, probably want assistance, people who've gotten older, people looking to retire. So there's a population that exists right now for these. Okay? You approach it as a service, not as a purchasing opportunity and give sellers white glove treatment.

Mike DeHaan: [28:10] Understand with this that it needs to be mutually beneficial and treat them that way. Like, once you go into these, you are in bed with the seller until the deal goes through. It's not like a wholesale deal where as soon a transaction closes, you're done or a flip as soon as the transaction closes, you're done with the seller. You're in it with them for the duration of this transaction whether you like it or not. And innovations will affect your cash conversion cycle. So be smart about when you're using them and understand your full cash needs. It goes back to what I was saying at the beginning. Just because you have one that, like, seems decent, like, if you're trying to do this deal and you're gonna do all this work to make $20, you have to decide if that's worthwhile to you. If you have nothing else on the table, sure. If you have, like, other options you're trying to work and there's gonna be a distraction, it probably doesn't make sense. Right? So just understand that and your needs for your business, in line of what what, what you need to do.

Drew: [28:55] Good presentation, man. There's a lot of really good stuff there, and I'm inclined to agree with most of it. I have a few thoughts. But my question is, and you may have answered this, when you had this scenario and a house needs a couple of things or rehabs done, Are you doing the rehabs before you put it on MLS?

Speaker 2: [29:14] That's a good question.

Drew: [29:15] Are you pro at?

Mike DeHaan: [29:16] So so the the ones that we've done, we have the one that we have that have, like, significant work that we did a couple years ago, we did the work before we put on the MLS. I kinda like your thought though of is there, like, a way you can almost, like, presell it or almost find, a retail buyer that's okay with, like, the situation.

Dave: [29:37] Yeah. There's definitely not Yeah.

Drew: [29:38] You're reading my mind. Yeah. Because that's exactly how we do it. The way that the way that we do it is, first of all, to know whether or not it's a novation, it's a mathematical thing right out of the gate. You're gonna try to wholesale it or buy it for cash. Mhmm. And if that price isn't good enough for them, then there's a novation offer that you can try to help them get that's a little bit higher. Right? So, like, these these groups that do, like, all novations, they can't possibly be trying to find the best outcome for the seller.

Mike DeHaan: [30:08] They can't. Yeah. It's not.

Drew: [30:10] They're definitely not. So that said, the way that at least we do it, and this doesn't make it right or wrong, but we've had a lot of success with it is we'll go talk to that seller. Our wholesaler, our cash number just doesn't make sense for them. And we say, okay, what do you need to get out of it? Right? Like, maybe I'd give them $1.80 cash. That's no good. They have to get to 200. Like, maybe that's their payoff is $1.95 or something. Like, they have to get to 200, and the house is worth $2.50. But it needs $10 in work, something like that. So what get out of here. So what we will do is we will set everything up for an ovation, but we put it straight on the MLS most of the time without touching most of it. We might tweak one or two things. Like, if the roof is pouring water in the house, okay, we're gonna at least patch it or something. But we list it with, like, a clause or a statement that says we will provide up to 5,000 or $10,000 in inspection required concessions. I I don't I forget exactly what we call it. But when someone wants to buy it, like, say that just dogs tore up the carpet. Rest of the house is beautiful, but it needs carpet all the way throughout. So that's gonna be $7,000.

Drew: [31:18] Okay. Well, we're gonna list it as is. We're not putting our money into it first, and we will offer, you know, up to $7,000 worth of inspection required repairs.

Dave: [31:29] Mhmm.

Drew: [31:31] And so then when it goes under contract, they know that we're gonna be on the hook. And and then once we've got contract, everyone's agreed, then we'll put that money in to do those rehabs. And so the risk of being out the money upfront goes down exponentially.

Mike DeHaan: [31:48] Yeah. That's interesting. You're almost giving them like a, you know, buyer inspection insurance policy. Right? It's like it's like, if it happens, like, we'll cover the cost.

Drew: [31:57] Well and that's exactly what it is, and that's where most of these sellers that's where they need the help because they have a good house with good equity where, yes, they could list it themselves, but they don't have the 10 to bring to the table to fix all that carpet or to, you know, brace the basement because they've got a broken support beam or something like that. So what we do is we because the toughest thing with novations is trying to convince people, well, why wouldn't you just list it yourself? Yeah. This is the problem that we need to fix for them. So we come in. We tell them we're gonna fix this problem. We'll still get you your number. We net the difference, but we're still fixing their problem. And that's the crux of how innovation, in my opinion, should work is you're helping to fix that problem.

Mike DeHaan: [32:39] Yeah. That yeah. That makes sense. I it's fine. I guess the ones that we've done, we haven't had any, like, major CapEx items, right, or anything like that that's a concern. It's always been, like, kind of cosmetic stuff. Right? So the larger one that we did a couple years ago, the big thing was he had, like, basically half finished the basement. He already, like, framed it in and drywalled it and stuff. But he hadn't, like, finished the drywall, painted it, or done carpet. So we basically just came in. We did all that. It cost us, like, $20, which we recovered. But the guy was, like, literally had gotten divorced, was in, a pre foreclosure and was just trying to get out of the situation as fast as he could. And so we put up the money on that and basically just recorded a lien. But that that act increased the value of the property by a $100 by going through that process to essentially double the square footage. You know? And I think the the thing is and then so then what we did with that one is when we sold it, above our scratch price, we split our profit within fifty fifty. And so we ended up making like 50 k and the the seller made like an extra like 100 and some thousand based off of whatever we were gonna offer. Right?

Mike DeHaan: [33:47] So it was super beneficial. But I think a a big point of what you're saying there too, Drew, is it's so case specific. Right? And that's where these get kinda weird. And, like, you really need to figure out what the seller needs in order to set up the best possible scenario. You know? And then probably too what you need to in order to to get what you can. Because in your case, if you can avoid putting in the $7,000 in carpet and still sell it for the same price, like, why wouldn't you do that?

Drew: [34:16] The other thing, I guess, that I would put out there is for us, like, we've got a spreadsheet that our our AMs use to calculate all of their you know, what they should be offering. And we've built novations into that. Right? So they can see what I want them to offer if it's a wholesale, and I want you to start at, you know, you anchor here, and then here's four offers to ratchet up. But then if that's not it, well, then here's the novation numbers. So they don't have to, you know, get off the phone and then come back to us and brainstorm about it. Like, they've got a pretty I pretty good idea of you know? And they float the idea and say, you know, we'll have to check with management. But if I could do this for you now this they just got all the numbers right there, which has been a game changer.

Mike DeHaan: [34:58] How much do you bet the seller on that? Like, you're not gonna do that if it's like a crackhead. Probably not.

Drew: [35:03] Probably not.

Dave: [35:05] Everyone's How much do we last. You just don't see that? Yeah. It's a

Drew: [35:08] lot more vetsier than crack, but that's a good question. How often do we vet the seller? Most of the time, if they're truly there's drugs involved or major, major, major disarray in their life, the house is so far gone that you're gonna buy it for cash or it's an absolute dumpster fire. We're probably talking about someone who got sick with cancer or someone whose spouse just ran out on them, and they've got a good house and a decent life otherwise. They're just kind of in a pinch, and it's time to move back home somewhere. They just don't like, someone broke six of their windows, and they don't have the money to put it together or, you know, something squirrely like that.

Mike DeHaan: [35:47] Totally. Yeah. So much of the situations. Right? You know, it's so it's so hard. It's so dependent. But no, man. I appreciate all the all the insights on that. So when you when you do your profit on these, Drew, I'm just curious how you do these before you move your office format or whatever you're doing over there.

Drew: [36:06] Yeah.

Mike DeHaan: [36:06] Do you do you structure it where basically you have a floor price and then you're getting everything above that or do you do like a fixed fee model or what's your setup?

Drew: [36:14] I mean, it's basically a conversation with them about what do you need. Right? Like, my cash offer of x isn't gonna be a good fit for you. So tell me what you need and let me find a way to help you get it. Okay? And when they share that with us, you know, if my $1.80 doesn't work and they come back and say, I have to have 200. Okay. Here's a way that I'm pretty sure I can get that for you.

Dave: [36:34] And,

Drew: [36:36] you know, again, we use this in a scenario where they need they could put on the market themselves, but they need to address this one issue, and we address that issue for them.

Mike DeHaan: [36:44] Cool. I like that. Solution assurance.

Drew: [36:46] But I but to answer your question

Mike DeHaan: [36:48] Yeah.

Drew: [36:48] It's we get everything above what they need.

Mike DeHaan: [36:53] Yeah.

Drew: [36:53] Yeah. So we're all agreed upfront, and

Dave: [36:55] we have open discussions about, you know, listing it with our realtor and going through showings, and you'll have to

Drew: [37:01] come to the closing table. And, like, it's a 100% transparency because without it, you're just setting yourself up for failure.

Mike DeHaan: [37:08] So you still have them go to the closing table? You don't take the power of attorney?

Dave: [37:13] I'd have to double check with Joel on how we do that. Yeah.

Drew: [37:18] But I think the simple answer is yes, because to novate something really needs to replace one thing with something else. Right? So we come in, we put a contract in place, we get them to the finish line, and then the new buyer's contract novates ours. And we essentially remove ourselves from it for a fee at the closing table and let the seller and buyer do their thing.

Mike DeHaan: [37:42] Interesting. Yeah. Because we intentionally have that that power of attorney so that we can do all that process for them. They don't have to do it. Then we don't have to worry about, like, being the middleman to get them addendums or extensions or all the other stuff.

Drew: [37:57] Yeah. Yeah. That's good feedback. I I'll

Dave: [37:59] have to double check because, again,

Drew: [38:00] my guy handles most of it for us. But that might be a difference in our process.

Mike DeHaan: [38:05] Yeah. Yeah. Still, it avoids any, you know, delays and people do weird things. Cool. Nah. I appreciate all that feedback, dude. It's awesome.

Speaker 2: [38:13] Check, Carl. You might have answered this already, but and this is for Drew as well. But what is it do you have the Novation added into the calculator somewhere?

Mike DeHaan: [38:23] Do. On his calculator. We don't have one on ours, I

Dave: [38:26] don't think. You don't

Speaker 2: [38:26] have one on yours, Mike?

Drew: [38:27] No. Drew, do know if you could

Speaker 2: [38:29] share that with the group? Or

Drew: [38:31] I basically took the scale community, like, flipping calculator, and I juiced it up a bunch because I'm a dork, and I like doing that kind of stuff. Me too. But, yeah, Mike Mike, if you can help me remember, I'll be happy to post it. I just sent it to Dylan just yesterday because he wanted it for a project. So happy to share.

Dave: [38:51] Cool. Yeah. Appreciate it.

Speaker 2: [38:52] Man. Appreciate that, Drew.

Drew: [38:54] Yeah. No sweat.

Mike DeHaan: [38:55] Alright, guys. Any more questions on these innovations to wrap up?

Dave: [38:59] Yeah. I just got a quick question. So when you're analyzing a or, you know, as far as why a seller would want to do an ovation, would it be a I know they're all seem to be fairly unique kind of piecing things together, but is it more often than not that there's work that needs to be done for them to to get a higher price or get the price they need or they and you can sell them on a way for them to net, you know, what they are saying they want or a higher price or and or is it just that they just don't wanna deal with a realtor? They just kinda don't want they they kinda like the idea of somebody helping them with this stuff.

Mike DeHaan: [39:36] Yeah. So kind of all the above what you just said. And I think a key thing, and this and Drew said this very specifically this way. It's about it's not about what they want. It's about what they need. So you go off of what they want, it's always gonna be more. Right? If you ask me what I want for my property, I would I will happily sell you my home for a million dollars right now. It's not worth that. I would I would love that if you did that, but it's not what I need to move on. And so when it comes down, like, it still need to be a motivated seller in the way that they are indeed looking to sell the property. And and it's something that they are certain they wanna do. And then when you go through and you're figuring out, you know, the wholesale price isn't gonna work for them because it's not gonna meet their needs. If there's an extended timeline, what is the price that they would need in order for you, you know, in order for them to move and does it make sense for you to do innovation at that price? Right? Because it's possible they're still gonna need too much, you know, or like in order to get that much, there's gonna be too much needs to go into the property in order to to get to that point.

Dave: [40:34] I mean, you know, a lot of times we ask the question, you know, have you thought about is there a reason you're not listing the property to realtor? I mean, is that that that would still be a valid question in this in this case, or or would you it's almost like you feel like you wouldn't wanna say it.

Mike DeHaan: [40:48] I think that's a great question. Right? Like like, why is there a reason you haven't just listed it yourself right now? Oh, well, I know that I was gonna I don't wanna have to deal with all of that. Right? That there's gonna I don't have to deal with all the inspections. I know they're gonna find this crack in the foundation.

Dave: [41:02] So in other words, if we could show you a way that you could get get what you need and not have to deal with all that, that we could help you out with all that. Was that something that would make sense to talk about?

Mike DeHaan: [41:13] Yeah. I think in your market, Dave, doing stuff down there in SoCal, there's probably a decent number of opportunities for stuff like this. There's probably a lot of guys down there that do these that are like these higher end realtors. Especially if you're getting out and, like, into Newport Beach where the properties are very, very expensive.

Drew: [41:28] Mhmm.

Mike DeHaan: [41:29] But we're gonna add something on that, Drew?

Dave: [41:31] I was just gonna say,

Drew: [41:32] I mean, the question was, would you not wanna ask the question about why don't you list this with a realtor? You have to ask that question because you have to get to the other side of the answer regardless of what it is. So it'd be better for you to bring that question up so that you can coach them through that in an honest way, not a manipulative way, but an honest way to get to the other side of that. Or you're gonna pitch them on it. You're gonna walk away, and they're gonna go tell their aunt about it. And their aunt is like, look, I'm a realtor. Let me just list it for you. Right? And if you haven't gone through the mechanistic the mechanism of why haven't you just called a realtor, you need to hear what the answer is and then help them understand what you bring to the table. Because most most people look at innovations and say, they're stupid. It doesn't make sense. Why would anyone do that? Because all they see is you listing it on the MLS. If that's all your innovations are, then that is stupid, and they should be asking you that question. What you bring to the table is there's something getting in the way of them sending it to market. Mhmm. You need to figure out what it is, and then you need to be the one to help build that bridge to get across it to the other side. And you're gonna get paid for that value. That's it. It's a good response.

Drew: [42:37] So ask that question.

Dave: [42:38] Yeah. Yep. That's good. Thanks.

Mike DeHaan: [42:40] Alright, guys. What's that, Dave? One more thing?

Dave: [42:42] Oh, I was just gonna say it seems like being honest about stuff just seems to work a lot of the time. Right?

Mike DeHaan: [42:47] It does. More often than not. But don't you believe that if you if you're honest and transfer and transparent with people, typically, leads to easier conversations. Cool. Alright, guys. Well, thanks for coming today. You guys have a great rest of your day, and I'll see you guys there.