When Novations Make More Sense Than Wholesaling

Dan Austin: [0:00] Hey there. Welcome back to another episode of the collecting keys real estate investing podcast. This is the podcast by off market operators for off market operators. If you are in the off market game or maybe you're aspiring to be in the off market real estate game, this is the show for you. Today is a Friday episode, which means it's solo, and you have me as your host, Dan Austin. And today, I wanna talk about something that we have talked about often on, up and down, backwards and forwards before on this show, which is novations. Are novations terrible? Are novations good? What do we think about novations? I've had varying opinions over the years on these. But the reason why I'm talking about these is because we have three going on right now. Three innovations, which is so unique to us. Like, you know, we'll usually pop these off once in a while, but I've hated them so badly. I wish I could remember the episode. But if you scroll like a 150 episodes back, like, you'll find that we interviewed Eric Brewer, which is like the self proclaimed, like, novation expert, which he actually does a lot of these. This whole business is built on these. I'll be honest, I thought at the time this is genius. And then afterwards, I was like, I don't like this at all. I don't like the way you explain that. It kinda just makes me feel uneasy because the way a lot of people are doing novations, I think, is just downright scummy and dirt baggy.

Dan Austin: [1:23] And some of the stuff he talks about, I think, is scummy and dirt baggy. So that's what we're trying to avoid when we do these novations, but we have three. I'm gonna talk about one in particular that we're getting ready to start on, but if I have time, I might talk about, like, the second one. Because a lot of the reasoning people it's like, why are you getting into innovation? Like, what is the benefit to the seller? Because I strongly believe you should be bringing value to the seller and not just taking advantage of an opportunity where you can essentially make a fat net listing fee or something like that. Yeah. Let's dive into this. So we actually have this deal that we're gonna start, and this one's interesting because it has a lot of different facets to it. So why Novation on this one? So this is a, it's actually a manufactured home about ninety minutes from Spokane. So ninety minutes into a rural town. I don't know what the population is, but it's probably just a few thousand people, maybe four or 5,000 people. So it's pretty rural compared to us here in Spokane, and not a lot of people wanna go out there. So to get it for a wholesale price is pretty tough because you gotta get it pretty deep for people to wanna drive all the way out there.

Dan Austin: [2:25] We've wholesaled some deals. We just recently wholesaled, like, four deals in the last, like, eight months out there, but it's super hard. And we just know a guy that has done deals out there before and has had success, but even him, he wants them deeply discounted and is pretty nervous. So it's tough to wholesale them The people and on this one, we didn't wanna flip it because it's just we're not set up to have a crew drive ninety minutes out there, and we just we have other flips going on, and it's just not something that fit our bill. So that's one of the reasons why. But it's a manufactured home. It's a 1981 manufactured home. So it's lendable. It's all that. It's like a it's a double wide, but it's on a basement. So super unique. Like, these people built a really awesome double wide home on top of this basement. It's super dated. It needs carpet. It needs paint. Kitchen probably needs some some upgrading. Bathrooms needs some upgrading. It's not gross and bad. It's just outdated. And the seller, they inherited the property, and they live in Spokane. So they don't wanna have to go back out there. Like like, she was kinda adamant. She's like, I don't wanna have to go out there ever again. Like, I just wanna be able to sign a contract with somebody and then walk away. But the price she wanted was like way too much for a wholesale price or flip price because like on a good day, the the ARV on this thing is $3.35.

Dan Austin: [3:39] I think it could go to $3.50, but it's a manufactured home, and it's out in this rural town. And and just the way the market is, it's not like it's popping off super hot to where you're like, oh, I'm super confident in $3.50. So $3.35 ends up kinda becoming our ARV. And she wanted two twenty. I think she actually, she wanted more than that. I think she ended up wanting, like like, two fifty. But we got her down to two twenty with the idea of innovation. Like, here's what we're gonna do. It kinda we explained it to her. It's like, hey. Here's the deal. You won't have to do anything. We're gonna come in here. We're gonna fix up your house, and we're gonna get more for it. So at the end of the day like, because our cash offer was maybe, like, I don't know, like, $1.90 on this thing. At the end of the day, you're gonna get more money, than you would have, and you don't have to do any of the work. And she wasn't in a hurry to get the cash. The property's vacant, which makes it awesome. These are the types of deals when the property's vacant, and you can go in there and do the repairs, it's the best. A lot of times, people try to like, you know, square peg the round hole with with, owner occupied property, and they don't wanna do work, but it needs work.

Dan Austin: [4:40] It's full of their crap. They wanna get some of their crap out in stages, and it just becomes, like, really frictiony. So on this one, it's perfect. It's vacant. It's not a dump. It just needs, like, lipstick and updated. And, like, as a side note, it's kinda funny. We took the interior pictures and shoved it through chat GPT and said, hey. Can you design this for, like, a more modern day look? And the awesome thing about it is is it spit out a pretty awesome design, like a picture of the design. So it makes it basically gave us a photo of what this house would look like. And it had, like, kind of like a tan LVP, white cabinets, black pools, like total flipper stuff that we would use. But it was awesome because now we can show our contract. We're just like, here's the picture. This is what we're going for, so let's nail it. So we do have to do some work. We don't have a crew that we wanna drive all the way out there. Probably need to put about $2,525,000 dollars into this is my guess to get it to where we want it. Because it's actually it's an eight it's almost 1,900 square foot double wide plus a 1,900 square foot basement. So it's got a lot of square feet. We're not gonna the basement's not completely finished, we're not trying to finish it. We're just really trying to put lipstick on this thing and make it go back to, you know, a more modern day look how it used to look, which is it's super clean. It's just dated. It's nineteen eighties. It has the same carpet from the eighties.

Dan Austin: [5:52] So so we're at, say, 335 ARV. I'm doing kind of the math here on my notepad while we're here. So if I make mistakes, don't don't kill me. But say 3335 ARV. The cool thing is is we we walked it with the contractor and the real estate agent yesterday, so we're all on the same page of what we're gonna do because we don't wanna have to, like, send a bunch of people out there and do a bunch of walk throughs. Right? Because it's an hour and half away. So at 03:35, our sales cost because we do have transfer tax here as well. And with our realtor fees and closing cost, we we run those, like, 7%. It's probably gonna be a little cheaper than that. But, anyways, 93% of $3.35 is $311,000 minus the $25,000 we're gonna put in the rehab. That's 286,000 and minus the 220,000 we promised the seller. Leaves a spread of about $65,000. Now the cool thing on this is is the contractor is actually somebody that's in our scale community. They run a construction company. They also run a wholesaling and flipping business. And they were looking for another deal, and it's like, do you guys wanna just go out there and do this deal for us? So they will basically contribute the labor and and their time, and we're gonna contribute the deal, and we're gonna, you know, help fund all, the material costs and those sorts of things. Right? And so essentially, on their piece, on their half, they're gonna split.

Dan Austin: [7:13] So say we each make $30, they're gonna make $30 on a deal that that's gonna take them realistically, probably two weeks of work. And we're gonna make $30 and not have to manage our crews because our crews are on other projects. Right? So it's a great deal. We're we're splitting the effort. And we both have pretty low risk because there's no no debt involved because the seller is obviously carrying the note because it's an ovation. And the reason why I like this deal is it's not a ton of work as far as, like, it's not a gross house that needs to be completely gutted. So, like, 25 k is what we're gonna have into this thing, which isn't terrible. It's reasonable. It's reasonable upside when you think we're gonna spend 25 k to make 60 essentially as a total, which I like those numbers. And the seller is is gonna benefit because she's getting more money than she could have. And it's kind of a risk because she could she could list it, say, for $2.50 as is. It might sit for six to eight months for her or a year because it's a rural market. And if it's not looking really good, it's not gonna pop off out there because you can literally go on Zillow and look at the eight houses that are available that are still sitting there, and they're usually sitting there because they just don't look that good. So she's reducing her risk and kinda guaranteeing a dollar amount into her pocket, which is at $220,000.

Dan Austin: [8:26] And like I said, she's not in a hurry, we can take the time to fix this thing up. And she knows exactly how we're doing it, what we're doing it, what we're gonna list it at. It's all above board. What I don't like is when people do novations, and we've talked to people, sellers, that had novations done by them by other competitors, and they didn't even know that's what they're gonna do. They didn't understand what that even meant. I don't know why or how. I don't know if the wholesaler or whoever was working with them was trying to be kind of elusive on what they're gonna do and how much they're gonna make, but I think that's totally unfair, and that's not how you should approach it. We have another innovation. I'll just I'm not gonna do all the numbers on it, but we're gonna basically do a we're gonna get a fixed return. So this is a guy, he wants to move into a house that he's building, and he wanted to move at a certain time. He was gonna be down in Arizona because he was a snowbird, so he was down enjoying sunshine while we were all up here in the North sucking in the snow, and he just got back. So we contracted with him back in, like, December, maybe November. And he said, here's what I want. I wanna know exactly how much money I am going to get on this date so that when I'm ready to make the move and I get all my ducks in a row, I can just execute it. So what we said, he has, like, a he's a contractor, so he actually did a lot of work on his house.

Dan Austin: [9:38] So the house is pretty dialed in, but it needs a little bit of work. And so we're gonna bring in like three thousand to five thousand dollars, and we're going to like clean up some paint, fix some unfinished stuff that, you know, everybody has in their house, especially when you're a contractor. And we we are guaranteed a $10,000 profit, and any of our construction costs are recovered. So we we came up with a price where we think that we can we can an ARV that we think is really doable, and he has a price that he's wanting. So he's really not missing out. I mean, he's maybe missing out on, 15 to 20 k tops of revenue that he's basically giving to us. So our value is is that on a specific date, once he's moved out, which he's actually back in town, we're gonna start on this in a week, he's going to be able to move out. We're gonna go in there and get the things staged, get it cleaned, get the photos taken, do the do all the touch ups and list it. He doesn't have to do anything. So now he's focused on the new build that he can keep, that he's contracted, that he's building, he can go work on it. He knows, hey, I'm gonna be guaranteed at least this much. And that's great for him. Our profit's not guaranteed. We will get our costs recovered, but our profit, it's like, hey, man, if it sells for less, there's nothing we can do. We'll just get our three to five k that we put into it back.

Dan Austin: [10:50] But the cool thing about this one is is if it sells for above what we're asking, we're going to split the upside with him $50.50. So he his situation's set up perfectly, and he's gonna maybe even get more, but he's guaranteed. So he knows how much he's gonna get. And then for us, we're obviously incentivized to make this thing sparkle and try to get it out there and sell it for more. And we and we have it that there's a I would say there's, like, I don't know, a 40% chance that we sell it above asking and we make more than our $10. But I like it, and it's something to think about. It's a reasonable amount of money for us to make on like a wholesale deal, which would be $10. You gotta do a little bit of extra effort to get it, but you're locking that in. Here's my guaranteed profit above a certain amount. And that's where these novations can be super helpful. It's like what value can we bring to the seller and what what what value are we getting out of it? Some of these guys, they wanna make a selfishly high amount of money when they're doing these novations, and they're not really bringing anything. I mentioned like Eric Brewer earlier, it's like a lot of this stuff, it's like he wants to go into list ready. Like, he believes in you do no work to the house. He wants to go into a list ready house, and he basically wants to make a big chunk of money just by listing it with his realtor, and then he signs the documents.

Dan Austin: [11:55] Like that, to me, like, no, dude. Like, don't don't do that. Like, why would you give $30, 40, 50, $60 away for somebody else to talk to a real estate agent and sign documents on your behalf? I would not do that. That's a bad that's a bad trade of value in my opinion. So lastly, I'll just wrap up with this, like, why why Novations and what's going on? And so I'll say right now, we are we've got Novations and wholetails going on quite a bit, and it's because we're running across we're in a competitive environment like many of you are. We're running across these deals that there is money to be made. We just have to figure out what is helpful to the seller. We we already know it's like, this is not gonna be a wholesale deal. It doesn't make sense. So why beat the seller up and try to, like, pull them down to a wholesale price? And instead say how much how can I maximize your revenue to to you as a seller while also serving you so that I can earn some money? And that's really what we're trying to do here. And every situation is different. But when you're in a competitive environment and you you see an opportunity to just serve somebody, do it. And usually there's, you know, $10.15, $20 to be made on that, and you you pluck a couple of those away in a in a hard month, and that becomes your baseline of deals. And then you're gonna get a few, you know, low hanging fruit, couple wholesale deals, maybe a flip here and there. And that's like how you get from zero deals in a month to two to three to four to five is you have these different tools in your toolbox that you can pull out. And I always say that because it's true.

Dan Austin: [13:24] Just use it sparingly and use it ethically. That's that's the line I'm gonna use. The innovation, probably sparingly, because it not every deal is innovation or should be innovation, and use it ethically. I will leave it with that. So I hope you enjoyed this episode. If you have questions, like, on the nuances of how to do innovations, the paperwork associated with it, hit me up. Instagram's the best way to do that at investor man Dan. I'm also on Facebook, Dan Austin. Just you can find me there. You'll find find my my face and my shiny bald head. So, yeah, hit me up if got questions. Happy to to share my knowledge on these. And other than that, have a fantastic weekend, and we'll catch you guys all next week. See you.