How To Underwrite A Novation Deal | Wholesale Real Estate

Determining how much you can offer a seller on a novation deal is similar to how you would determine your MAO on a wholesale deal, with a few key differences. You still need to be conservative with your numbers, and to only use comps that are of the same property type in the same neighborhood, without crossing any main roads, and of similar square footage and year built. A big difference though is that instead of looking for ARV comps, or comps that have already been renovated and are selling for top dollar, we are looking for as-is comps. We want to determine how much our property will sell for on the market in its present condition. Meaning without us making any repairs or renovations. We're going to do this by analyzing what other as-is properties have sold for in the area in the last 90 days and what properties are currently listed on the market or pending. Now, when underwriting a wholesale deal, looking at what's currently on the market is not as important because more than likely by the time we have assigned the property to another investor and they have completed their renovations and listed the property, the inventory that was on the market when we were underwriting it will no longer be there. However, with Novation deals, these properties are going to be our direct competition, and we need to make sure that we are able to price aggressively to ensure ours sells the fastest. So step number 1 is to determine the as-is value. Take for example this house I randomly pulled up in Phoenix, Arizona. Now, this isn't an actual lead of mine, it truly is just a random property I picked on Zillow, so we're just going to assume that it is in as-is condition and doesn't have any major mechanical issues like the roof, AC, electrical, or foundation. Here are the pictures that were listed on Zillow, so you can see that it's not updated by any means, but it's livable. And as I said before, the first step is to identify some as-is comparable properties. So you can see here 4 properties that I have identified. The first 2 are going to be as-is comps, and the last 2 are going to be ARV comps. If we take a look at comp number 1, we see that it is very similar to our property as far as number of beds and baths and square footage. And by looking at the photos, we can also tell that it hasn't been updated either. We— it sold for $485K earlier this year. And if you scroll down a little bit on Zillow, you can see the price history. And this tells us that the property was originally listed in November of 2022 for $530K. And after a couple of months and price reductions, it eventually sold for $485K. This shows us that $485K is going to be a realistic price. Comp number 2 is another similar property. And you can see here that it's another property that is in as-is condition, without any interior updates, and although it's a little bit bigger, it's also 3 bedrooms and 2 baths. This property sold for substantially less at $410,000, and if we scroll down, we can see that it was listed in the beginning of February and quickly sold for just under list price. Based on these 2 comps, we can tell that if we want a quick as-is sale, we are going to need to be priced somewhere in the $400s. Where in the $400s is going to be dependent on how clean the property is, and since we don't know the exact condition of our subject property, we're just going to assume the worst and plan to list the property for $410,000. Now I picked $410,000 because comp number 2 sold in 30 days, and that's what we're looking to do with our property. Here's what the underwriting is going to look like for our Novation offer. At the top, you can see that we inputted the as-is value at $410,000, and then there are a few costs we need to back out of that number. Now, the first is going to be the selling costs. We account for 5% of the sales price for this. This is going to pay 3% to a buyer's agent and then leave another 2% for other closing costs. Notice we don't include another 3% for a listing agent, and that's because we list all of our Novation deals with a flat fee broker that typically costs us a couple hundred bucks and a quarter of a percent, which we factor into the 2% for closing costs. The next line is going to be the repair costs for as-is. Now, this is not the same as the repair costs you would estimate for renovation. This is purely backup money just in case our buyers ask for repair concessions, or perhaps they offer under list price. Now, with the Aziz properties, this is going to be common. And I only accounted for $10,000 here because I think at $410K, we would already be aggressively priced and there wouldn't be much of an issue. But like I said, we aim to be conservative. The last box is going to be the investor profit, and this is how much money we plan to make on the deal. Our goal is to always make at least $22,000 on every Novation deal, but we're going to shoot for $25K. So if we can list this property for $410K, even after paying the realtor fees and closing costs and accounting for potential concessions or price drops, we would be able to offer the seller $354,900, and that would still allow us to make almost $25 grand. Now let's compare that to what our wholesale offer would be on this very same property. If we take a look at comp number 3, we can see that it's another 3-bedroom, 2-bath, 1,500-square-foot property, and it sold for $588,000. As you can tell from the photos, the property looks like it has been recently updated. Now we also have comp number 4, which is another 3/2, 1,500 square foot property sold for $550,000. And again, from the photos, it looks recently renovated. Now, accounting for our smaller square footage, I would expect for this property to sell somewhere between the $500,000 and $515,000 on the market if it underwent a full interior remodel. Now here's what my underwriting would look like if we were we're going to wholesale this property. At the top, you can see I put $500,000 for the ARV, again, erring on the side of caution here. And we would need to pay out 8% for selling costs when the flipper sells the house. So $3,500 for closing costs when they buy it from us, then also a $60,000 to do a full interior renovation, which is going to be very typical for this market. And then also the profit the flipper would expect, which again, 12% of ARV is very typical for for this market. Then also the flippers' holding cost, which is the hard money payments they will be expected to make while the renovation is going on. Now based on that, if we wanted to make a $20,000 wholesale fee, we would need to buy this contract for $300,000. That is more than $50,000 less than what we can offer on a Novation. Not to mention also you only get a 25% smaller fee. Now we have found that using Novations has allowed us to consistently offer sellers $30,000 to $80,000 more than what we could if we were— all we were doing was wholesaling. The power of using this strategy has allowed us to close way more deals and for higher fees. In the current real estate market, flippers have become much more picky and institutional investors like hedge funds have mostly backed out, and it has made the traditional methods of wholesaling so much harder. Novations take care of all of that since they allow us to sell on market to retail buyers who are always willing to pay much more for houses than investors. So if you are currently wholesaling and you want to learn how to implement this strategy into your business, you should consider booking a call with me by clicking the link in the description below to learn about my Novations Mastermind, Wholesaling V2. By joining Wholesaling V2, you will get access to every single script, contract, and SOP you need to start doing novations nationwide, as well as get access to our private community of other high-level investors who are currently using novations to double their close rate and increase their average fee per deal. You'll even get weekly calls with me to get help and to learn what I'm currently doing in my business so you can stay up to date with the latest trends and strategies for making money wholesaling real estate. Now, some people are worried that even if they do get a Novation deal, they won't be sure how to go about listing it on the market and dealing with the title process. And this is why we will hold your hand the entire way. So if you are interested in learning the number one best strategy for making money wholesaling real estate in 2023, Book a call now below. If you found this video helpful, please give it a like and consider sharing with a colleague who could benefit from learning the power of Novatians. And as always, guys, thank you for watching and I will see you on the next one.