Hi everyone,
I am looking at doing straight options on pretty houses and reselling them to retail buyers by using a round robin auction. I just have a few questions about the best way to do this.
should I be using an option or actually putting the homes under contract? I was thinking the really good deals (up to 70% of value) I would put under contract and homes with less of a discount I would use an option.
When selling the homes am I better off assigning the option contract or should I exercise it and do a double close. By assigning it my buyer and seller see the profit I’m making and might not like it, but a double close could cause problmes with seasoning issues for buyers getting a mortgage. What is the best way to handle this?
I also am trying to nail down the process for the auction. I have read Bill Effros’s “How to sell your house in 5 days” and I would like to use his basic concept, but I will ad more time for advertising and also put a reserve price on the auction. What I’m trying to figure out is what type of escrow payment I should require and do I just talk to the highest bidder about this after the auction. Also since many of the homes will be in pre-forclosure, how do I make sure the buyers will be able to close on time and not have the sale fall through last minute and possible hurt the original seller?
This strategy is almost guaranteed to fail in these economic times.
Here’s why…
1st…Options are TIME SENSITIVE, you only have a certain number of days/weeks/months to either BUY the home yourself or find a buyer. Due to severely tighter lending standards, underwriting is taking a LOT longer than it used to and MANY buyers are getting shut down in underwriting. Even the appraisal process is slower because the banks have gotten burned by bad or fraudulent appraisals.
2nd…even at blow out prices homes are not selling fast. (at least not in the Northeast)
As far as falling through at the last minute…that’s not a MAYBE, that is now a common occurance.
Use options to sell to other investors. NOT TO RETAIL BUYERS.
Banks are not going to go anywhere near these deals in the current market. They’re even balking at homes bought and rehabbed by flippers because the title hasn’t SEASONED for at least 6 months. (that means they want the flipper to OWN IT for 6 months MINIMUM) I’m not saying NO BANK will do this, it’s just harder and harder to find them.
Having said that…if you find a little old lady with a paid off home that will sell it for 50 cents on the dollar GO FOR IT!!! But your end buyer will most likely another investor.
Thanks for the advice,
If this is sure to fail, is there another way to go about selling homes to retail buyers. It seems like if the house doesn’t need any repairs and I can get it at a good discount I should be able to auction it off at 85-90% of its value.
I guess I just can’t understand why I would sell a house to an investor at 70% if it doesn’t need any work? Why wouldn’t I go for the full profit, I’m not trying to be greedy, I just don’t like giving away more than I have to.
Again thanx for your advice, I really appreciate it, I can’t afford to mess this up.
Lance
I BUY HOUSES ALL THE TIME AT 50% OFF, but…they need a lot updating and problems fixed. My typical rehab takes 30 +days, and I know exactly what I’m doing.
If there isn’t equity in a home but it’s in PERECT CONDITION there’s not a bank on planet earth that’s going to short sale it to you at 50% of it’s retail value. Especially when that bank is owed 150% of it’s current market value!
I seem to be the only one using this thing and promoting it…
The last round robin auction I did, there were 40 people through the house, and around 9 offers.
The first 2 buyers fell out and the 3rd one, although offering 12000$ less made it through.
If you do round robin auctions correctly, you will have 50 + couples / buyers through the house in ONE weekend. ONE weekend. With 50 + people, you’re gauranteed minimum 5 offers. These won’t be retail offers, but they will range anywhere from 80-95% of market value depending on condition of the house.
Remember, this is done all in ONE weekend so you don’t need an option for more than 3-4 months which ISN’T HARD TO GET.
Don’t do these unless you have enough spread. And really, you MUST test a few round robin auctions to find out at what price you will get it RIGHT.
My first 3 round robin auctions FAILED because of the following 3 reasons:
Optioned property at too high a price, optioned it at 90% of value, got sold at 90% of value.
Not enough marketing. I want minimum 50 couples / buyers through the house in 1 weekend, nothing less.
House was too ugly. Ugly houses gut a lot of your spread.
I don’t recommend doing it the Bill Effros way because Bill Effros is spending about 500-1000$ less than he really should.
Options work, and I would argue FOR options in a down market because of the following reasons:
You don’t own the house. Seller deeds house to buyer. No transaction costs, no holding costs. Therefore no seasoning.
You cut the process even shorter.
You offer sellers a QUICK SALE NEXT WEEKEND in a market where sellers are waiting 6 MONTHS to 1 YEAR to sell their property.
You don’t own the house. And that means you’re not effected in anyway if the sale doesn’t work. In and out without any risk.
Thanks both of you for your help.
Tien, I have also read many of your posts and noticed you talk a lot about 7 day sales. What is the difference between this and bill effros besides more marketing and also setting a reserve price? Any more info or recommended reading on your auction strategy would be appreciated.
Also from what I’m understanding the seller deads directly to the seller so you must be assigning your option not double closing, correct? Do you ever run into problems with the buyers not being able to close? I realize you can just move on to the next highest bidder, but if the house is in preforclosure (not a shortsale) how are you able to have enough time to try multiple buyers to find one that can close before the bank auction date?
Last question, do you ever use a non-exclusive option so you don’t have to put down as big or any option fee? I’ve read about this being done but I guess it seems risky to me that buyers could go around you.
I respect your posts a lot and you have a lot more experience than I do so don’t think I’m bashing you at all. I’m wrong on these boards a hell of a lot more than you are :biggrin
Options no longer work the traditional way that they would in up markets, you need a different strategy with them in down markets. However they are extremely powerful when mixed and used with other techniques.
I would be shilling for the investor if I named him since he charges a few hundred bucks for his round robin course. So I won’t name names.
The only thing I disagree with Bill Effros about is how much he spends in marketing. He says he puts up ONE NEWSPAPER AD. ONE FREAKING NEWSPAPER AD.
To give you an example of what I do:
30-100 bandit signs all over the property area for a week.
Flyers all around the neighborhood.
Call up neighbors
Ads in multiple newspapers.
Sign on the house.
Constant internet postings
Others (sometimes):
Dancing sign guy.
Post cards to areas
I spend 500-1000$ in advertising to attract 50-100 people and get 100-200 calls within 7 days.
When you break the 7 day sale down, it’s honestly not that complicated.
All you are trying to do is flood the house with as many people as possible to find those 2-3 buyers that fall in love with the house. You advertise a cheap price (70-80%) of market value as opening bid and let them bid it up to 90-95% of market value.
The trick and the ONLY trick behind this whole concept is finding a property that you can option at a cheap enough price to make it worth your while.
The big differences between me and Bill Effros is that:
I blaze the entire neighborhood with as much advertising as humanly possible.
I Don’t B.S. you and say you will sell at 100% of market value. Even when I flood the house with 80+ people I sometimes still get 90-95% of market value.
That’s why I just automatically formulate that the most I can pay the seller is:
“90% of market value - repairs - my profit = Maximum option price”
and I DON’T break from this rule EVER.
In a down market I would adjust the 90% figure down even more.
Your second question. You honestly cannot magically close the house before the auction date if a couple of buyers fall through. The best best best thing you can do is take a look at your list of buyers and see which one is the most serious buyer.
Don’t go after the guy that offers the most because you want more, go after the guy that will JUMP THROUGH HOOPS WITH YOU to buy the house.
For example:
One option I did, I selected a buyer that offered 6000$ less than the highest bidder because I just knew when I looked into his eyes that he was a serious buyer that would go all the way. And sure enough, he had to jump through a thousand hoops to get that property closed. There was honestly 3-4 times during the process where I thought to myself no way the buyer would put up with all this crap and buy the property, but he did. He had to put up with property bullcrap, lender bullcrap, lender vs closing agent bullcrap, closing agent bullcrap, seller bullcrap, etc etc etc.
It didn’t help my case either that I had to close the deal within 30 days because that was the foreclosure date as well as the seller’s 9 month pregnancy date…
A bird in a hand is better than 2 in the bushes.
And that is why I think the round robin auction is even more powerful in down markets. You don’t have to start over the whole process when 1 buyer falls through, you have a list of 6-10 buyers you can just keep running down the list from.
Another example:
Optioned a condo at 130 000$, round robin auctioned and had 2 people offer 168 000$ and 170 000$ respectively as highest bidders on a condo worth 180 000$. Those top bidders got cold feet or something and the next day they became asshole buyers demanding 10000 concessions from the seller.
The 3rd guy on the list was 158000$. It was as simple as calling him up and offering it to him at his price. Yes he was 12 000$ less than the highest bidder but I had to close quickly and he was a serious buyer.
My option consideration is 10$ maximum. If they ever ask for more than that you are talking to an unmotivated seller and need to move on ASAP to the next seller.