KGCI: Real Estate on Air - WTH is a Novation?! The Secret to More Listings AND More Money

Episode Date: February 5, 2025

Welcome to Uncommon Real Estate, where it's all about finding creative solutions for real estate agents and investors. In exclusive mastermind conversations with some of the brightest minds in real estate, you'll learn how to earn an extra six figures a year. Don't follow the herd. Be Uncommon. Here are your hosts, multi-millionaire real estate agent and investor, Chris Craddock and Jeff Safright. Welcome to another episode of the Uncommon Real Estate podcast. I'm your host Chris Craddick, and I'm here. with a friend of mine who is going to be talking about one of the most powerful tools and little-known tools that is a usable way to help people and also make money doing it without needing all the cash that most people need if they're going to flip a property. So with that said, just want to remind you, wealth is when your money works harder than you work. And the way we see this is you've got to trade your time for

where you make a lot of money there, then you start buying your assets and then let your assets steamroll into a massive amount of wealth for you. So with that says, Stephen, tell us a little bit about yourself. Well, hey, first and foremost, Chris, thanks for the invite and having me on. It's always awesome doing anything with you, whether we're doing business together or just chopping it up about business or spending time with each other. It's awesome. So thank you so much. A bit about me. I started flipping houses full time in 2017 out in San Diego, and that has taken me across the country and the world doing deals. So I currently live in Puerto Rico where I typically wholesale and flip and do novations across the country. Right now, we're pretty heavily focused on

the East Coast. And then I also run a sales training community and a platform. basically that teaches everybody every exit strategy in real estate. So that's a bit about me. I love surfing. I love fishing. And you talked about being able to buy back your time. And that's something that I'm huge on. And these are the exit strategies that if you're direct to seller that you can use to seriously increase your profit margin each property and spend your time fishing and surfing. So, you know, that's what I'm all about. And yeah, love to dive in. Yeah, very cool. Well, today we're going to talk about novations. So first, why don't you tell us what a novation is and what does that word even mean, right? So like, tell us about it.

Sure. So to define a nobation, I think it's best to define wholesaling or assignments of contracts first because having a good understanding of that helps you understand novations that much better. So as an investor, I offer somebody 100 grand to buy their house cash. I'm able to then once they sign that contract, when the seller signs that contract, I'm able to sell that contract to another investor and get paid an assignment fee at the closing when I was originally supposed to purchase the property. So I sell my rights to buy the property for 100 grand to another. investor, maybe they pay me 20 grand or something. I get paid 20 grand at closing. The investor gets

the house. The homeowner gets the 100 grand they agreed to. So that's an assignment. A notation is where you as the investor sign a contract with the seller, say, for 100 grand. Okay. What you're then able to do is sign an additional addendum that we just call a program sheet. And what that allows you to do is have the seller sign a limited power of attorney so that you can list the property and make any repairs to the property out of your own pocket without having to buy it. What you then do is you list the property, whether with a flat fee brokerage, with an agent that you're familiar with, that works with investors, or if you're an agent yourself, you can list it, and then you find a third-party buyer. Now,

how it differs from an assignment of contract is instead of assigning your rights, to the original contract, you're actually replacing your contract with the contract from the third party buyer that you find on the MLS. So I know that's a lot of words. Let's break it down really simply. Okay. You signed a contract in a program sheet with the seller saying that you're not buying the house and you're going to do a novation. What a novation is is replacing your contract with another contract from a third-party buyer. You're able to do this via a power of attorney, which allows you to list the property that you don't own on the MLS with an agent. It also allows you to make any repairs to the property out of your own pocket without having to buy it and go through the transfer tax,

recordation fees, title and settlement company charges, so on and so forth, right? So, so real quick, to make it super clear, it's essentially like having a joint venture with the seller, right? I know in the agent world, a net listing is a no-no. You can't say, hey, I'll give you this and keep everything above that. In the investor world, you are allowed to do that. Now, if you are an agent, you need to disclose that. There are a couple states that do not allow innovations. So just, you know, you've got to check your local states. I think I definitely think Oklahoma is one of them. And I think Utah, But I need to confirm on that one. But it's essentially like a joint venture with the seller saying,

hey, we're going to pay this much for the property. Like you can take it to the bank, guaranteed this much. We're going to do the rest of the work here and basically flip your property for you. And we're going to take the spread. So you're able to guarantee the price to them. We're going to pay commissions. We're going to pay everything else for you. And we're going to take the spread.

And that has to be done in a separate. entity. It cannot be done as an agent and you don't want to do it in your personal name. So it's a separate LLC entity that would work as a joint venture with the seller. Yep. So there's so many ways that it can be executed. You know, some people use attorney and facts instead of limited power of attorneys. Sometimes people don't even mess with any of that and they just have the sellers sign all the listing agreements. You know, there's so many different ways that you can do this. But essentially what needs to happen is you need to agree to a price with the seller that they're cool with walking away with, right? And that's what they get. You as the investor are then able to market the property with their blessing for more. So say that they agree to the Novation program at 100 grand, and then I put the property on the market with a local agent for 150, right? Now, once we get an offer, whether it's one, 145, 150, whatever it is, when we accept that offer, we contemporously execute the

Novation Agreement, which releases my original contract and replaces it with the third-party buyers. And I get paid the difference to release my agreement. So lots of title companies are able to do this. and if they're not familiar with it, then sometimes you might even have to file a lien to get paid via your release. And, you know, all this stuff, we teach it from nuts to bolts A to Z, you get all the paperwork and everything that you'd need to do it every which way. And what it allows you to do, which wholesaling or assigning contracts doesn't allow you to do,

is it allows you to basically expand your buyer pool not only via the MLS, but it allows you, if the property is in a financeable condition, you can sell it to somebody with a retail mortgage, right? So lenders do not lend on assignments of contract for regular conventional mortgages or FHA loans, all that stuff. There's no way you can assign your contract. However, you can know. And by assignment of contract, just so that everybody knows.

want to make sure we're on the same page because I know a lot of agents are not as familiar with the investor lingo. So assignment of contract means a wholesale deal. If somebody is wholesaling the deal, they typically won't lend on a wholesale deal. Exactly. And not only that, so also with wholesale deals, if you're wholesaling to somebody with hard money, a lot more hard money lenders have started to institute basically restrictions on assignment of agreements or wholesale deals where you can't make it a hundred grand assigning a property to a hard money to an investor using a hard money loan the lenders won't let it fly you know they don't want you getting that big of a spread because it somehow affects their underwriting or whatever

excuse they use but it is what it is right so this allows you to increase your margins with basically a little bit more paperwork and you know what are the risks involved one, I would not recommend putting a lot of work into a property beyond a trash out with an novation. If you're going to be putting work into a place, buy it, and secure yourself and mitigate that risk. So if something does go wrong, you can at least hold on to it, maybe refinance it a few years down the line or whatever you have to do, but you have options instead of just, you know, walking away, taking a big paymaker to the chin. You know, that's not what. you're looking for. So yeah. All right. So with an ovation, tell us, tell us your talk track with a seller,

right? What does the talk track sound like? Sure. So, you know, I run no fee cash offer.com. And that's what people are looking for. They're looking for no fee cash offers. So we're very heavily focused on making them cash offers. If they say yes, great, we're either going to buy it or we're going to wholesale it. And we're completely transparent with all the sellers about what we're going to do. If they decline it, we pivot to our Novation program. And there's a few things that we need to do in order to qualify them for the Novation Program. What I just want to say this, because I know most of our listeners, they have a knowledge of things investment, but most of them are agents that are also in the investor world. So I would just be super clear that marketing for with a cash offer is

one of the best ways to secure listings as well. So just know that this is a super powerful way to secure listings. You also have this other tool we're talking about as well. So just know that that is, if you get the one, the one two punch when you're dealing with, you know, people that want to sell and have some sort of distress or some reason why they need to sell fast or sell as it. So sorry, go ahead. Yep. So absolutely. So there's a reason why people would want to sell fast, right? There's either financial pain, relationship pain, or health pain. There's some sort of distress going on there. And, you know, guess what? Not everybody that reaches out to my company has those types of issues where it makes sense for them to take a cash offer, right? And for us to be able to help more people

and also monetize more leads, the Novation program is a great way for us to bridge the gap between a number that a seller that's not distressed is going to, you know, throw in the garbage to one that they're willing to accept. And a lot of it boils down to ease of transaction. So what we pitch is exactly that. Once they decline our cash offer, we say, listen, you're not distressed. You just don't want to deal with this, right? You don't want to have to worry about making any repair requests or yada, yada,

so on and so forth. And then we ask them and qualify it. So it seems like the only thing that's keeping you from doing business with us is price, right? And they're like, yeah, absolutely. And then you ask, all right, well, if it's just price, if I had a way to get you the X number you're looking for, would you be willing to wait 60 to 90 days for that? Yes. All right, cool. So I'm not sure if it's a fit, yet. However, we do have a special program and then you talk to them about solving their problem, right? Whatever their problems are you called. The question is, okay, the reason you're not taking this other offer, you know, cash offer is price and you say, okay, so right now you're saying the only reason we're not working together is because of price. And so if I had another option for you that I

could get you the price that you're looking for, would you be interested? Yeah, and I'm not saying I can, but if there was one, is it something you'd be interested in? Sure, would you be willing to wait 60 to 90 days? Got it. And, you know, the 60 to 90 days, it's really up to your market knowledge for you to give them an accurate time frame. You know, the sooner, the better, or depending on their time frame, just give them their time frame, right? And solve their problem that way. Like, oh, you, want this done in 87 days, great, we can make that happen. Right. And then what you do is you take them through the process, right? And it's really transparent with our contracts and this is all stuff that you guys would have access to joining the community. It literally says like, hey, we are not buying your house.

And they have to initial that right there. They know the whole time. They know that they're going to be signing a limited power of attorney that allows me to basically do whatever with the property right up until closing where all they have to do is show up, sign, and get paid. And that's what these people are looking for is a white glove service, a hybrid program. There's a million things that you hear it called, but essentially it's just ease of transaction. They get peace of mind that they don't have to worry about anything and we're able to help more people. So as far as how agents benefit, knowing this, there's tons of investors that are using this. I have a community of people all over the country using it. And Chris, I mean, you can tell

people lay up listings. The easiest listing you're ever going to get is from a investor with a novation, right? It's, hey, can you put this on the market as soon as possible after you go and put it on a lockbox and get pictures. Right? Like that's it. That's all you're doing. You got so many investor friends that are like, hey, can you find me an agent who is not going to just be terrible in XYZ area?

Because I found, you know, I found innovation here in the middle of like Arkansas. You know, and so I call. And literally the question usually is, wait, so it's an investor. So they want to like beat me up. commission. No, they're going to pay you a commission. Wait, so it's an investor. They're going to, no, no. And they're like, oh, so it's just like literally, I just list it and deal with it. Yeah, that's it. Okay, I can do that. It's so easy as an agent. So for me, this is what's allowed me to move to Puerto Rico and operate everything remotely

is because I'm able to leverage agents, which I'll gladly pay 3% if it's our first deal together. you know, I'm going to look for a flat rate if I'm actually doing marketing in your area so that we all win and grow together. But, you know, if it's just an introductory, like, or a one-off thing, it's like, here's your 3%. Offer 3% to the buyer's agent or try and double end it if you can, Lord willing, right? And make as much money as possible. Here's what I need. I need pictures. I need it on a lockbox or for you to be there if, you know, I try not to know, Vos properties that have sellers or tenants occupying it, it's just easier to show properties if the property is vacant, right? So, you know, we offer different incentives to sellers, whether it's cash advances or putting them up in Airbnb for a weekend so that we can show the house, whatever it is. We're trying to get this done as easily and smoothly as possible. But, you know, I want pictures. I want it on a lockbox. And then I want it priced at the price I wanted at,

because I know where the comps are. However, I'm always going to ask that agent if they're an expert in the field what they really think it's worth after they go out to the property, right? Your input is 100% weighed into what we market the property at. And my goal with every novation and most people's goal is to aggressively price it below everything that's current inventory and get it. bid up and sold it in a weekend. Like that's the goal. We're not here trying to get every last penny out of it. We're trying to sell it as fast as possible and leave enough meat on the bones for somebody to, you know, make some money besides us. Right. Right. No, that's great. All right. So when you're talking to people, we've got the talk track down. Then how do you decide what you will do and what you won't do in house? It's all situation based, but it all boils down to what is the as is on market value. And that is the biggest number when it comes to novations.

You know, there's so in the investing world, there's the after repair value, ARV. Most people know, you know, that's a number that fix and flippers and wholesalers look for. With novations, you are looking for the as is on market value. And when I say that, I mean, without putting more than a trash out of an investment, into the property. The only thing I'm trying to do is trash the place out or clean it up. Like, that's it. I'm not trying to paint it.

I'm not trying to carpet it. As is on market value, you want to take the as is on market value, multiply that number by 0.9 and then subtract your repair costs and your profit. And that is what your offer can be. If you want to be a little more conservative, you can take the as is value, multiply it by 0.88 minus your repairs and your profit. And that's what your novation price is going to be. And that's how we're arbitraging the as is value is we bake in the cost to sell, which are typically 10%, right? If you're paying full commissions to agents, transfer tax, recordation fees, title and settlement company charges, you know, closing costs, right?

And then if, say, it takes three grand to trash the place out and then I want to make 30 on it, that's how I figure out my number, right? So say it's $100,000 as is on market value times point nine is 90 grand. It's going to cost me three grand to trash it out. That's 87,000. and then say I want to make 20 on it, my novation number is 67 grand. We put it on market at 99, sells for 100, done, Asian gets their commission, you know, that's that. Okay. So we've only got a couple minutes left.

Tell us what else should people be thinking about when it comes to novations. Maybe I've never heard about it before, or maybe they've heard about it, but they just don't know much. more about it. What else should people be thinking about? It's so if you're doing direct to market or direct to homeowner, direct to seller marketing, not having this in your tool belt is a detriment to your ability to do business in my opinion. You can either only buy a place, wholesale it, or throw the lead away, right? If you're maybe you have a agent referral program that you can use, but essentially, you know, that's it. And one out of every 10 leads is probably a good wholesale deal,

maybe two out of 10, depending on how direct or how targeted your marketing is and how much you're willing to pay. There's that. On top of that from agents' perspectives, it has to be, I know so many people that are nationwide wholesalers that are using novations to expand their reach, you being able to say that you're a go-to novation agent and knowing the process could get you exponentially more listings without a doubt. And the reason why is because investors like myself

want to work with people that know what it is that we're doing, right, and are able to help facilitate that, right? So that's, I think those are two biggest things is most people look at it from a investor's perspective of like, hey, I can make more money with more people by doing this instead of wholesaling. And I'm able to do it much more scalable because agents handle the dispositions process. What I think is really left out is how much more listing or how many more listings agents can get working with investors for their area. If you become the go-to novation agent for your area and people are marketing there, which I'm pretty sure every major metro has a truckload of nationwide wholesalers that are out there looking for deals,

right? So if you're the novation agent, could it mean one more listing a year? Could it be one more listing a month? Could be one more listing a week? Like, it's true. really all up to you and how big you grow your network and I'm trying to do everything. I kind of facilitate that with consistent closers community, but, you know, whether you're finding these referrals through Facebook or through your network or however it is, being able to speak intelligently with investors like myself or Chris or other people out there that are able to, you know, execute these exit strategies, I think are huge. So we'll put how to, we'll put more information in the show notes as far as, you know, how to get access and how to see this.

But Steve, tell us what's the best way to get into your world and learn more about it? Yeah, I would just say go to consistent closer.com. And it has all my contact information on there. There's tons of everything off market real estate, investing real estate, direct to seller real estate is on there from Novation, to, you know, how to set up pay-per-click campaigns to, you know, everything. It's all on there. And then there's a community of people that just are doing more deals off market, direct-to-seller.

We all help each other. We're in every time zone across the country. And, you know, that's how you can get a hold of me. Boom. Love it. All right. Yeah, if anybody is listening and is looking for other ways to add to their income and to help more people, this is definitely one of those opportunities that would be just absolutely huge for you to explore.

With that said, also, please remember if you are out there, if you're an Asian investor and you are looking for a home, you know, we have started gaining the Global Agent Investor Network. Please, if you would like to reach out and do it, just go to my Instagram at Crad Rock, C-R-A-D-R-R-C-K, cheesy, cheesy, that I've just never gotten around to changing. but send me a DM and you will get me personally. It's not something that any of my staff respond to. And we will set up a call to discuss how we can help you hit all the goals that you have and really build well. With that said, Stephen, thank you for joining us today.

And until next time, guys, go crush you. Welcome to Uncommon Real Estate, where it's all about finding creative solutions for real estate agents and investors. In exclusive mastermind conversations with some of the... the brightest minds in real estate, you'll learn how to earn an extra six figures a year. Don't follow the herd. Be uncommon. Here are your hosts, multi-millionaire real estate agent and investor, Chris Craddock and Jeff Saferight.