Dear Investor,
Take this little survey: The most important key to Real Estate Success is:
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1. Finding Motivated Sellers
2. Funding Your Deals
3. Negotiating
4. Knowing a Good Deal when you see one
Yes all of them are important. And if you answered #4 – you're right on the money. Why, because if your deal is a not good one, all your other skills and marketing and power will not make you money, and may even lead to disaster.
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On the other hand, if you can unfailingly target good deals, you will
always be successful and all the other skills and your marketing methods
will serve to increase your success.
What
is a Good Deal?
It's a lot easier to state the question than give the answer. Why? Because
it depends on many factors like:
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Market
value and purchase price |
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Expenses,
carrying costs, repairs |
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Cashflow
and profit |
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Holding
time |
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Loan
terms |
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Risk
factors |
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And
more . . . |
And most importantly, it depends on the type of deal you're doing. For
example, if you have a loan on a property that you intend to rent or sell
on a lease option, the terms of the mortgage, future tax increases, and
current area rents are critical to consider in insuring a positive cashflow.
However, if you are planning to do a short rehab job, and sell or just
flip to another investor, rental income is irrelevant as are future tax
increases.
It's What You Don't Think About that Can
Get You
The thing that trips up many investors, is that in our enthusiasm to
do a deal that we've found, we don't take into consideration "hidden"
costs.
For example, if you're doing a renovation and you've done your due diligence
on contractor costs, have you also considered your carrying costs such
as mortgage payments, utilities, etc. not only during the renovation,
but also the time it will take to sell and close with a new buyer?
Or if you're using a realtor to sell the property, have you calculated
the effect of a 6-7% commission and the closing costs the seller will
pay on your bottom line. A 10% profit margin can shrink pretty quickly
to zero under those circumstances.
Read Those Loan Terms Carefully
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Or have you taken into account, not just your loan to value ratio on the property, but your investment to value ratio (e.g., the total of all outstanding loan balances plus the additional funds you've put in from your own cash or borrowed from your home equity line or friends and family)?
And on the income side, have you calculated how long you should hold the property to receive a significant profit from the pay down of the mortgage. With a new 30 yr loan, you may have to wait 5-10yrs to get the same pay down you'd get after a few years from a 30yr loan that's been seasoned for 10 years.
And did you carefully read the note contracts to take account of adjustable rates and pre-payment penalties?
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Checklists aren't Enough
A number of courses and real estate gurus will give you checklists.
That's helpful in not forgetting something, but it doesn't help you with
the laborious and complex task of putting all the numbers together.
There's just something about working with the actual real numbers, that
brings the reality of the deal into actual focus. Our hopes and wishes
dissolve before the actual profit and loss calculations.
Moreover, the numbers can pinpoint the weaknesses in a deal, and point
the way to a solution. No mere checklist can do that.
What
About Risk?
I think you'll also agree that a Good Deal, is not just High
Profit, but also, most importantly Low Risk.
Many a dream of a golden future has come crashing down because some little
thing went wrong.
Many a would-be mogul, is now working at a 9 to 5 because their killer
deal was wrecked by an unforseen glitch. This is what we mean by high
risk.
The successful investors do deals with low risk. Deals that are so robust
that even if almost everything went wrong they'd still come out with a
profit.
Build
In A Safety Margin
For example, suppose you have a rental with a positive cashflow. Is your
cashflow high enough or your option payment big enough, that even if you
had to evict your tenant for non-payment and it took you 2 months to fill
it with another cash-paying customer, you'd still come out ahead?
Or, is your investment to value so low that even if you had to offer
your buyer a big discount for a quick sale, you'd still walk away from
the closing table with a fat check?
In real estate things can and usually do go wrong. It's Normal. So,
wouldn't you like all your deals to have these kinds of safety margins?
Fixing
the Problems with Your Deal
Now, if you knew in advance that your risk was too high, or your cashflow
was too low, or your profit over the life of the deal wasn't enough, you'd
want to think of solutions.
This is what is meant by being a "transaction engineer". Find
the solution, fix the problem, test it on the numbers, and then negotiate
it into the deal.
And if you can't find a solution (but there always is one) or the seller
won't accept it—NEXT!
I can tell you from real experience, a bad or risky deal is NEVER WORTH
DOING—no matter how enticing the vision. The personal stress, heartache,
and loss of confidence can be even more harmless than the potential financial
loss. In the words of an ex-president's wife, if you are faced with doing
a bad deal—Just say No!
What's
the Answer?
Some experienced investors have a feel for good deals, and can avoid
trouble most of the time. Others only do a particular type of deal and
use a rough "rule of thumb" to evaluate their risk and profit.
However, what's really needed is a "calculator" or computer
program that will take in all the variables and
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Calculate
the exact profit and cashflow for all kinds of deals |
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Measure
and Evaluate the financial risk in the deal |
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Use
standard and safe criteria for what constitutes a good deal |
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Suggests
alternatives to fix what is wrong |
The
Deal Evaluation Tool
We've taken tons of real estate courses and looked at all kinds of real
estate software, and nothing has come close to what we as investors need.
So we decided to create our own Deal
Evaluation Tool.
Well, after several months of testing and improvement, we now use it
for all our deals—short sales, subject to, lease option, rehab,
wholesaling, and even some commercial.
Since we can try out different "what-if" scenarios, it's kept
us away from some real pitfalls, and helped us negotiate better profit
margins. We wouldn't "leave home without it".
Constantly
Meeting The Needs Of Investors
Best of Success,
Michelle & Richard Odessey
modessey@InvestorWealth.com
770-338-2797
P.S. You can take a FREE test drive of the Deal Evaluation Tool by clicking
here.
