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Buyincomeproperties.com How To Articles Dear Investor,
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:
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
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
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 P.S. You can take a FREE test drive of the Deal Evaluation Tool by clicking
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