Knowing what a Good Deal is - Is the Key to Success in Real Estate.
Dear Investor,
Take this little survey: The most important key to Real Estate Success is:
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.
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:
- Market value and purchase price
- Expenses, carrying costs, repairs
- Cashflow and profit
- Holding time
- Loan terms
- Risk factors
- 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
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?
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
1) Calculate the exact profit and cashflow for all kinds of deals.
2) Measure and Evaluate the financial risk in the deal
3) Use standard and safe criteria for what constitutes a good deal
4) 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
Well, some other investors wanted to try it, so we put it on our website. Much to our delight we now have a community of users and a users group that shares their insights about doing deals and creative ways to use the Deal Evaluation Tool.
Their suggestions, are leading to a rapid improvement of already incredibly useful tool. There is just nothing out there like it. We've also put a demo up for those investors who would like to get a feel for using it. And we hold classes for new users.
Knowing all the numbers, and having evaluated our risks with the Deal Evaluation Tool gives us more confidence in negotiating deals with sellers and more consistent high profit real estate deals.
And that's what we all want, isn't it.
Richard Odessey along with his wife Michelle have the premier site on the internet - http://www.InvestorWealth.com for training and teaching real estate investors to do high profit deals. They offer regular Free Teleseminars by the top real estate investors in the country, the best tools to enhance your real estate success like the Deal Evaluation tool. They also offer 4-8 hands-on training seminars with personal advice from experts that investors can take from the comfort of their home. Richard and Michelle have been investing for over 5 years and personally teach and mentor other investors.