Having been in real estate investing nearly my whole life, starting at the age of twelve with my dad back in the 1970’s, I have seen and been involved in literally thousands upon thousands of discussions about various topics related to real estate investments. I would say “buying right” is right up there at the top of the list. As a saying goes, in real estate investing, “you make money when you buy”. This is so true it should be internalized to the maximum extent possible by any investor wishing to succeed long term. Thus, your thread is one that warrants a good deal of discussion. I will give an initial thought or two on the matter in hopes that it will prompt further meaningful discussion from seasoned investors happening upon this post.
One of the most important first steps you MUST determine in order to figure what constitutes a good investment, which is what you’re really looking for, is to know what your goals are in your investing activities. For example, if you work in a full time career position that you love and want to continue working in, and you are looking to build a passive portfolio of solid, well performing rental properties, that sets a certain playing field for determining what is and is not an attractive investment.
If on the other hand you have some disposable time to pursue more hands on type investments which are not suitable for the typical professional for hire property manager (commissioned or otherwise) to manage, such as rehabs of whatever nature, then what constitutes a good investment may be somewhat different. Someone going into investing that has little in the way of experience with rehabilitating physically challenged properties, and that has limited capital at hand to invest may focus more on quick turning real estate to other investors, which again will dictate certain parameters of what does or does not constitute a good deal.
Then there are considerations for what type of property you want to work with. Although most investors who pass thru these forums are just starting out, and are leaning towards smaller residential properties, some may want to pursue smaller commercial properties, some small multi-family properties such as 4 to 12 unit buildings, etc. The type of investment, and the local area in which one is investing, affects to a large degree what is and is not a good investment or “good deal.”
For your purposes, I’m going to make some assumptions which may be wholly inaccurate since there are a million starting points a given investor can be at, due to the wide variety of markets, property types, investor goals and so forth. But hopefully it’ll begin a discussion that will eventually cover meaningful strategies.
Let’s assume you’re in the market for single family homes, that you intend to begin a dual path of short term investments to build operating capital and provide some income for funding your lifestyle, while also gradually carving off a few of your investments to add to your long term portfolio. I’ll also assume that you have some source of income that support most if not all of your current living needs and that that source of income is fairly stable and is projected to remain in place for the first few years of your real estate investing activities. Next, I’ll assume that you are in a market where prices have not been pushed to levels where cash flow is next to impossible to obtain with a reasonable 80% leveraged investment (you put 20% down and get a loan to carry 80% of your initial purchase or purchase/fixup costs). I will further assume that you are not in a financial position to negotiate and take down large quantities of homes such as buying an entire portfolio of an individual investor or small investment company (this is now nearly the only way my company buys houses but early on we did not have this ability – having reached this level we are able to get better deals with much less work so it might be a goal for readers of this post down the road).
The strategies for getting a “good deal” in this scenario will be typical and should fit for many beginning investors, where I define beginning as those who have been in investing for 1 to 5 yrs or so.
You’re most likely, given the above assumptions, looking for single family homes, and likely homes that will be purchased a la carte, or one at a time.
The first step to going in and negotiating good deals is to go in with the proper mindset. If I were to write a set of rules for finding and securing good deals I’d put pretty close to the top of the list that you must BE A PROBLEM SOLVER. If you go in with the mindset of finding problem properties or situations and using creativity and out-of-the-box thinking to solve the given problem or problems (and usually problems come in multiples), you’ll be able to get the best deals in the long run. Always seek a WIN-WIN approach where the seller gets what THEY want and you get what YOU want. If it’s not win-win, walk away.
The second rule would be that you need to find MOTIVATED SELLERS. And these sellers are motivated by the PROBLEMS noted above. A seller that does not have some issue at hand to deal with will be content and thus NOT MOTIVATED and you’re better to say one of my favorite words – “NEXT” – in such situations.
Unless you do the above two things, my experience has shown that most strategies you’ll employ will result in temporary success only. If you employ the above two rules, then you can mess up most any strategy and still come out a winner in the long run. Also, remember that EVERY DEAL YOU do has the potential to HELP you or HURT you in the future. And you want every step you take to be building a solid road beneath your feet for the long term wealth building you are most likely hoping to achieve. For example, if you are professional, SINCERE, and truly bring value to the table, even if the deal you go into does not pan out it may very well result in your getting another deal from the seller telling others about you. Therefore always leave the negotiation in a manner where you’re on friendly terms with the seller or sellers and when you wish them the best, ask them sincerely to let others know your name and number if they may have a problem you can help solve. Sincerity and honesty in your dealings, and importantly your ability to conduct yourself in a way that others will see it, will eventually open up floodgates where good deals will literally find you. It may take a few years to get there but then deals will be yours for the picking. And in the short term you’ll also have greater success.
Now, when beginning you need to get the word out somehow that you’re in the market, that you are the professional sincere type, and that you solve problems. Being a leverage junkie, I like to leverage those who pass out the postcards, run the ads, etc. I rarely do these activities nowadays (although we do occasionally send targeted letters to certain owners). I give the wholesalers a place to wholesale and since I’ve bought many properties flipped to me I have folks coming to me first. Consider this perhaps as a long term objective. If you chose to run an ad, or to launch a letter campaign, be sure to DIFFERENTIATE YOURSELF in some way. Not enough room here to go into all the ways you can do this but be just a LITTLE different so you’ll get noticed. And remember, professionalism builds trust, and trust is essential.
Once you have someone at hand you believe is ready to sell, you must remove the barriers that present themselves. One of the reasons, indeed the MAIN reason I got my real estate broker’s license is to remove a barrier of fear that sellers may have – they know they’re dealing with a professional and that I have something to lose for NOT being professional. This alone has helped make so many deals I’ve long ago lost count.
I hear a lot of folks say use a one page contract, and keep the conditions to a minimum. This is also removing a barrier. But remember this – some folks are suspicious of the one page contract. Some folks know that a well written contract protects both the buyer AND the seller. My contract form is very similar to the standard local Bar Association form, is 6 or so pages long, and I have better luck with it than I ever had with the one pager. I do often, when I KNOW the deal is good, remove certain contingencies, such as the financing contingency, appraisal contingency (ONLY when I am 100% dead certain of a property’s value), etc. BUT I make SURE the proper language is in the offer to PROTECT THE SELLER and I point this out to the seller. When a seller feels you are trying to truly be win-win and look out for their interests too, instead of being a wheeler and dealer, they are much more likely to do business with you on terms that truly work.
Realize that the world is changing. People are becoming more careful, more suspicious of others taking them, and sometime when things seem too simple it also throws up a red flag. The most important point is to learn where your seller is coming from and to tailor your offer to be in line with what they’d want to see. This is a fluid situation and means you must build a little rapport with the seller, find out what their needs are, then structure your offer to meet those needs.
There are so many out there selling such and such a system saying this way works best, or that way works best. What I’ve found is that nearly ANY properly constructed, legally and ethically sound system or packaged method will work under certain circumstances but that nearly every seller’s circumstance is just a little different so you must determine the circumstances of the particular situation and adjust accordingly. Don’t fall into the trap of having only one way to do a deal. Read extensively to learn the myriad of ways a deal can be structured, learn as much as you can from every deal you do (and the real learning starts when you “get in the trenches”), learn as many techniques as you can so your toolbox if full, then go in with an open mind and look to see what tool fits the given situation.
Another thing many preach is that the ability to pay all cash and close super fast is the trick. Well, being able to pay cash – and it doesn’t have to be YOUR cash – is important in almost all situations. Being able to close quickly IS a bonus in a LIMITED NUMBER of situations. Not all sellers that have a problem to solve want to sell in 3 days. For example, I have had many, many pre-foreclosure situations where the foreclosure was days away. We did not close in 3 days, but rather I helped buy time from the lender so that the seller could become comfortable selling to us, so we could build our relationship and trust, and so that we could find the optimum set of circumstances for the seller. One case in point I helped the seller find a better place to live and found a way to put $2500 in their pocket to help them move. Not only did I buy their house and end up reselling 6 months later at a $20K profit but they became willing to sell Sub2 because they believed we’d cash them out in a very short term – which we did, and they sent three other deals may way two of which worked out and netted somewhere on the order of $50K for us in the next year or two. We may have got them on the hook by saying we had the ability to close in a short time frame but we did not focus on that point when we got to the table – literally their kitchen table in this particular case.
I know that this post has not given a cookie cutter formula in response to your question, for as in my experience that is NOT the best way to go about making the most short AND long term gains in this business. There is no magic bullet or short term solution. Indeed anyone who tells you that you can get rich overnight using such and such incredible prepackaged system is most likely 99% focused on making profits from the sale of their wares, and less than 1% focused on your success and you might consider clicking the channel changer to find the next station where some truly meaningful content can be viewed. If you follow Rule 1 and Rule 2 (and you know how to accurately calculate the numbers up front) and internalize some of the finer points that are hidden in my above random dissertation I believe you’ll be on your way.
I hope the above will loosen up the mental juices and that experienced investors will post their thoughts and knowledge, be it in line with or contradictory to, what I’ve written as again, BUYING RIGHT is a MOST IMPORTANT FACTOR in long term investment success.
I published a very short article last year which is related to the topic at hand. Go to www.rondpate.com, click on the Articles tab, and look for the article “Secrets of Winning Real Estate Investments”.
Best of luck with your investing endeavors.