.The secret to making money in real estate is understanding the value of a good deal.
Financial Backer,
Answer the following quick poll: To succeed in real estate, the most crucial factor is:
1. Locating Serious Vendors
Deal Capitalization 2
Third, Bargaining
4. Recognizing a Good Buy When You See One.
Every one of them is crucial. Yes, option 4 is the correct response. Why? Because if your agreement is terrible, no amount of marketing prowess or political clout will save you from financial ruin.
However, if you can reliably zero in on profitable opportunities, you’ll always be successful, and your other abilities and promotional strategies will only serve to amplify your achievements.
When do we know a bargain when we see one?
It’s far simpler to pose a question than to provide an answer. Why? Because there are so many variables involved, such as
Value in the market and cost to acquire
– Costs (including maintenance and repairs)
– Earnings and cash flow
Waiting it out
Credit Conditions
Potential Dangers
And even more…
What matters most is the nature of the transaction at hand. The terms of the mortgage, potential tax hikes, and existing area rentals are all crucial factors to consider when ensuring a positive cash flow, for instance, if you have a loan on a property you intend to rent or sell on a lease option. But if you’re doing a quick fix-up and sale to another investor, the rental revenue and any future tax rises don’t matter.
What can get you is often not what you expect.
What often gets us in trouble as investors is that in our haste to act on a deal we’ve uncovered, we fail to account for “hidden” costs.
Have you, for instance, thought about the carrying costs of your refurbishment, such as mortgage payments, utilities, etc., not just during the makeover but also for the time it will take to sell and close with a new buyer?
Have you factored in the realtor’s commission (often between 6 and 7 percent) and the seller’s share of closing costs? Under those conditions, a 10% profit margin can swiftly evaporate.
Please Read All Loan Documents Carefully
Or, instead of just looking at the ratio of your loans to the property’s worth, have you considered the investment-to-value ratio (e.g., the sum of all your loans plus any additional money you’ve put in or borrowed, such as from a home equity line or family and friends)?
Have you figured out how long you’d have to retain the home to profit from the interest you’d earn on the mortgage payment? It could take five to ten years for a new 30-year loan to equal the payoff of a 10-year-old 30-year loan.
Did you consider the possibility of interest rate adjustments and prepayment penalties by reading the terms of the note contracts?
Not Even Checklists Will Do
You can find checklists offered by various courses and real estate experts. That’s useful for keeping track of everything, but it won’t help you with the arduous and complicated chore of adding everything up.
Working with actual, concrete statistics does something to ground one in the reality of the business. The cold reality of profit and loss computations dashes our hopes and dreams.
Furthermore, the data might highlight the deal’s flaws and indicate how to fix them. A simple checklist won’t cut it.
Is There Any Danger?
You’ll agree that a good deal is one with low risk and high potential reward. Many a bright future has been shattered due to a minor misstep.
Many would-be billionaires have been forced to settle for 9 to 5 jobs after having their game-changing business ventures destroyed by unforeseen obstacles. When we say “high risk,” we mean exactly this.
The most prosperous financiers choose low-hazard investments. Firm deals would still be profitable even if practically everything went wrong.
Leave Room For Error
Take a rental property with positive cash flow as an example. If you were to evict your tenant for nonpayment and it took you two months to fill it with another cash-paying client, would you still come out ahead because your cash flow is strong or your option payment is large enough?
Or, is your return on investment so high that you could afford to give a significant discount to the buyer in exchange for a quick sale and still come out ahead?
Things often, if not always, go wrong in real estate transactions. This Is Typical. So, wouldn’t it be nice if some cushion was built into your transactions?
How to Repair Your Failed Business Transaction
Now, if you knew ahead of time that your risk was too high, your cash flow was too low, or your return throughout the life of the contract wasn’t adequate, you would want to consider alternatives.
A “transaction engineer” performs these duties. Solve the issue, check your metrics, and then use those results to leverage your negotiations.
If the vendor is unwilling to compromise or a solution can’t be found, move on.
No matter how appealing the concept may be, a lousy or dangerous deal is NEVER WORTH DOING in the long run. The potential emotional and mental damage is often less harmful than monetary loss. If you’re ever presented with a terrible bargain, say “No,” as one former first lady said.
So, What Is the Solution?
Some seasoned investors have a knack for spotting promising projects and can stay clear of sticky situations. Some people specialize in one type of transaction and utilize a general “rule of thumb” to estimate their potential loss or gain.
However, a “calculator” or computer software that can factor in all the relevant factors and
1) Determine the precise profit and cash flow of any transaction.
2) Assess the potential monetary loss associated with the deal.
3. Determine what constitutes a fair deal based on tried and true methods
4) Offers potential solutions to the problems
The Deal Analyzing Software
As investors, we have looked into various real estate courses and software, but none has met our needs. That’s why we built our in-house Deal Analysis Software.
After months of testing and refinement, we have been using it for all our transactions, including short sales, subject-to-lease options, rehabs, wholesales, and even commercials.
It has helped us avoid real problems and negotiate more significant profit margins because we can test many “what-if” scenarios. There’s no way we’d “go on vacation” without it.
Maintaining a Focus on Investor Preferences
We placed it on our website since other investors expressed interest in testing it. We are thrilled to have a user base and users group that openly discusses the Deal Evaluation Tool and offers suggestions for improving it.
Their input has sped up the development of a product that is already extremely helpful. Simply put, nothing else compares to it. We’ve also made available a demo for interested investors to try out. And we do training sessions for first-timers.
There will be more consistent high-profit real estate deals now that we have all the statistics and have evaluated our risks with the Deal Evaluation Tool.
And that’s what every one of us hopes to achieve.
Richard Odessey and his wife, Michelle, run the go-to online resource for becoming a successful real estate investor: http://www.InvestorWealth.com. The nation’s foremost real estate investors often host free teleseminars, and you can access helpful resources like their Deal Evaluation tool to help you get the most out of your real estate investments. In addition, interested parties can participate in one of four to eight online training seminars where professionals provide individual guidance. Richard and Michelle are experienced investors who have taught and mentored others for over five years.
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