There is a certain rush you get when a new deal comes your way. How you act in these precious moments will often decide whether or not the deal comes your way at all. If you take too long or drag your feet, the seller will look elsewhere. If you dive in too quickly without evaluating the property, you could be left with a deal you quickly regret. The best way to avoid this is to develop a system before a deal comes to you. By setting up basic guidelines and perimeters, you will know which deals to move forward with and which to pass on. Here are 5 tricks to help you analyze your next deal:
1. Time is of the essence: Almost all deals are time sensitive. If you are dealing with a bank-owned property, they may take the best offer that comes in the shortest amount of time. Even traditional sellers want to hear something as soon as possible. Instead of pondering over every new property, you need to act decisively. Set your guidelines: if the property is in an area you like at a desired price point, aggressively move forward. Moving forward doesn’t mean you are going to immediately make an offer, but you should start your due diligence as soon as possible. Start by finding out as much information online as possible. Keep in mind that pictures can be deceiving at times. You should physically see every property you want to make an offer on. Once you view the property and gather information, you should make your decision almost immediately. If you have to decide whether or not to even make an offer, you should probably pass. The only question should be what you want to offer.
2. Run your own numbers: Regardless if you are getting the property from a wholesale contact or from the MLS, you need to do your own homework. This is not to say that anyone is intentionally trying to deceive you, but many sellers may not have accurate information. If the property taxes are higher than you thought, that is on you and not anyone else. It doesn’t take very long to validate the number on the property. This is another reason why it is so important to have systems in place before you get a property. There are many applications and websites that can help you confirm property taxes, insurance, utilities, rents and even value. Numbers are the key to most every deal. The minute to start to get lazy with your numbers is when you start to get bad deals.
3. Use real numbers: It is very easy to make almost any property look attractive. A slight increase in the estimated rent received coupled with a decline of property taxes will give you cash flow where there may not really be any. The same is the case if you are trying to find profits on a rehab deal. You can omit expenses in your budget and hope that they just go away, but numbers rarely lie. The more realistic numbers you use, the more accurate picture of the deal you will have. There is nothing wrong with making a small profit on a deal, but it has to be in line with the time involved and the capital being used. Real numbers lead to real results.
4. Repair money doesn’t equal value: The key to maximizing profits on a rehab deal is to know where to spend your money. Many novice investors think that any projects will add value. However, money spent does not always equal value gained. You need to do the right repairs for your market. A new pool may cost you $15,000; but in some areas it will actually decrease the value. Another point to remember is that buyers do not care how much work you put in. There is a tendency to list the finished product over market value only because you did a lot of great work to the property. Buyers are only interested in how your property stacks up with others currently on the market. Even if your quality is top notch, buyers won’t necessarily pay 10% above asking price. Value is about doing the right work for your market.
5. Almost anything can be replaced: The property may be aesthetically awful, but that is not important. Don’t analyze a property for what it currently is, but look at it for what it could be. This is how the best investors think. They know that with a cleaning crew, dumpster and a day’s work of demo, they can completely change the look of a property. As long as you budget for the work, you should never run away from a property based on how it looks. In fact, the dirtier a property, the less competition you will have.
There is a lot that goes into analyzing a deal. Most of the work you do should be done before you get your next deal. This will allow you to act quickly and decisively, and ultimately get more deals.