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Simplified Property Analysis
Before you can start buying property or making offers on property you have to learn how to analyze a deal. This section of property analysis is probably where I am going to butt heads with a few people. But I would like to challenge you to at least go through this and keep an open mind as to what I am doing. I know many Investors that have multi-page spreadsheets that list the ROI (return on investment) five, ten, fifteen years down the road. It lists every conceivable expense that they could ever incur on a property including holding cost and insurance, all the way down to marketing expense. I am very much a “big picture” person. I believe that if you need a calculator, it is probably not a deal. I don’t mean that in a bad way, only that if you are running all these numbers and you have to figure all this out just to tell if it is a deal, it probably is not a deal anyway. If somebody can run numbers by you in a conversation, “Hey, I have a house and the after repaired value is $100,000, it needs 10 Grand in work and you can pick it for $50,000”. Now what kind of numbers do you need to run on that? That is a deal, right? So, the way that I want to get you to thinking about your investing is, if you need a calculator, it is probably not a deal. The other thing is, if you have to ask someone, it probably is not a deal either. I get people asking me all the time, “Hey, what do you think about this deal?” Well unfortunately, it usually is not a deal or they would know it, right? Having said this, remember that most deals are made and not found. Meaning that when I found it, it wasn’t a deal until after the negotiation process. You want to hit home runs, especially on your first few deals because you need to make sure there is plenty of profit in the deal. The worst thing you can do is get involved in a marginal deal and get discouraged and get out of the business before you get started well. I want you to get used to running the numbers and making the offer before you ever get off the phone on your first call. Sure it is going to feel odd at first without ever having seen the property but after you do it a few times it will come as second nature. Remember here that the goal is to get your offer to them and start the negotiation process. I know I am not going to buy it on the first phone call but we have to get them “in the glue” so they feel attached to you because you are probably the only person who talked to them about their property that actually made an offer. Now if you are just starting out remember I still want you to go see the properties before closing on them but eventually you will be able to complete the entire
transaction without ever looking at the property just like we do and many of my students do. We now do all our business by phone, fax, FedEx, email and internet and we never go look at our properties. Now don’t worry because once you get to that point I have included specific scripts, a property analyzer and other tools and techniques to do the work for you as we will discuss later. Property Search Criteria Before I can make an offer on a property I need the answers to two, sometimes three questions. 1: After Repaired Value: A lot of people ask me, “Well, what is the current value?” or it has a “current value of $___”, they tell me. That does not mean anything. It makes no difference, whatsoever, what the current value of the property is or what it will appraise for in its‟ “as is condition”, if it needs work. We are not basing it on “as is”; we are basing the value on after repaired value or ARV as you will often see. So the first thing I need to know is what is the after repaired value? 2: Amount of Repairs: What is it going to cost to fix up this property? And that is where you are going to catch a little bit of resistance, especially on the phone with people, especially with realtors because they do not want to make a commitment to a figure. One of the phrases that I use a lot is “just a ball park”. Give me “just a ball park”, what do you think it is going to cost to fix it up? 3: Potential Rent: If this is a rental type property I will need to know what kind of cash flow it is going to have to make sure the numbers will work at the total cost I will have in the property. Another thing I will probably need to know if it is a For Sale by Owner, is what is their loan balance and are they current or how far behind on the payments are they? I usually ask it that way to, “How far behind are you on your payments?” That way they are not as embarrassed to tell me if they are behind or not. They assume I already expect that they are behind. This is all in the FSBO script in the course. Now you are probably thinking that the seller or realtor does not know this information or will not tell you but don’t worry as I will show you in the section on negotiating exactly how to ask those questions and get your offer to them before you get off the phone. I will also show you how to make those low offers and not have them hang up on you or laugh at you like they may have in the past. Now, let’s take a look at the way I run numbers and determine whether or not a deal is a deal. Most of our houses we wholesale to other Investors. In my market we have to be able to wholesale houses at 70% of appraised value. (Now this may be different for your market depending on market conditions, price range of the property and what investors are willing to pay in your area.) The 70% includes purchase, repairs and closing costs, so I basically have to be able to buy the property at 60% or 65% or sometimes even less. Now when running your numbers, you always want to use worse case scenarios. For example, if your seller tells you that the house is worth $80,000 to $85,000, then you are going to use the $80,000 number. If they tell you it needs $10,000 to $15,000 in work, you are going to use the $15,000. The other thing that we do since we are in the Mortgage business and we provide rehab financing for most of our customers, we always figure in the rehab closing cost, so that is the worst case scenario. If an Investor is paying cash or has their own money or has a relative funding their deal, they will actually make out even better. If they also do some of the repairs themselves, they will make out better. Because we are basing our rehab cost on hiring someone else to do the work and we have already probably gotten at least two or three estimates on the repairs, we give those over to the person buying the property.
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This intel was contributed by larryg
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May, 2012
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