QUOTE OF THE WEEK
“Know who you are and deliver at all times.”
– RuPaul –
When we first came up with the concept for this newsletter, we said that we didn’t want to just give out information on real estate investing to our readers without providing them ‘real world’, actionable steps they can take in utilizing the information that we provide. So, since we’ve already covered how to find Sellers (with deals) in a previous newsletter, in this week’s feature story we’ll show you how to analyze a deal to determine whether it’s worth pursuing or not.
Also, in this week’s case study, we’re going to dive even further and show you how to “crunch the numbers” on the deal to ensure that once you get it under contract, you’ll be able to make a profit.
As always, I’ve got a little food for thought in our Manifestation Corner this week on The Law of Attraction; something I’m sure you’ve heard of before but you may not have heard of it explained this way. Also, check out our suggested materials to help you along on your real estate journey. So, strap in, and let’s get ready to…
ROCK THE REAL ESTATE!
Lena W. Claybon
ANALYZING A DEAL
I made the mistake when I first started out of thinking that every distressed house was a good deal if I could get it under contract for a good price. That could not have been the furthest from the truth. Knowing how to pick a good deal is key to making money in real estate investing.
There are 3 major factors that go into deciding whether a property is a good deal or not. They are Area, Repair Costs, and Price.
Many seasoned investors will tell you the rule of thumb in finding investment properties is to look for the worst houses in the best neighborhoods. That might work for some, especially for fix and flippers, but for wholesaling, my best deals have come from working class neighborhoods (which some consider “lower middle class”) and “the hood”. When I say “the hood”, I don’t mean the worst of the worst neighborhoods. You want to stay away from those areas. But look for areas that are relatively safe but are high rental areas. Those are the areas that YOUR buyers, if they are investors, would be interested in.
This is where a lot of wholesalers get caught up. In order to negotiate the right price for a property, you have to be able to estimate the costs of repairs that will be needed to make it ‘rentable’ or bring it up to market value. If it’s minor repairs, it shouldn’t be that difficult to figure out, but if it’s major repairs, and you don’t know a lot about repairs, you might want to call in an expert.
You can call a contractor and tell them you are considering buying a house and would like a free estimate on what they would charge to repair it (which is “technically” true). Most contractors don’t mind giving free bids if they think they might get the work. If you tell them you are a wholesaler and just the middle guy wanting an estimate, you will probably have to pay for it, if they do it at all. If you feel strange about it, once you find a Buyer you can always turn them on to the Contractor that gave you the bid.
If you still don’t feel comfortable doing it that way, then a `quick quote’ way of doing it (but definitely not the most accurate) is to find out the square footage of the house from the tax records or Owner and multiply that by $9-$13 a square ft for minor repairs and $25-$30 for major repairs. That should give you a ballpark average.
There are also books you can read on repair costs like J. Scott’s book, The Book on Estimating Rehab Costs you can get on Amazon. The bottom line is you will have to develop basic knowledge of estimating repairs if you want to make good deals in real estate.
You would be surprised how many Owners still think they can get full market value price (or near it) for their home even though it might need a ton of repairs. Many start out unrealistic and some will listen to reason and come down off their initial price. But, some won’t. If you can’t negotiate a price that makes sense for you to make money on it or be a good investment for your end Buyer, you have to pass. Only 5% of deals will really fit your criteria as a Wholesaler. The rest you’ll either have to negotiate to get it there or pass.
The actual formula many Investors use in determining an offer is:
ARV x 70% – Repair Costs – Assignment fee = Max offer
The reason you start with After Repair Value times 70% is because ideally, the investor would like to have at least a 20-30% profit margin left once repairs and all other costs have been subtracted. As in all things in real estate, this is negotiable depending on the deal. In the case study below, I will break it down further so that it makes sense.
Crunching the Numbers
A couple of years ago I did a direct mail campaign and got a call from a landlord looking to sell one of his rental properties. The property had been vacant for a while and was in need of repairs but the landlord didn’t want to put any more money into it.
I looked up the property and saw it was a 2 bedroom / 1 bath home. Then, I looked up comps in the area before going over. The average ARV on a 2/1 house in that area with close to the same square footage was about $30,000. After walking through the property, I determined that it would take about $5,000 to do the repairs needed. So, this is how I arrived at his offer:
I offered $10,000 (you always want to leave negotiating room), he countered at $15,000, I came back at $12,000 as ‘best and final’ and he accepted.
Well, I have been a student of Universal Principles long before the book and movie, so I think I can shed insight on why most failed. While it is true that you can ‘consciously’ and deliberately attract things into your life through your energy, thoughts, and emotions, where the book and film failed is by not emphasizing or explaining enough about the importance of understanding vibration, frequency and resonance.
In order to attract something you desire into your life, you must learn how to work on your vibration so that you are in vibrational harmony with your desire. This is the biggest obstacle you must learn to overcome in learning to deliberately use Law of Attraction in your life.
On a scale of 1 to 10, let’s suppose your goal represents a vibration level of “8”. If you are personally creating thoughts that create a vibration level of a “3”, it doesn’t matter how badly you want that goal, it’s not going to manifest because you are not in alignment to it. You are tuned in to the wrong frequency.
Telsa said, “If you want to find the secrets of the universe, think in terms of energy, frequency and vibration.” You have to emit the frequency of what you want to attract. Here are 3 simple steps to follow to ensure vibrational alignment with your goals.