All Profit Comes From 5% of the Sellers
To get killer deals on real estate you must understand one simple fact:
At any given time across America there are really two real estate markets. The first is the regular or retail marketplace. This is usually about 95% of the market and this world is inhabited mainly by Realtors™, builders, banks, mortgage brokers, home owners, home inspectors, mortgage originators, and any other group of people that focuses on helping “normal buyers and sellers” buy and sell properties.
There is also a secret sub culture of the real estate market. This second market is usually around 5% to 10% of where the total marketplace falls. This world is inhabited by investors, REO brokers and agents (bank foreclosure brokers and agents), private money lenders, hard money lenders, foreclosures, probate properties, highly motivated sellers, contractors, subprime buyers, and anyone else that’s geared toward the investor buyer/seller and subprime buyer.
The profit for the savvy investor is dealing only with the 5 to 10% of the marketplace that will allow you to make the profits you require for your business. So many beginning investors will waste the bulk of their time dealing in the 95% world and wonder why they don’t buy any properties or the properties that they buy are subpar deals.
Make a decision right now to only deal in the 5 to 10% world and your life and business will be far more enjoyable and profitable. You need to become an expert in dealing with the 5% world and all its players. There are great deals all around you but you must be the prospector and focus only on the gold and not the dust.
In my over two decades in real estate I have been through every kind of market imaginable from red hot multiple offers in hours kind of market to a free falling value market where it seemed you could not give properties away. I have found that unsuccessful investors will always find reasons why they are not doing well or finding good deals. See if any of these sound familiar:
“The market is too hot here to find any good deals”
“This market is so bad that nobody is buying”
“You can’t do those kinds of deals in this market”
None of these are true and I don’t care what cycle your target real estate market is currently experiencing. During red hot markets I bought properties and got great deals. During dead dog slow collapsing markets both I and my clients have bought killer properties at rock bottom pricing. During a red hot market you really need to stay tuned to the 5 to 10% of the market. When you buy in these markets most of the houses are never “officially on the market” but rather the properties were found by you or your ant farm using the marketing strategies above. They also might have been on the open market and did not sell. They had some kind of problem that the agent and owner did not know how to solve. If the property hits the MLS and is a super bargain it will always be hard not to overpay for the property. The rule of thumb is the more people that know the property is for sale the more money you can expect to pay to acquire the property.
That’s the bad news; the good news is because that kind of market is so hot you don’t always need as big a discount to make the deal work. The hotter the market is when you go to resell the quicker sell you will have and less holding costs you will need to pay. When you are dealing with very slow markets, many times you can pick and choose the deals you want to buy right off the MLS and find solid deals that make sense. You must customize your buying and selling machine based on the market conditions.
The third type of property is “pretty homes” and those are homes that require a whole different approach than the ugly and semi ugly homes. These will be covered in a future article.
Analyze Deals Quickly
The next step once you have found a deal you think might be a good deal is to run your fast turn numbers.
Here is a simple formula to use every time.
- After Repaired Value (what you believe it will sell for after repairs are made, based on comps)
- Repairs to be made (more on figuring these in a future article)
- Holding costs (utilities, taxes, insurance, lawn, snow) (budget 5 months minimum)
- Interest on funds (interest paid to outside lenders or your own bank (remember being the bank?)
- Buying closing costs such as points on money, insurance, title company fees etc (check with local investors and title companies to get an idea)
- Selling costs such as real estate commissions, transfer taxes, title insurance (check with local investors and title companies to get an idea)
- Cost over runs and oops factor
- Your minimum acceptable profit
Maximum offer allowed by you
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