I’ve been a little frustrated lately when reading online forums by some of the questions and responses being posted. The one that has frustrated me the most has been “Where are all the deals?”.
To be very clear, this is a different question than “How do I find houses” or “How do I get started”. Those two questions are asked everyday by new investors trying to figure out the lay of the land and are looking for input and advice from experts. I see those questions on a routine basis on different forums and message boards and I have no problem with them. These are good and basic questions that every new investor needs to be asking early on.
The real problem I have is this narrative that seems to have taken hold here lately on a lot of forums and even in advice blogs, that the real estate world has been taken over by uneducated foreign investors or deep-pocketed investment funds or both! Too often I am reading about how the investment business is being ruined and how it is impossible to find any investment houses. I may not be able to talk specifics about each market, but I have been in the business long enough to know that there are plenty of investment opportunities and that many of those complaining are either too green in business to know how to deal with adversity, or they have not been doing any business in the first place, and this is a convenient excuse for why.
The over-whelming problem as I see it is a lack of creativity when it comes to finding houses. We have seen our share of buyers over-bidding and have even had to deal with a large funding dropping millions into our market without a clear thought process on how to make money, while driving some pricing through the roof. So we have had to double down on the basics of great business and I thought rather than complaining about the narrative, I should offer a few encouraging ideas that we have implemented for everyone else to try.
How to Find Real Estate Investment Deals
1. Never Eat Alone. Not only is this the title of a great book by Keith Ferrazzi, it is also a great piece of practical advice that we put into practice everyday. Our company is set up a little differently where, as owners, we don’t have to do some of the same things we were doing when we started. This is an example of one of those things. We now have a full time broker who works for us and represents us on what we are buying. We recently sat him down and helped him breakdown his business and understand where weaknesses were and how to fortify his strengths.
What we found was that we had purchased from 39 different listing agents so far in 2012 and he had a personal relationship with most of them. We challenged him to not let a single day go by where he was not having breakfast, lunch, dinner, dessert or coffee with somebody. Not every meal, but a minimum of one meal a day. We challenged him to strengthen his existing relationships and remind the agents who he was purchasing the most properties from, how important their business was to him. We encouraged him to look beyond the top agents and build relationships with the up and coming agents trying to make a name for themselves. These types of actions would go a long way to show how important he took the opportunity to do business with them.
In some cases, he got creative and took lunch to the whole brokerage office because we was dealing with several listing agents at that office, and sat down with them to discuss the market. In every case, he was building his relationships and those relationships are key in this business.
TIP: Never forget that this is and always will be a relationship business. Not all contracts and not all buyers are created equal and your reputation as well as the relationships you keep can go a long, long way toward winner contracts on investment homes.
2. There is more to the contract than price. When we started seeing that we were losing contracts that we would normally win, we investigated who was buying and began to strengthen our offers accordingly. We knew that the funds in town were throwing their money around and using price as their main tool to win houses. Since the fund is located out of town, we decided to use our knowledge of the market as well as the markets’ knowledge of us to our advantage.
We started to improve our offers not solely on price, but also on the terms. Closing quickly is an easy thing to throw on a contract and often really means very little. Most banks are not able to move as quickly as cash paying investors so putting 24 hour closings is unrealistic and doesn’t improve your contract enough to accept over another higher offer. Knowing this, we decided to look at the earnest money deposit and consider how we could strengthen that line item in a contract. We improved our offers by raising our earnest money offers. If most contracts had $1,000 for earnest money, we would offer $10,000. In some cases, on houses we really wanted, we would offer as much as $20,000 in earnest money.
The second thing we would do is remove any contingencies. We would in effect, make our earnest money deposit non-refundable. This was a key for us moving ahead of higher priced offers from un-proven funds or even other investors with spotty reputations for closing. When the listing agents knew it was our offer and that we made our earnest money non-refundable, it would immediately make our offer more attractive even if it were at a lower price.
TIP: We used the information we had about buyers backing out of contracts to strengthen ours. If the agent knows you are all in on the house, they will go to bat to get your offer accepted.
3. Never allow someone else to dictate your business. I think this is simply part of my families’ competitive nature and love for adversity. We love to be told what we cannot do and nothing is better for our business than a challenge. When we were first told that a fund had committed hundreds of millions of dollars to buy single-family real estate in our markets we knew exactly how to react. While many people are running around (including in online forums) screaming like Chicken Little, we calmly told our staff a story from our past businesses that still resonates with us today.
There is a family owned grocery company in Central Texas that has been around for several generations and has made a name for itself by offering top of the line customer service and extremely good value. They have always been priced at a level that made them profitable and competitive, but more profitable than competitive. They have always chosen to compete on value rather and service than price. This story sounded very familiar to our staff.
One day, the big bad villain of the small family-owned grocery world came knocking in their territory with their eyes set on taking over and driving out the competition. That company was called Wal-Mart and they had successfully taken huge pieces of the grocery market in almost every major market in the U.S. In some markets, their price cutting strategy had helped them take over 50% of the grocery sales. But in this one Central Texas area, they were up against a very formidable foe.
When Wal-Mart entered the market, this grocery company told their employees and their customers that they were going to force Wal Mart to abandon the market before they would. They committed to matching Wal-Mart price for price every-where they could and were determined to use their superior relationship and long-standing community reputation to keep their business. To this day, they are one of the few markets in the U.S. where Wal Mart is unable to capture even 15% of the grocery business. When the time was right, they slowly raised their prices back to profitability and have not lost any ground to the bigger, better-funded company that was intent on taking their business.
After hearing the story, our staff knew that we meant business, and the last thing we were going to do was change our mode of operation — we sure weren’t going to cower in the corner and hope the situation improved. We went to work and we have protected our business. If we have to do deals that are good for our clients, but bad for our bottom line, then that is what we are going to do right now. If we have to pay more for houses or bid on properties we previously thought were too expensive, then that is what we will do while our business is under threat. They understood that right now, we are going to protect what we have built and at a later date we can recoup anything we may have lost. In the meantime, we are going to perform for our clients and our staff. That message gave them a ton of strength and belief and so far, big funds and un-educated foreign investors have not been able to slow us down.
TIP: You are in control of your business. If you let someone else come into your city and dictate to you what you can or cannot purchase or make money on, then it may be time to find another market or another business.
Photo: Pat (Cletch) Williams