The 5-Step Formula for Reliable Profits in Real Estate (or Any Business!)
Visualize this with me…
There’s a woman (or man) in your hometown. She has a problem that is driving her crazy. When she goes to sleep at night, she can’t get this issue off her mind. When she reads the newspaper, watches the news, or has conversations with friends, this “itchy” problem keeps bubbling to the surface. Before long, the “itching” has become so annoying that she’s ready to do whatever it takes, listen to all solutions, in order to solve this pesky situation.
I didn’t say what the actual problem is, but go ahead substitute some possible problems: toothaches, lower back pain, not enough money to pay the bills, retirement accounts sinking like the Titanic, teenage son getting into trouble at school, etc. Just listen to soap operas, the news, or any lunch-time conversation, and you’ll realize that people are overflowing with problems.
The truth is that people will never run out of problems; therefore, we entrepreneurs will never run out of opportunities to solve them!
My long-time mentor and friend Louis Stone told me the first day I rode around with him in his car when I was still in college, “Chad, you’ll never have a problem making money if you just focus on finding a need and filling it.” I have always remembered this advice, but I would now add to find needs and fill them them with what people are willing to pay for.
Along these same lines, marketing and business author Dan Kennedy in his book The Ultimate Marketing Plan says that if we want to make money by solving our customers’ needs, we must focus on the following 5 steps that each customer follows before buying:
- Step #1: Awareness of a need or desire
- Step #2: Picking the “thing” that fulfills the need or desire
- Step #3: Picking the source for the thing
- Step #4: Accepting the source’s price
- Step #5: Finding reasons to act now
You could have a wonderful service of buying real estate, but if you can not guide your customer down this 5-step path, you will struggle. So, you can look at this 5-step formula as a core process of your business. This is a basic formula for turning a prospect into a customer over and over again.
In the rest of this article, I’ll show you how these 5 steps can be applied to our real estate acquisitions business and our key customer, a motivated property owner.
The 5-Step Formula for Reliable Profits in Real Estate
Step #1: Awareness of a Need or Desire
What needs are we solving in the real estate market?
We aren’t able to solve problems for all home sellers, are we? More particularly, we are helping homeowners who are more motivated. They have some sort of deadline, financial problem, personal problem, house problem, or all of the above. My friend Louis Stone used to call this an itch that needs to be scratched.
Motivation need not be desperation, but I’ve found in all of my successful deals that the seller had some sort of problem that motivated him or her not to sit patiently waiting for top dollar.
So, as a first step in communicating with a seller, it might be good to ask them, “What are you trying to accomplish? Why are you selling?” I focus on the sellers whose answers indicate that they already recognize their need. If I have to convince them of this very first step, it will be an uphill struggle.
In this way, listening is the critical first step. We must listen to see whether or not a prospect really has potential to become a customer. If they don’t, I simply thank them and refer them to someone else who can better serve them.
Step #2: Picking the “Thing” That Fulfills the Need or Desire
What is our unique solution? What do we sell and provide to motivated property sellers who have indicated a need? I propose that the following might describe our solution:
- Liquidity — Cash without financing contingencies
- Timing — Quick sale or a delayed sale, on the seller’s exact timeline
- Privacy — No sign in the yard or public marketing
- No Hassle — Easy, painless path to a closing
- As-Is — No repair costs or hassles for the seller
- Certainty â No last-minute changes or loan denials, a sure deal
Terms Offers (Lease Options/Seller Financing/Subject-To):
- Debt Relief — Relieving seller of cumbersome monthly payments
- Management Relief — Handling all day-to-day affairs of a rental property
- Potential Tax Deferral or Estate Planning
- Passive Income Stream
It is really this simple. To successfully solve our customer’s problems, we must be able to communicate and then provide the solutions above. In exchange for these solutions, the property sellers give us money in the form of a lower purchase price and/or better seller financing terms.
This is not an easy skill because the seller may not recognize your solution as the one he needs. We may have to compare our solution to other more traditional solutions, like listing the property with a real estate agent. Each of our investor benefits can be compared with the corresponding weakness of listing with an agent.
My approach is to also sell the agent's solution as if they might consider it too. I tell the seller why it might be advantageous to go through an agent. I tell them there are pluses and minuses to each approach, and I lay them all out on the table. I then present my specific offer in light of all of this discussion. If the benefits of my offer resonate with them, they can make a choice to work with me.
This is much different, by the way, than just offering someone a purchase price or a list of numbers by itself. Numbers and contracts have no life. Our job is to be a guide and a translator of the technical details. If we can help the seller visualize our solution as becoming real, we have succeeded.
For example, I may offer to pay someone $100,000 cash and close in two weeks, but what does that mean for my seller? A better translation of this technical detail might be that she can use that money to purchase a very good, limited-time deal on a different property she really wants. If she has to wait for someone else to buy her house, even at a higher price, she could lose that other deal.
Because I have listened to her true need, I’ve now conveyed that my cash purchase means that she’ll get the new deal she wants. I have translated numbers and a contract offer into a living, breathing solution.
Step #3: Picking the Source for the Thing
We must now answer the question in the seller’s mind: “Why should they sell to us and not someone else?”
The answer to this question could be as simple as, “Because I’m the one here right now.” This is why it’s CRUCIAL that you consistently put yourself out there in front of potential customers. New motivated sellers enter the market daily, and when they’re ready, you must be ready to move quickly.
If the seller likes you better, you may also have an advantage over other investors who claim to provide the same solutions you do. One time I bought a deal from sellers who I know for sure called and met with two other investors in addition to me. My offer was a little lower than the others, but the sellers called me back and said they would sell to me if I came up to the same price as the other investor.
Why did they choose me? I think it was because we trusted and liked one another.
This is why I always emphasize getting to know the seller and letting the seller get to know you. Connect with them in some way. Without this connection, we’re just another name or a commodity that has no real value.
I also think our confidence and competence come into play in this step. When your marketing, your phone conversations, and your face-to-face conversations convey a sense of confidence, the seller will often be drawn to you. Don’t be wishy-washy or timid. If you don’t feel confident inside, borrow confidence from your team, your mentor, or a partner. No one will be confident in your solution if you’re not confident in it yourself.
Step #4: Accepting the Source’s Price
We must now think about how to help our seller accept our price. Our price is the perceived discount we are paying for the price or terms offered in our solution. In other words, why should the seller work with us if she perceives she’ll get less money?
An excellent investor and teacher in California named Bruce Norris with the Norris Group has a very interesting process for addressing price and the value of his cash.
He will have a conversation with the seller that looks something like this:
“It really comes down to this: You have a house. I have a large amount of cash. The question which we must answer is what’s worth more to you, the house or the cash.
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Look at it like this. What if you had two options:
1) I’ll give you a house, free and clear, and you get all the potential benefits but also all the potential headaches – like repairs, management, taxes, waiting for a buyer, etc. or
2) I’ll give you a big wad of cash.
At the price you’re asking, I’m not saying it’s a bad price, but I’d rather keep my cash. What you really have to decide is, at my offered amount of cash, are you willing to take the money and give me the house, or would you rather wait for something that may be better?”
This is an ingenious conversation because it creates a vivid picture of our main solution – quick, easy cash. It also emphasizes that there is a cost to getting cash. No hidden agendas here. You decide if the obvious benefits of my service are worth the price tag or not.
Step #5: Finding Reasons to Act Now
How do we encourage a seller to act now? When you're face-to-face with seller or their agent, your most powerful strategy is something called "take away selling."
You must always be the one more willing to walk away from the deal than the other. If the other person perceives that you need it less than you do and if they perceive your solution really might go somewhere else instead of to them, a sense of fear and urgency is created.
Practical ways to do this are with offer deadlines. I also like to mention that my money and time aren’t unlimited — I can only focus on a certain number of projects and there are others that I’m considering.
Remember the person with a problem in the beginning of this article? If that problem is painful enough, she will want it solved sooner rather than later. The uncertainty, fear, and hassle of finding someone else to solve the problem may be too much to bear. Your walking away could be the event that helps the seller to realize she needs to get her problem solved right now.
Learn, Apply, and Share
I really appreciate you taking the time to read my article. Most of all, if you have learned even one thing, I hope you take the time to apply it to your own investing or other business.
I challenge you to write down in your planner, your smart phone, or your notebook how you are going to use this idea you have learned. This one habit — learning something and immediately applying it — is how you will make a profit from your time on BiggerPockets.com.
If you have learned something, I’d love to hear your thoughts and comments below.
Please share additional thoughts or feedback. Thank you!