Have you ever gone into a real estate deal feeling like you just aren’t sure what you’re getting yourself into? Have you ever wondered if someone is trying to pull something over your head? How do you really know if the numbers on the deal you are pursuing are good?
Well, there are two things to help with these questions. The first is due diligence. But due diligence is a little bit more difficult, and it can take a little while to learn how to do it thoroughly enough. So due diligence isn’t the one I’m going to focus on in this article, because that one is a more thorough and detailed path. However, be sure you always conduct thorough due diligence on any investment property you are pursuing. If you don’t know how to do it, don’t purchase anything until you do.
I’m going to focus on the second thing that can help answer these questions. This one isn’t really talked about much. Many people probably don’t even realize it’s a thing. I can hear people now griping at me for this one because of how non-technical it is. And to that extent, no, this is not an official method and it certainly isn’t thorough or technical. However, in my experience, it is one of the easiest ways for me to feel confident in what I’m buying—and confident in the deal that I’m getting.
This thing can actually be a lot of fun, but it can also require a little bit of patience. I think everyone should do this for at least a decent amount of time before purchasing their first property.
Even more exciting, this technique can be used for just about anything in life—buying a car, renting an apartment, buying clothes, or picking out décor. In some cases it can even be used in job searches, when looking for a new pet to adopt, or picking out outdoor equipment. I’ve even used it for hiring people, looking for new doctors, and choosing health insurance plans.
Are you in total suspense now? Are you wondering what in the world real estate investing technique can be used in so many other arenas? Well, it’s not specifically a real estate investing technique, and many people don’t think of it when they think about real estate investing. But, it can play a big role in your investing.
Are you ready? Prepare yourself to find out the most anti-climactic yet easiest way to feel more confident that you are landing a great investment property. And that is—
Does “anti-climactic” accurately describe the sentiment you felt when you read that? It does for me. But hear me out.
A Non–Real Estate Application of Shopping for a Deal
Before I talk about shopping being advantageous for real estate investing, I want to give you an example of the benefit of shopping for something completely unrelated to real estate.
A couple years ago I decided I needed a different car. My 1990 4WD lifted Jeep with no windows (that got nine MPG) was no longer filling the role of “practical car.” I thought about what kind of car I wanted, and since I definitely wanted a 4×4 but hate how big every post-2004 4WD vehicle is, I thought back and wondered what older cars I’d always liked. I remembered that I always loved the 2002–2004 Xterras. It’s arguably one of the best off-roaders out there. It’s the perfect size, and I do always love paying cash for a car and avoiding payments. So I set out looking for my perfect 2002–2004 Xterra.
Now here’s where this shopping thing came into play. When I checked the Blue Book valued of Xterras from those years, even ones with lower miles usually came up with a maximum of about $3,500 estimated value. I thought—OK, now I have a general idea of what I can expect to spend, and knowing that baseline number can help me evaluate any Xterras I find in my shopping. Well, guess what I started to find very quickly into my search? The only Xterras from those years that came up somewhere close to $3,500 were either ones with extremely high miles or in extremely bad condition—or both. I raised an eyebrow and went back to the Blue Book, thinking maybe I had mislabeled the condition of the vehicle I was shooting for. But nope, $3,500 was the estimated value for 2002–2004 Xterras in excellent condition with decent mileage. Hmmm.
Unrelated to trying to figure out the discrepancy between Blue Book and what seemed to actually exist, I ended up shopping for my Xterra for about five months. And when I say shopping for five months, I mean extensive shopping. I shopped every single day, refreshing every Craigslist search page in every city between Seattle, California, Texas, and everywhere else on the West Coast. I assumed if I could drive an Xterra from somewhere, it was worth shopping there. I even shopped on the East Coast a little. AutoTrader, random for-sale pages, eBay, Carmax… I shopped everywhere. The reason I had to shop so extensively is because I was looking for a 4WD manual vehicle. For some reason, Nissan just didn’t make a lot of manual Xterras in those years. So when I’d finally find a manual, it either wasn’t 4WD—or if it was, it had absurdly high mileage and/or was in such bad condition it just wasn’t worth it. I knew I could find the combination I wanted if I kept looking, but I had to drastically extend my search radius.
What happened in all of that shopping was that I got an extremely good feel what the true value was of a good Xterra in that date range and condition. After a certain amount of time, I had seen so many Xterras that I had probably seen every combination of year, style, drive, color, condition, bells and whistles, location, etc. I had seen prices attached to every combination of each of those things. I had seen so many Xterras that covered every end of the rainbow that I could almost immediately tell if one was priced well or not. I could spot a rip-off a mile away. I could see a good deal a mile away. And when I finally found my dream Xterra—4WD, manual transmission, clean as a whistle inside and out, well taken care of, and white like I had hoped to find—in Seattle priced at $6,500, I knew I had to buy an airplane ticket immediately and go get it. I knew that $6,500 was just about right for this quality of 2002 Xterra anywhere outside of California ($8,500 would have probably been the value of it in California).
Even when I plugged the specifics of this particular Xterra into the Blue Book and other car estimate calculators, it came up that this vehicle was really only worth about $3,000. Even so, I knew I was getting a fantastic deal. Why? Because I had just shopped for five months and knew the price of every 2002–2004 Xterra west of the Mississippi, so I had an extremely wide range of comps in my head. The Blue Book could say what it wanted, but I knew $6,500 was a steal for this car in the condition it was in.
Why did I know that? I had been shopping like crazy. Maybe all of the Xterras out there were over-priced since they were all priced so much higher than Blue Book. But if that was everything that was out there, I either had to adjust my price or pick a new car to buy. Compared with what was realistically available, I got my car at a steal.
Shopping and Real Estate Investing
The same way I knew the value of the car I was buying because I’d shopped extensively for Xterras, you can end up with a really solid knowledge of what a good deal looks like when it comes to investment properties—if you’ve spent a good bit of time shopping for them.
If you buy the first investment property you find or that is pitched to you, you have absolutely no way of knowing if you got a good deal or not. I would even argue that even if you do the most thorough amount of due diligence and verify every single number, if you haven’t shopped around and seen other properties, you can’t actually know if you are getting is a good deal.
In my experience, if you shop around like crazy for whatever it is you want, when you finally stumble across the right property, it will stand out like a shining diamond amidst everything else you have seen during your shopping.
You will know you’ve found the property.
You will know exactly why this property is a good deal.
If you can intelligently explain to someone why you know a property is a good deal, it probably is a good deal. How could you truly ever know or justify why a property is a good deal if you’ve seen very few or no other properties?
If you are shopping, you will see all sorts of different factors within each property. What are some of these variances in investment properties that you will see?
- Location (macro and micro markets)
- Risk factors
Not a fully inclusive list, but those are the basics. Price is at the top for a reason—ultimately price should be based on all of the factors below it. And ultimately, whether a property is going to be a good deal or not largely depends on the price.
Now in thinking of all those factors below it, how many different combinations of those things are possible in an investment property?
- High income, good condition, bad location, high risk factors
- Low income, good condition, great location, low risk factors
- High income, bad condition, good location, medium risk factors
- Low income, bad condition, bad location, high risk factors
- High income, good condition, good location, low risk factors
- And on and on and on and on.
- There are multiple combinations of just these four factors.
Each combination of these factors should be priced differently. The “low income, bad condition, bad location, and high risk factors” should easily be the cheapest of the properties (to help make up for the mess you are about to take on), and “high income, good condition, good location, and low risk factors” should be priced the highest, because it’s the highest quality property.
But what should each of those different variances and combinations of variances be priced at?
I have no idea.
What constitutes the designations of each category/variance?
I don’t know. It’s all relative.
Think about cap rates. I often hear people ask, “What cap rate should I shoot for on an investment property?” Well, that depends. Where are you buying it? What kind of property are you buying? A “good” cap rate will vary between every market and between every type of property. The only way to know what a “good” cap rate is in any particular market is to shop several similar properties in the same market to get a feel for the going rate.
If you haven’t done that, how can you know if a 1 percent, 5 percent, 20 percent, or 0 percent cap rate is good for that market?
And what about the condition of the property? Do you want the same cap rate on a distressed house as on a fully rehabbed house? No. But how can you know which cap rates are applicable for which property conditions?
This is what shopping will teach you.
Shopping can teach you much of which general research and education will teach you. Even better, shopping is a great way to look at practical applications of what you’ve been learning in your research and education phase (hopefully you are doing that phase). You can read books by phenomenal authors, you can read every BiggerPockets blog post out there, and you can network and learn from other people. But what will really drive home what you learn is getting out there and seeing real-life properties, deals, and situations. If you see enough of those, and you analyze each one—and practice identifying the pros and cons of each—you will become more and more clear on what properties make for good deals.
If you look long enough and shop around long enough, you will know the good deal when it shows up on your doorstep. That doesn’t mean there will never be problems with it or that it will be perfect—because hello, welcome to real estate investing—but since there’s not a guarantee on any property, the best we can do is to do the best that we can do! And so far, I have found nothing else that allows me more confidence in the quality of a deal than spending a great deal of time shopping for properties.
Pro Tip: know exactly why you are buying a particular property. If you don’t know exactly why you are buying it, or why it’s supposedly a good deal or why it should be a good deal, you aren’t ready to buy it. At least not without it being a gamble.
How long do you shop for? What tips do you have for building confidence in doing deals?
Share them below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.