How I Analyzed a Deal in 5 Minutes (& Bought it Before Anyone Else Could)
I recently attended a conference on buying properties off market. The course taught techniques for finding motivated sellers and making offers on their homes. While at the conference, I put a property under contract from a couple I met at there. The couple was buying the house from a wholesaler and found out, right in front of me, that the source of their financing had just fallen through.
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I could see from the look on the wife’s face that something went wrong on the phone call. When I asked her what happened, she told me the person who was going to lend her the money had just decided to lend it to her son instead. Realizing you’re going to lose a killer deal can ruin anyone’s day, and I recognized that feeling all too well!
When I asked her what she was going to do, she shrugged her shoulders and said there was nothing she could do. She didn’t have the money and couldn’t buy the house. Out of curiosity, I asked her what the numbers were. She told me the house needed very little rehab (paint and cleaning for about $5,000) and was likely worth $165,000, but she was running her numbers based on a conservative $145,000. The rent was about $1,050-1,200, the area was on the nicer side, and she was going to buy it for $95,000. She showed me the pictures on Zillow and confirmed they were accurate. (She had already seen the house.) Her mentor, a very successful and knowledgable investor who owns 25 (and counting) properties in this same area, confirmed everything. He also gave me the contact information for four banks he had used before that would lend against the appraised value of a property up to 80% LTV. Everyone was bummed they were going to miss out on this great deal.
Then I told her I would buy it from her for $101,000.
The entire conversation honestly lasted about five minutes, and most of that was me scrolling through the pictures of the home on her phone and looking for her mentor to verify what she’d told me. We could have done it in three minutes if everyone had been there.
Why I’m Not Crazy
Now wait. Before the chorus of doubters spring into action and crucify me for making a careless decision, let me explain myself.
Many new investors think it's the time spent analyzing an investment that makes it safe. To them, due diligence is based on the amount of time and effort one puts into their research. It creates a false sense of security when you spend hours looking at a computer or running your deal by other investors. Now, I'm not saying any of that is a bad idea. Honestly, if it takes hours, days, or even weeks to analyze a property correctly, that's what you need to do!
What I’m saying is that when you get good at knowing what you’re doing, it doesn’t take that long.
And that is really, really good news for anyone who wants to be involved in real estate investing for the long haul.
I want this to be an encouraging article. I want people to realize that investing can actually be a lot of fun, full of excitement and victory, and it doesn’t have to be a chore full of anxiety, doubt, and worry.
At its core, real estate investing is buying a business. Each property we buy is its own business, with its own profit and loss columns. In our world, we call those two columns “rent” and “expenses,” but they work essentially the same way. A property produces income (usually through rent) and has associated expenses (PITI, CapEx, vacancy, etc). Once you learn these items well, you’ll find that most properties, no matter where you buy them, operate very similarly. Once you know how to calculate the numbers that go into these columns, you can very quickly and efficiently analyze deals and make offers on them.
In this case, it took about five minutes.
Here’s how I did it.
6 Things I Did When Buying This Deal
1. I knew my standard.
When I buy a property, I am looking for four things:
- I want to recover all—or the lion’s share—of my initial investment.
- I want the property to cash flow positively.
- I want the property to be in an area that won’t make my life miserable or require much of my attention.
- I want people in the area where I’m buying who are competent and whose opinions and word I trust.
If I follow these four rules, I will likely end up with a property that requires very little of my time or attention and that will build me wealth over the long-term.
Because I analyze properties so often, it doesn’t take me long to mentally plug in some numbers and quickly determine if a potential property is likely to be a good fit. The faster I can analyze a property, the more properties I can analyze. The more properties I can analyze, the more deals I can offer on. The more deals I offer on, the more houses I close on. The more houses I close on, the better the vendors and talent I can surround myself with because I’m employing them more consistently. This growth spiral upwards is what allows me to get better rehab prices, work with better agents, and get better loans than the next guy.
Related: Looking to Invest Out-of-State? Here’s How to Pick and Analyze a City
It all starts with mastering the fundamentals of analyzing properties.
2. I knew my numbers.
The first reason I was able to make a decision on this property in five minutes is because I knew the numbers associated with evaluating a property. This isn’t a huge compliment towards me—it’s not exactly calculus. By knowing the rent, mortgage amount, property tax, and insurance and by leaving myself a cushion for expenses like vacancy and repairs, I was quickly able to determine the property would cash flow positively.
Before I even ran these numbers, I ran the property through my first analytical metric commonly referred to as the 1% Rule. By seeing that the expected rent ($1,050-1,200) was more than 1% of the purchase price ($101,000), I knew that unless there were some hidden surprises like HOAs, the property was going to cash flow. Knowing a cheat as simple as this saved me a lot of time. If the purchase price had been $125,000 or so, I wouldn’t have even considered buying it as a rental.
Once I knew the property met the 1% rule, I did some quick math on my phone’s calculator to confirm it did actually cash flow well.
3. I verified the contract would work for me.
Before I gave my word I would buy the house, I told the couple I was buying it from I would need to see the contract. My friend Beau who was also present explained to them that meant I would need standard inspection contingency times, a standard real estate contract used in the area, and a reasonable deposit. Pretty cool when I don't have to even open my mouth to say what I need, right?
Real estate contracts are written by real estate lawyers and used to protect both parties in a transaction from unscrupulous activity. While you should always read and understand anything you sign, I have a strong sense of confidence in a contract used millions of times over the years for the vast majority of all real estate transactions. By making sure I was getting a standard contract—not one written up by a wholesaler in his bedroom—I ensured I would have all the protection I could reasonably expect.
With this in place, I felt confident to move forward knowing I could find out anything I didn’t already know in a reasonable period of time.
4. I ordered a home inspection.
By ensuring I had an inspection contingency, I gave myself time to get the home inspected and ensured I could back out if I needed to. While I had no reason not to trust the people I was going to be buying the contract from, there is always the strong possibility that there are problems with a home even the other party doesn’t know about. By giving myself time to get the home professionally inspected, I helped myself in several ways:
- I made sure if there were bigger problems than $5,000 (my expected expenses) would cover that I could back out.
- I gave myself time to make sure the banks would underwrite me for the loan after I closed on the house.
- I gave myself time to confirm other potential issues like the actual rent, the school systems in the area, the rental demand, the property tax base rate, the insurance rate, etc.
Many people are afraid to buy a house they’ve never seen. I used to be, but not anymore. I, David, don’t really need to look at a house. What I want is a professional inspector to look at a house! It is much more important that I look at an inspection report than I look at the house itself. Once I realized that, I started making big strides in my confidence and consequently my progress.
5. I spoke to the lender to confirm.
During my inspection period, I called the four lenders I was given and confirmed three of them would give me the loan. One even agreed to give it to me with zero closing costs. Not too shabby, right? By making sure I had financing in place to secure my loan, I had the "refinance" portion of the BRRRR strategy covered, and I was better able to calculate expenses (the mortgage).
6. I created a contingency plan for every step of the process.
While no one can make sure nothing will go ever go wrong, we can make sure we have a plan in place for when anything does.
My inspection contingency covered me for just about every big surprise that could happen. That helped a lot. In addition to that, I also:
- Confirmed the rents on Rentometer, Craigslist, and with a professional property manager.
- Confirmed the assignment contract was solid.
- Had a contractor walk the house to confirm the rehab estimate was accurate.
- Double checked my ARV with several sources.
- Ensured the property was not on a flood plane.
- Ensured the property did not have termites.
- Ensured the roof was newer.
Once you know what can go wrong, it doesn’t take much time at all to build in whatever protections you need to feel comfortable that if anything goes wrong, you’ll know what to do. This makes it possible to analyze and move on properties much, much more quickly.
4 Things I Didn’t Do
1. I didn’t try to get wholesalers to lower their assignment fee.
I can pretty much ensure that when some of you read this, you’ll ask yourself why I paid the couple who couldn’t buy the property anything at all. Since they were going to lose it, I could have just bought the assignment from the original wholesaler and saved myself some money. At the very least, I could have paid them much less, right?
Well, yes, I could have. But that would have been stupid. Here’s why.
This couple just received the heartbreaking news that they lost the house. For me to jump in and take advantage of their loss would have been pretty classless. It also, at best, would have left them with a bad taste in their mouth about me. Now, this deal was pretty sweet, leading me to believe they are likely to come across more sweet deals in the future. It didn’t seem very wise to save a couple thousand now to lose tens of thousands in the future.
There is also the fact that the deal worked for me at $101,00, and that means something.
If a deal works, it works. It doesn’t benefit anyone to go back and look for how they could have ripped someone off to save a little money. Those kinds of people develop really bad reputations in this business, and, in my opinion, short themselves on their own success. I was more than happy to pay an assignment fee to these people and turn their crappy day into a great one. If they leave seeing me as a hero instead of a cheap villain, who do you think gets the first phone call when the next deal comes out? (For those of you wondering, since that day, I have already lined up a second deal with their group that I’ll be getting next week.)
I know it’s tempting to go after someone for whatever you can get, but you should first count the cost. I made this mistake in the beginning of my career, and I lost a lot of powerful relationships that would have made me a lot more money in the long-term. Winning battles to lose wars is not a good long-term strategy. Building allies to win wars is much, much better.
2. I didn’t waste people’s time.
I didn’t hem and haw at this deal. I didn’t tell them I would buy it, only to change my mind. I didn’t analyze it for fun while making them wonder what I would do. I asked the questions that were important, I weighed the answers, and I quickly realized this was a deal that I would be stupid to pass up. I took just enough time to make sure I had a solid contract that gave me time to do my due diligence, and I moved forward.
Think about it—I’m buying a house for way under market value, that needs virtually no work, and that will cash flow well. I’m also getting a loan with no closing costs, and I’m making strong allies in a market where I want to start buying. Why on earth would I take more time to think about that than I needed and give someone else the chance to step in and buy this house instead?
Time wasn’t going to make this deal any better or worse, I promise you. Taking more time wouldn’t have helped me at all.
3. I didn’t ask irrelevant questions.
I knew what I needed to ask, and I asked it. I knew WHO I needed to ask, and I asked them. I knew where I needed to go to verify these answers, and I verified them. I knew what the contract would afford me to do, and I did it.
There was absolutely no reason to pour over census data from the last 20 years or to try to confirm whether the siding was aluminum or wood. Many investors get caught up in unimportant details that becomes excuses not to act. I didn’t waste the couple’s time and was therefore able to get all the answers I needed to feel comfortable taking the next step—all in five minutes.
4. I didn’t try to alter the contract.
It can be tempting to try and alter a contract to make it more beneficial for you in times like these. When you sense weakness, it’s only natural to go for more.
If the contract needed changing for me to feel comfortable, I would have requested changes.
But it didn’t. So why go through all that for nothing? Making this couple call the guy who originally put it under contract and request changes would have required him to go to the sellers and ask the same questions. That would have raised an entire new set of problems in the deal and possibly ruined it. Why risk all that just to experience a sense of power in “winning”?
The contract was solid, so I developed my strategy based on the way the deal was already written. It worked out fine, and there was no reason to think I needed to change anything.
I Promise I’m Not Crazy!
Before you jump to any conclusions about how irresponsible this all was, please just take a moment to ask yourself why. Why does it matter if I could put this together in five minutes if I did the same work that would require someone else five days?
Why take time to sleep on it if I know my numbers, know my goals, and know my standard?
Why would I give someone else the opportunity to buy this deal if I didn’t need to?
What I hope you take from this is that you CAN analyze a rental property in five minutes if you know what you’re doing. You CAN feel confident that you can do all your due diligence in a short period of time if you have a system in place to help you do this more effectively.
Real estate investing becomes a lot more fun when it doesn’t take days of anxiety and worry over whether you should move forward or not!
If you find yourself dragging out the analytical process for days at a time, ask yourself how efficient you really are. Ask yourself if you’re really trying to master this craft or not. Ask yourself why you are even doing this.
I love real estate investing. A big reason why is it’s not easy, but it’s simple. I love the simplicity, and I love the familiarity with this asset class. My hope is that more investors catch the same bug I do and learn to love it just the same way.
I promise, I’m not crazy. You can learn to do this, too!
Are you at a level where you can analyze properties quickly, sight unseen yet?
Let me know your experiences with a comment!