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Posted over 11 years ago

What is a deal anyway?

What is a deal anyway?  Are MLS deals not good?  Do you really make more money on unlisted deals?


These are all questions asked regularly by seasoned investors and it is the debate that never seems to end and probably never will.  I will cut to the chase and say I believe the answers to all of these questions are ‘it depends’.  Depend on what?  Ultimately the End Buyers exit strategies (they do have more than one yes?).  These strategies play a huge role here.  There is a lot of opinion on this subject so let’s get started into analyzing this debate for fun.


‘What is a deal anyway?’ 


This is almost a loaded question.  With all the different rehab calculators, landlord calculators, wholesale calculators, MAO calculators, ARV hard money/private money calculators, owner finance calculators and on and on out there, it is easy to get lost in the mix.  Everyone has the ‘perfect’ calculator that will solve all your woes as to what a ‘deal’ is.  Realistically, they are probably all correct for what ‘they are looking for’.  I have learned that this may or may not mean anything when it comes to having a deal.  It just depends. 


Example from my market:


SFR built in 1985 on sale for 50000 and needs 10k in work.  Let’s say investor contracts at 47000 because it is a relatively simple rehab in a decent neighborhood with some owner occupant homes and some rentals.  Once you add in closing costs and taxes, they are all in for about 59000 cash.  Buyer is paying with their own funds and plans to buy and hold.  This property rents easily for 950/mo.  Here is what the numbers could look like for the investors ROI:


Total investment: 59000


The ROI Breakdown

Monthly Rent

$950.00

Rents x 12 months

$11,400.00

2012 Taxes

$1,210.00

Insurance Estimage

$650.00

Property Mgt 9% average

$1,026.00

Net Annual Cash

$8,514.00

ROI

14.43%

 

Now this is just one version of the ROI calculator landlords have.  14.43% does not include vacancies and other expenses but does include property management at a 9% average.  For some investors, this is a great deal they will gladly take.  For some investors, it is too risky.  It all depends on what they want and what their expectations are.  I know guys that would take this in a heartbeat and others that would say no just as quick.  So to me the answer here is ‘it just depends!’  This particular scenario is quite common for both MLS and off-market deals today.


This is a great segue to question number two.  Are MLS deals not good?


I cannot tell you how many times people call looking for unlisted deals.  My response is generally the same.  I ask what their criteria is and then simply state that with all the deals out there from the banks today that meet their criteria, what’s wrong with an MLS deal?  ‘Well everybody has seen it!’ or some variation of that is usually the answer.  Well that may be true but that doesn’t mean you can’t get a deal on it.  Every house is different and even better, many of them do fall through which many times means a better deal for the end investor.  Again I believe it just depends.  We have done very well with some MLS deals so I would certainly not subscribe to the ‘you can’t get a deal from the MLS’ way of thinking.  Another example is a wholesaler’s perspective.  If a wholesaler can wholesale an MLS deal to someone and make a small fee and the end Buyer gets the numbers he needs, is it not a deal?  Is not a win-win?  We tend to think this is just fine.  It’s no different for those that buy to renovate.  Or lease option.  To be sure some MLS deals are definitely NOT deals.  Like question number one, to us the answer is simply ‘It just depends’.  However we believe there are plenty of deals to make money from on the MLS so why cut out a perfectly good lead source?   


Which leads to question three:  Do you really make more money on unlisted deals?


I believe most if not everyone would love to find that hidden gem off-market deal and for sure, they are out there.  However they do take a little work to find more often than not and many times are no better deals than MLS deals.  Private Sellers do have an opinion too on the sale of their house which can make or break things.  :-D  We have seen no shortage of private seller deals that are quite frankly worse than the listed deals and vice versa.  Example:


I just saw a house yesterday with an ARV of 75k tops best case, 60-65k more realistically.  The asking price was 30k.  I went and took a look at it as it was in a part of town that is in demand.  I was expecting a 15-20k rehab based on some pictures I saw.  What I walked into was one step above a full gut.  Completely trashed, beat up inside and out and had mold as icing on the cake (analogy there, don’t ever eat a cake with mold.  :-D).  Rehab was easily 35k possibly 40k.  This was an off market deal that looked like it had potential for a Buy and Hold but in the end our offer was ½ of asking at best.  The numbers simply weren’t there to do anything with it. 


On the flip side, we recently worked on a private seller deal where the home was worth approximately 75-80k.  It only needed approximately 12000 of work.  We were able to get the deal and wholesale it for 42000 to an End Buyer to do the renovation.  As a Buy and Hold, it worked for them.  We did have to jump through some hoops since with private seller deals, title concerns are especially prevalent to watch out for since you don’t have the luxury of a foreclosure sale generally wiping out most of the past issues.


As you can see in one scenario, it wasn’t even close to a deal and in the other, it worked out for this particular Buyer quite nicely.  We actually had some people look at the 42k deal and pass!  It just depended on the End Investor goals.  As a wholesaler, we were able to make money on deal number two however making money on deal one would be quite challenging!  So again, the answer to us is ‘It just depends.’


In conclusion, I realize this is a very brief article over something that can be discussed for hours on end between investors.  What I have learned as the most important thing for us is answer the question ‘do the numbers work for us and/or our Buyers to make money and be satisfied with the deal?’  If the deal is strong enough, it will usually move whether to us or someone else.  Everything else generally becomes secondary, if a factor at all. 


So my suggestion is the next time you see a deal, instead of wondering where it came from, just see if the numbers work for you for your goals.  You may find you have been letting some nice gems pass you by.  I have met more than one person who has felt that way!  Every market is different but deals abound.  Happy house hunting!

 

 



Comments (4)

  1. Good food for thought. I'm a new investor and have yet to purchase an investment property. I'd like to buy and hold, but have been struggling somewhat with how to find the right buy and holds that will cash flow (or at least not cash bleed) without having to turn over every stone in my farm area. There's always been the thought in the back of my mind that MLS listings that have sat for awhile must be bad or they'd be gone. Sounds like I need to move past that and get to crunching more numbers. Thanks for the advice!


  2. Great post. There are lots of places to find good deals and fortunately a good deal for one is not necessarily a good deal for another investor. I also suggest that investors look past the numbers to the other details about any property. The numbers are only part of the story, location, zoning, condition, crime, environmental hazards, etc can be the rest of the story.


  3. The most important component is your diligence. Weather you are purchasing from the MLS, FSBO, Auctions, or REOs direct from banks (I would recommend only experienced investors even attempt the latter two) the main component in getting the best deal is how well you know your market. I have found great deals on the MLS that were either passed over by less experienced investors or shunned because of the amount of rehab work involved. Additionally it is important to note you should have a exit strategy before you ever begin placing offers. A great deal for a buy and hold investor can be a horrible deal for a flipper and vice versa. I think for first time investors the MLS is a very good place to start. It is more formal than auctions and direct REOs and has safety nets built in that are typically not available in other venues. Get a agent who is experienced in investment property and is willing to teach you. Try and tell a bank or auction company you want a "inspection period" or ask for the property's financials and you will typically get a generic response absolving them from any concrete obligations and telling you to do your own due diligence.


  4. Great post. From my experience, the MLS can be perfect starting points if you're into serious number crunching. Get 10, 20, 50 deals into YOUR calculator (the only one that should mean anything), and for the best way to get the best price out of the best five. Unlisted, exclusives, word of mouth, these are all great bonuses, and can sometimes turn up great leads for future deals, but to depend on them for your bread and butter can be very dangerous, in my opinion.