Formulas don't work, every deal is different

18 Replies

When I am dealing with wholesalers or Realtors they almost always ask for my formula.  I tell them, there is no formula, if you think it is a deal, send it to me and I'll run MY numbers on it and let you know.

If it needs a lot of work, it will take longer.

If it is turn key it will move quicker.

Lower price, I'm probabaly all cash, higher price I am probably getting a loan or private investor.

Tenant or Vacant?

So many factors that need to be considered on each deal.

If you are using a "formula" you are either missing out on potential deals OR you are buying something you shouldn't.  Run your numbers fresh on EVERY deal you see.  Get as many deals coming to your inbox as you can.

@Luke Weber

Hey Luke, I like this. Some people just operate more analytically and they need one to feel comfortable. I don’t. I think there is a difference from a formula and streamlining your processes. Just like a business, you need to maximize efficiency without sacrificing quality. This is an ever changing industry which is why I too shy away from strict formulas. Good post my friend!

I agree...kind of, with a twist. There are formulas, but the formulas are a result of the answer. Every REI has their own bottom line for cash flow and/or profit. When you start with that at one end, and the property in question at the other, the formula in the middle is generated as a connection between the property and the bottom line. The formula is in fact, the strategy/strategies that will work to make that connection.

@Luke Weber  @Joe Villeneuve

Solid advice.  I think what you are both saying is that while there is/are a 'formula(s)' you have to apply your experience and knowledge to dig into the details of the deal to see if it works for YOU.  Flip numbers will be different from buy/hold numbers but you need to know the numbers of the deal.  So yes, there are formulas, but each deal must be assessed of its own merits.

Thanks,

Steve

Originally posted by @Steve Hiltabiddle :

@Luke Weber  @Joe Villeneuve

Solid advice.  I think what you are both saying is that while there is/are a 'formula(s)' you have to apply your experience and knowledge to dig into the details of the deal to see if it works for YOU.  Flip numbers will be different from buy/hold numbers but you need to know the numbers of the deal.  So yes, there are formulas, but each deal must be assessed of its own merits.

Thanks,

Steve

Kind of. Each deal must fit into the same formula. However, to maximize each deal, the REI that understands how to rearrange all the variables, constants, signs, ets... found on the left side of the formula (without changing the answer on the right side), wins...as long as that REI stays on the left side.

4 + 4, 2 * 4, (6 * 4)/3, {(4^3)/16}*2, (8 * 12) - {(4 * 4 * 5) + (2^3)}...all equal the same thing...8

Hi @Joe Villeneuve

I think I saw that exact same equation shared at a Guru's weekend bootcamp  ;-) 

With experience, one gains the ability to improve their formula to include the necessary variables/constants/signs used to mitigate risk. So while 4+4 = (8 * 12) - {(4 * 4 * 5) + (2^3)} the more detailed approach could allow an REI to avoid something the more simplified approach (only relying on the 1% rule for example) might miss.

Be well,




I couldn't agree more as well. When new investors "interview" me, they toss around formulas and terms that don't matter to me. I've been investing for 30 years, a formula doesn't tell me anything. And will the advent of all the calculators, it's actually what keeps people in analysis paralysis because they run numbers and don't see properties because the numbers don't work. Then, they can make the numbers work by just adjusting numbers when the property is what holds all the cards. I think the best advice for new investors is to look at as many properties as possible in person and then use calculators to see how your real-life investigation is going.

People who want to promote formulas for flipping are trying to sell a system. Real investors know the system is a broken mess of investor feel, experience, knowledge, back data, neighborhood identification, and a bit of numbers.

@Jonathan Greene that is exactly it.  Yes a formula can get you in the conversation, but those of us who have been doing this for a long time know that a formula can also get you into bad deals or keep you out of good deals, plenty of variables.  And yes if you really wanted to, you could have a formula that includes most of those variables and build it all out in a spreadsheet with about 15-20 columns, but even then, there will be sometimes it looks good on paper (or doesn't) and you know you shouldn't (or should) just not do that deal!  I basic formula is a starting point, it shouldn't be the deciding factor.

Great post- so many novice investors get locked in to "it doesn't meet the X rule, so it's not a deal," or " I ran it throught the BP calculator and..." There are so many nuances to this and every market and deal is totally unique. Sure, those formulas and rules are a good base, but the nuances are where the magic happens and that only comes with experience. This is why it's SO important to have trusted partners on your team to help you see the forest for the trees. 

Originally posted by @Steve Hiltabiddle :

Hi @Joe Villeneuve

I think I saw that exact same equation shared at a Guru's weekend bootcamp  ;-) 

With experience, one gains the ability to improve their formula to include the necessary variables/constants/signs used to mitigate risk. So while 4+4 = (8 * 12) - {(4 * 4 * 5) + (2^3)} the more detailed approach could allow an REI to avoid something the more simplified approach (only relying on the 1% rule for example) might miss.

Be well,




That's it...but I made up the numbers...but the meaning behind them doesn't change, and you nailed it.

 

Maybe when people ask "what is your formula" they don't mean it literally. My guess is they mean to say what type of properties fit your business model. Some people like gut rehabs, some like cosmetic, some flip quickly, some buy and hold. The point is knowing the "formula" helps people direct the right kind of deals your direction. "Send me everything." is a bit of a shotgun approach in my opinion.

So from a newer investor perspective, what criteria do ya'll have in order to determine if something is a good deal or not?

Originally posted by @Tucker Cummings :

So from a newer investor perspective, what criteria do ya'll have in order to determine if something is a good deal or not?

 Everyone's successful investment is based on different criteria.  Always financial, and based solely on what their predetermined plan tells them those numbers are...at each timeline in that plan.  That means that each timeline can, and probably should, have a different set of criteria.

Speaking to a very experienced and well versed investor earlier today, I asked him how he was able to move on a few deals  so quickly.  In addition to his experience and knowing what works for him i.e. what @Joe Splitrock referred to as a fit for his business model, he said, "I knew the market".   Ah, another variable.  And as @Corby Goade said, who do you have on your team to rely on?  There is another.  How about state of the market?  Is it 2006, 2010, 2015 or 2020?  Oh, another variable.

So you run the numbers through a 'formula': ARV - closing costs - repairs - holding costs - loan costs - closing costs - purchase price = profit. But you can't escape the value that comes from those non-quantifiable elements like experience, market knowledge, strength of your team, state of the market to ultimately determine Deal or No Deal. That's a winning formula. The intuitive part can only come from experience and learning, often then hard way.

Cheers,

Those wholesalers and Realtors are just trying to see what kind of a bar you have to be able to pitch you.

If your requirements are too high, they don't want to waste their time. When I was in sales I didn't go around trying to land customers who bar my product couldn't meet, I'd just go knock another door and find softer soap. 

They aren't going to stop trying to qualify you. Just be glad that after they find out you know your ****, they disappear rather than annoying you with lousy deals. 

Yes, every deal is unique and special with its own nuances. And aside from the human factors that are unpredictable (i.e. contractors, subs, tenants) the "financial rules" people apply are just nonsense. 

Take the 1% rule for example. It totally ignore basics like taxes and insurance not to mention things that change by geography (i.e. snow removal, CapEx, etc.)

As a Realtor who works with different types of investors, if I'm going to spend time going through gazillions of properties anyway, I like to know what kinds of deals I can send out to different kinds of investors on my list -- so in a way, I need to know what "formula" they're looking for. @Joe Splitrock hit it on the nose. For example, there are investors who just want a place to "park" their money, so they want a property that is an area that they don't think will go down anytime soon. Some investors work with amazing lenders who will fund and let them do whatever renovation they want with no money down because they already have the right relationships and reputation. Some investors want a 40% ROI and are okay with some creative solutions and non-standard properties with zoning issues. Some want a steady cashflow right away and a turnkey rental with no headaches or work that can be managed from out of state. But just signing up all of those different investors for a generic new property or cheap property alert or sending "deals" that are not deals to them just fills up everyone's inbox (an my outbox!) with unneeded trash.