WHAT IS A DEAL TO YOU?

56 Replies

What is a deal to you and why? I'm sure not every one is strictly focused on the 70% ARV-repairs, 50% (multifamily), or 2% for B&H. The BP boys also mention that these are only guidelines, but what do you all focus on to consider a purchase is a deal.

I ask this because I do not want to start going around calculating said math above, make a million offers and never get anywhere although I would celebrate if an offer where to be accepted. I am curious on how to obtain an "eye" for deals so if you all may add that in to the reponses I would greatly appreciate that. Thank you and have a great day BP!

Numbers and exit strategy...or strategies actually.

First you need to decide what your exit strategies are.  Are you a flipper, holder or both.  What specific strategies are you interested in, or more importantly are you and your team equipped to handle?  Once this is decided, you need to design a system with criteria for analyzing properties to see if they meet your criteria for your strategies.  The criteria is always based on your numbers for your market.  If one person tells you you should use this method of analysis (2%, 70%, etc...) they are correct...for their market and their strategies.  One person's floor is another person's ceiling.  What's right for them isn't necessarily right for you.

NEVER offer based on what it will take to get the property.  This isn't a contest to see how many properties you can acquire.  It's a contest to see how much $$$$$ you can acquire.  

Your analysis will tell you what to offer. ALWAYS offer based only on what your numbers tell you (based on your criteria).  The numbers don't lie, so don't argue...you'll lose every time.  Sometimes the best deal you make is the one you don't make.

Joe Villeneuve
REcapSystem
A2REIC

Sent you an email Joe!

Rich Got it.

Joe Villeneuve
REcapSystem
A2REIC

@Rich Cee   my criteria in my local market is first is it below market for the condition or area, next if the price is low is there something I can do to add value that is low cost in relationship to how the value will go up.  last I look at the numbers of price versus rental income.  No matter the deal it must have sufficient cash flow to make it worthwhile.  I have ocassionaly taken deals that had low cash flow based upon special factors, like no money down in an excellent area where I could resell immediately if needed.

I'm a flipper in Washington DC and a good deal to me is one where I can net at least $50,000 upon exit. Frankly, if I used the 70% ARV - repair cost formula, I would never pull the trigger on anything. It's a good rule of thumb, but it's tough to find properties at that much of a discount in my market.

I've found it much more helpful to set up a detailed spreadsheet that covers all the costs of doing the deal.  If I'm netting at least $50,000 after plugging in my conservative numbers, then it works for me.  

As an example, my last flip was a property that was listed for $282,000 and I purchased for $250,000. It had an ARV of $379,000. I estimated repair costs of $33,000. If I had blindly abided by the 70% - repairs formula, I never would have bought the property unless it was at $232,300. I knew I could make it work at $250,000 so that helped me beat competing investors. I ended up netting $47,967 on the deal after all was said and done.

I find that the 70% rule, and other rules like it are dangerous.

Newbies shouldn't use it because it hides both the problems with the deal that would make the deal worse,  and the pluses that the 70% rule would reject.  I prefer to use actual numbers...as all investors should.

Joe Villeneuve
REcapSystem
A2REIC

Originally posted by @Joe Villeneuve :

I find that the 70% rule, and other rules like it are dangerous.

Newbies shouldn't use it because it hides both the problems with the deal that would make the deal worse,  and the pluses that the 70% rule would reject.  I prefer to use actual numbers...as all investors should.

Joe Villeneuve
REcapSystem
A2REIC

 I agree with Joe. As a buy and hold guy I built a spreadsheet that does all the math for me of the actual numbers so I can evaluate a deal in minutes. That being said around my area if I can get $150 dollars a door in cash flow I consider that a good deal.

What makes a deal? 

The challenge for any new investor is determining what they really want. Problem is, they don't know. 

When I was new, I was no different. I began buying default properties at a discount, but the discount wasn't enough to resell at a profit, in most cases, so I held them and turned them into rentals. They made a positive cash flow, but not much for all the work. This was during the early 80's when we were suffering the effects of post-Carter era economics, stagflation and high interest rates. Buyers were scarce until consumer confidence picked up after Reagan was in office a few years.

At the heart of the problem was my low Dealflow due to limited marketing effort. When I got serious about my direct response campaigns, I talked to more sellers and looked at more properties. 

I began to understand the sales and rental values in my 'farm'. I no longer thought every caller was gold and got more confident by earning how to ask better questions in better ways to get better answers in shorter time. 

This in turn lead to an increased ability to vet prospective sellers quickly, efficiently and lead to more accurate decisions. 

After making mistakes, remembering the hassles I encountered due to some of my decisions, I was better able to draw upon experiences and relate them to callers and weave these stories into the way I communicate with would-be sellers who are/were astonished that I was unwilling to fall all over myself to pay what they wanted for their home. 

Hint: It's just a house to me!

Like @Joe Villeneuve   states, use actual numbers. The connecting factor of all posts above is your market and your exit strategy.  Know your market!  In a larger metro area like Tacoma, I would probably at least at first, focus and farm a certain corner I specialize in.  A good deal will stick out like a sore thumb, and you can do like  @Robert Williams   did and take advantage of a great deal . Broaden your farm area as you get comfortable.   The 70% rule and the 2% rule are basically never available to me in my market.  I would have long starved only looking at those.  I like the cashflow per door rule like @KYLE Z.   recommends.  I use a slightly different approach. On my 5+ units I do a break-even analysis.  If it will survive with only  5/7 of the units rented, it is worth looking at.   The terms are as important as the price, especially with single-families.  If I don't have to play with a bank or grind through a single-minded realtor or attorney, I will 'pay' a higher price.  It's all about what works for you.

Originally posted by @KYLE Z. :
Originally posted by @Joe Villeneuve:

I find that the 70% rule, and other rules like it are dangerous.

Newbies shouldn't use it because it hides both the problems with the deal that would make the deal worse,  and the pluses that the 70% rule would reject.  I prefer to use actual numbers...as all investors should.

Joe Villeneuve
REcapSystem
A2REIC

 I agree with Joe. As a buy and hold guy I built a spreadsheet that does all the math for me of the actual numbers so I can evaluate a deal in minutes. That being said around my area if I can get $150 dollars a door in cash flow I consider that a good deal.

 Right....except with me, I need at least $300/door for a good deal.  That just makes our points though.  One general rule, doesn't work since there is no one size fits all for investing criteria,

By the way.  I also designed my own analysis spreadsheets (3) to evaluate my deals in seconds.  The only way to go.

Joe Villeneuve
REcapSystem
A2REIC

I have to admit that all of these responses are excellent. I held this question in the back of my mind for months thinking I would figure it out by listening to more podcasts and reading but I could not grasp such black/white answers pertaining to "how to find a deal". Next questions will follow once I choose what I think would work for me I'm sure. Thank you all very much for your replies. You all are the reason why this site is what it is! Hopefully I'll be following suite one day replying to rookies, etc. with knowledge.

Originally posted by @Joe Villeneuve :
Originally posted by @Kyle Z.:
Originally posted by @Joe Villeneuve:

I find that the 70% rule, and other rules like it are dangerous.

Newbies shouldn't use it because it hides both the problems with the deal that would make the deal worse,  and the pluses that the 70% rule would reject.  I prefer to use actual numbers...as all investors should.

Joe Villeneuve
REcapSystem
A2REIC

 I agree with Joe. As a buy and hold guy I built a spreadsheet that does all the math for me of the actual numbers so I can evaluate a deal in minutes. That being said around my area if I can get $150 dollars a door in cash flow I consider that a good deal.

 Right....except with me, I need at least $300/door for a good deal.  That just makes our points though.  One general rule, doesn't work since there is no one size fits all for investing criteria,

By the way.  I also designed my own analysis spreadsheets (3) to evaluate my deals in seconds.  The only way to go.

Joe Villeneuve
REcapSystem
A2REIC

 That's great cash flow Joe! 2 different parts of Michigan lol. I most times make over 150 but I am buying nicer houses that don't need rehab for around 20,000 to 25,000 with hardly any money invested so ill take it.

I'm a 'newbie' at analyzing rentals, and I ran the numbers to death before I just put offers on my 2nd rental (first was a conversion from my primary to a rental in 2010).  I am afraid I'm missing something, but I've tried to think of everything and I've showed an experienced landlord I work with my spreadsheet as well as a friend of mine that is better at math than me.  They both seem to think I've overanalyzed, lol.  So i guess that is reassuring.

Joe has said it to me before, that the rules don't really apply here.  It's hard to find a house that makes sense under the 50% rule or 70% rule.  I don't know that my 2nd purchase will add up to the 50% rule but it will be fairly close.  I calculate 350 a month in cash flow without any catastrophes, and I think 300+ for me is a great deal.  I will take 10 homes with 300+ cash flow.

I'm already starting to plan the funding for a 3rd, but want to see how the 2nd goes with finding/screening tenants, going through the inspections, and the minimal rehab.  For my 2nd, I bought a nearly move in ready home to make it 'easier' on the first one.  

The advice I got from a friend at work and around here has already saved me alot of grief.

For my 3rd, I am really considering finding a home that looks nice on the outside, but it totally outdated and needs TLC on the inside, and going after it by paying cash, then putting a bunch of capital into it to bring it up to ARV, THEN renting it, and refinancing in a year to get most of my money back out of it, while taking all the write-offs. Is this a smart way to go about doing a rehab/rental? I have never done one.

@KYLE Z.  My rehabs are no more than 10-15k...or I pass on them.  I can do South Redford all in for less than 50k, and CF over $400.  I can do areas of Livonia for under $80k, and cash flow over $700.  Livonia is nicer than Redford, but you can get into Redford much cheaper...and South Redford isn't anywhere near being "cheap housing"...just not expensive.

Joe Villeneuve
REcapSystem
A2REIC

Also sometimes what goes through my head is how come I found this deal and why am I the one able to get it, or why am I the one that is looking very seriously at it?  Where are the other investors?  What am I missing?  I generally think first about everything wrong with something, and then that's when I start thinking why i'm the 'lucky one' and no other investor or person has picked this house up yet.  What am I missing, indeed?

Just from this site alone it appears there are many investors in Michigan.  So it definitely makes me wonder.

Originally posted by @David Roberts :

...... THEN renting it, and refinancing in a year to get most of my money back out of it, while taking all the write-offs.  Is this a smart way to go about doing a rehab/rental?  I have never done one.

 Yes, this is how I do it...with one more step.  Take the money you got out from refinancing and invest that into your next deal.  Then, refi that one and invest the refi cash in the next one.  Did you notice that as long as you are cash flowing each property after refi, you aren't using any new money.

Joe Villeneuve
REcapSystem
A2REIC

Joe you have been such a great help in several threads for me.  I really appreciate it.  I've been writing many notes down as I learn.

My primary home has about 100k in equity. I was planning to pay cash for the home, then use a HELOC for 20-30k in rehab, and then rent it. I should be able to pay that HELOC off in 1.5 years or less between my full time job and rental income. By then I could refinance the money out, and use that to buy the next rental with cash, etc.

Joe, doing it this way, does it also allow for the bank to consider 1 year of rental income as actual income since I believe you have to wait until taxes are done the following year to show the income? 

It's great that it only takes getting to a full cash deal once, and then re-using that cash. Essentially after the refinance, you go from a low COC return to an extremely high COC return, and so on and so forth.

But at some point you have to focus on paying down your mortgages right?  At what point do you do this?

The biggest thing Rich is to decide what you want to actually do and what you want to make then you work back to your hard numbers.

For example I wholesale to investors in Memphis. My minimum margin is 5K. Our business model is to deliver as much equity to our clients as possible so any property I can buy and sell and make 5K plus is a potential deal. The next wholesaler in Memphis who might spend big money on marketing to find more buyers or may use affiliates or may just have a different business mindset has a minimum margin of let's say 15K so that is their bottom line.

Once you decide what your bottom line is then it gets easier to start to identify deals. Knowing the patch you farm is also critical.

(901) 264-8674

@David Roberts  I'll answer the last question first: 

Q:  "But at some point you have to focus on paying down your mortgages right? At what point do you do this?"

A:  No...that's the job of your tenant.   However, there is a way to combine a faster payoff (your tenant still pays it off for you) and refinancing the same property again.

Q:  "...does it also allow for the bank to consider 1 year of rental income"

A:  Yes.  You actually answered this question in your next paragraph.  The lender I use allows for up to 10 mortgages, with each subsequent mortgage using the CF from the previous mortgages as income.

Q: "Essentially after the refinance, you go from a low COC return to an extremely high COC return, and so on and so forth."

A:  Correct...thus one of the many beauties of this system.

Contact me directly if you'd like, and want to discuss anything you'd rather keep private...or just to get faster answers than on a blog.  I'm available now if you are.  It will get me out of raking leaves...so please contact if.  LOL

Joe Villeneuve
REcapSystem
A2REIC

Your email in your signature doesn't seem to be working.

As others have stated each market is different. I'm happy with $100+ CF on a SFR after factoring PITI, PM, CAPEX, MAINT, and Vacancy. I also like to buy below the $150K mark so when I'm ready to snowball the mortgaes I can do it quickly.

This post has been removed.

A "deal" to me is something where I am making money going in (buying under-market), where the numbers "work"  (I don't have a fixed $$ per door rule - too many other factors at play), the employment center is good and appreciation is likely.  I have pretty specific locations where I own/buy and it takes me about 10 minutes (or less!) to know if something is a "deal".  I am in a "holding pattern" right now - no pun intended!  I don't really want anymore rentals, but I love to buy.  The flip opportunities are limited and I'm kind of lazy...so nothing much is happening.  I am in a different place than I was when I started investing in my early 20's.  I'm in pay-off mode and training my assistant to handle everything while I spend winters in FL and summers at the beach.  I control my buying addiction by finding deals for my friends (:

@David Roberts  I like your plan.  I have used a similar one.  If I am buying for cash, I am looking for property which couldn't qualify for a conventional mortgage.  Actually, I am looking for anything I could make money on, but what I normally find at a sufficient discount is something a mortgage financed buyer can't buy. 

A dated-cosmetic fixer is the holy grail for a mortgage backed buyer. A property with plumbing problems, a problem roof or other relatively minor structural problems will normally sell for a deeper discount since it needs repairs to qualify for a mortgage. If that is not your speed, then peeling exterior paint or single pane windows will disqualify a property for an FHA or other low down loan and can make it cheaper.

That is my strategy in my area.  From what I read in the forums property is much cheaper in your area, so you might not need to look the kind of properties I buy. 

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