This tip is for new investors.

How do you know when a property is a good deal or not? 

Let's say you get an opportunity to buy a 3 bedroom, 2 bathroom home that is 1500 sq ft in you neighborhood for $200,000. The property has a good layout but it needs new flooring and paint. Also the the kitchen cabinets look old but they are not damaged. So you figure you could probably just paint them rather than replace them to save some money. And if you wanted it to look even nicer and updated, you were thinking about adding some new quartz countertops to the kitchen and bathroom vanities. You have a buddy who is a contractor who said he would give you a good deal on the rehab and said that he can get that all done for you for $35,000. 

Here is the question, "is this a good deal?"

Most of you who live in the United States should say, "yes this is a great deal in my neighborhood." However, for some of you living in the United States, this would not be a good deal. So why is this? Because a deal is only a deal when compared to other things around it.

If I were to walk into Walmart and I see that I can buy a bottle of water for $1.00, then that would not be a good deal. Because I can my a case of 24 bottled waters for $5.00 - $6.00. However, if I am in the subway in New York on a hot, sweltering day and I see someone selling the same bottle of water for $2.00 then that might be a steal, estecially when those bottles of water usually sell for $4.00 in the subway. So what changed? A lot of you will say location, location, location, and you would be right. But I will be more specific. The thing that is really different in the water scenarios is what the waters next to the subject waters are selling for. That is what tells you if you are getting a good deal or not.

I was doing some coaching with a friend who is new to real estate. On the call we had a couple of weeks ago I showed him how to get on wholesale lists. This week I gave him homework to pick a market according to the strategy that he wants to use (and in his case he wants me to show him how to set up lease options). I told him to get on to Zillow, Realtor dot com, and Redfin to start to get to know his perferred market. This way he gets used to what the prices are at the different levels of finishes in that market. For example, what does a newly, well done, remodeled house go for? What does a house go for that was built in the early 2000's that hasn't been updated? And what does a house go for on the market that needs a lot of work? It is basically impossible to know if you are getting a good deal or not unless you are familiar with what the comparable prices are on the market. 

So you know how you were taught that you shouldn't compare yourself to others? Well in real estate it is the opposite. Compare, compare, compare. It's the only way that you will know if a deal is actually a good deal. 

So here is the sequence in determining if something is a good deal:

1. Choose a market.

2. Get to know the market price points in that market. 

3. Get deal flow (through wholesalers, realtors, or your own marketing efforts).

4. Compare the "deals" that get sent to you with the properties around them. 

5. Find out about how much it would cost in repairs to get a particular property to the same level of finishes as the ones selling on the market.

6. If after you do all of that, and there is a significant difference between what you are able to buy a property for, rehab the property for, pay the closing costs, and any financing costs, then my friend, you have found a good deal.

For newer investors, I hope this was helpful for you. And for experienced investors, what would you say I left out?