Real estate investors often pride themselves on their ability to be creative, and to design win-win deals as an outcome to many different scenarios. The problem then becomes choosing which of the possible win-win scenarios to pursue. Each of us only have so much time, so much energy, and so many resources available to put deals together. With this in mind, we should only spend our time on deals which have a high likelihood of being realized, are most profitable, or both. Filters can help us focus our efforts on the right deals.
1. Establish Focus
The first thing you need to do before working with filters is to establish your goals. Once you get clear on the type of deals you’d like to do, you can stop following up on everything that comes your way, and learn to say “no” to the people and deals that will only end up wasting your time.
If you want to buy and hold rental properties, you don’t need to waste your time looking at a potential flip on a $1.2MM luxury home. If you want to wholesale properties, you shouldn’t waste your time negotiating with every seller on the MLS. If you want to renovate and flip you should again set your sights differently.
2. Create Your Filters
Once you are clear on the strategy you want to pursue, you can setup a filter. Apply the 80/20 rule and come up with a rule that will eliminate about 80% of your leads so you can focus on the 20% that are worth your time and resources. If you are familiar with the 80/20 rule, you’ll also recognize that 80% of your deals will come from 20% of the people you talk to. Why not narrow this down right off the bat and quit wasting time examining every deal that comes your way?
If you are looking for buy and hold properties, try something like the 10% rule. Do the annual rents equal at least 10% of the purchase price? If yes, get started on your due diligence. If no, move on to the next lead. Of course this 10% may be different in your area or the type of property you like to purchase, but you can adjust this to quickly screen for properties that will provide the best cash flow.
If you are considering shorter term strategies like wholesaling or renos, determine an appropriate filter for that. Set your threshold for asking price as a percentage of ARV (after repaired value). If a seller wants 80% of what the place is worth, it might be a great deal for someone who is looking for a home for themselves, but you might not have the margin you need to wholesale or flip and still make a great profit. Whatever your filter is, set something that will narrow out the junk and let you focus on only the best opportunities.
3. Work With Real Prospects
After creating filters that work for your business, you’ll be able to stop wasting your time with suspects, and focus on dealing with real prospects. Instead of spending your time with people who want to sell, you will be working with people who need to sell. When you start putting deals together with the best numbers and most motivated vendors, your efforts will go much further. You will miss out on some great deals as a result of filtering your opportunities, but when you get more done in less time you won’t be concerned with the few that got away.
Learn the difference between suspects and prospects and create your own filters to screen out the suspects before they zap your time, energy, and enthusiasm for real estate.
photo credit: peterjroberts