How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
The Usual Diagnosis
Most people would start a post on this topic by describing how people are overwhelmed with the amount of information available on learning how to flip houses. Making heads or tails of where to start is a challenge in and of itself. Each time you think you’ve cracked the code, you realize that you’ve just discovered 20 more questions that need to be answered.
I will agree that “analysis paralysis” is one of the biggest road blocks for new investors, but I want to take a different approach here and talk about people that break through the fog and finally find a way to get started…only to end up quitting after putting in a lot of hard work.
The reason so many fail after taking some action is because they don’t fully understand that this is all just a numbers game. No, I mean REALLY BELIEVE that . . . this is a just a numbers game.
Great! You’ve Made It. Now The Hard Part.
Ok. Let’s assume you’ve figured out where to start. Incidentally, you’re probably looking for some good deals. You’ve determined that this is the best way to making progress. Every successful real estate investment starts with a great deal.
You’re contacting Realtors and marketing directly to motivated sellers and sending yellow letters to owners of vacant houses in order to find that coveted first deal. You can just taste it. Images from “Flip Men” and “Flip This House” of dilapidated, trash heaps of property are dancing in your head. The pile of money at the end of the rainbow is not far from those dancing images either. Your motivation to get that deal is at its peak.
You’ve done your homework. You know how a short sale works, or at least you know of it. You know that there is a possibility to wholesale your first deal ‘As-Is’ and make a quick couple grand. You’re privy to the knowledge that rehabbing is where the money is at and that you can really make the big bucks doing that. Oh, but lease options and owner financing are fantastic for long term investment and building to financial freedom. Rentals are perfect for tax reasons, so we like those too. Oh man, what about buying ‘subject to’? We could do that also. The possibilities are endless! (I even feel myself reverting back to the analysis paralysis just writing this.)
Stop the presses! You’ve got a lead from a real estate agent. This must be promising as it’s a REO (Real Estate Owned by the bank). According to the agent, it just needs paint and carpet and it was just listed. The price is a ridiculous (the agent’s word, but I gets it’s true from either perspective) $70,000 and, “it should sell for over $80,000 fixed up,” the agent informs you. Hmmmmm. I don’t know about you, but the hamsters in my head are working overtime. I really want to make this work so that I can continue to get deals from this agent. Boy is this dangerous.
How Can I Turn This Into A Deal?
Well, according to the 70% rule that we all know so well, the purchase price should be 70% of the after repair value of house, minus repairs. So, 70% of $80,000 is $56,000. Darn, this probably won’t work for a wholesale or rehab as the numbers just don’t work even before figuring in the repair costs. From what we’ve read, banks won’t typically take more than about 10% off the list price when a listing is new.
You might start thinking through all of those strategies that we mentioned earlier. Surely one of those will work for this situation. Maybe so, but I’d venture to say not likely!.
We simply may not know enough about the approach that could work as a remote possibility to try and do this as a first deal. Signing it up and trying to put together something that is beyond our ability is a great way to grow, but an even better way to fail. We’ve got to be cautious here. There’s a lot at stake.
Your approach is not clearly defined.
The problem here is that a lot of newer investors don’t have their approach clearly defined. Their exit strategy has not been limited to one or two strategies that fits their situation best. Doing a deal to just do a deal can quickly result in disaster.
But, if we know what type of deal we are looking for, our temptation to do that very, very marginal deal presented by the agent will not entice us to purchase the property. We can quickly dismiss it and begin to work at finding another opportunity. A profitable opportunity.
Looking for this first profitable opportunity can be very frustrating in the beginning. For most investors, the first deal takes the longest to find by far. The second one usually takes less than half the time to find than the first one and often can only be a couple of weeks later. The third, fourth, fifth, etc. are soon to follow. Even so, trying to attain that first one has caused so much frustration and lost faith that most people just throw their arms up and decide to go back to their old, comfortable (or not so comfortable) life.
Other People Just Got Lucky – I tried, but it didn’t work.
The bigger problem is that you just don’t have enough opportunities coming to your attention.
Make your own luck.
Commit to being persistent and continue your marketing. Let the snowball effect of your marketing reach take hold. Often, the result of marketing is not realized until months down the road as all that you do to get your marketing message and name out there start to build and grow.
You’ve probably heard many times before that this really is just a numbers game. But do you really focus on this while planning and working towards your goal? Do you keep your head up knowing that it just takes one great deal to make up for months worth of hard work and persistence? That not giving up can allow you to drastically change your life, if not for the deal, for the habit it creates?
Proof Of This Numbers Game – Reason To Stick With It
For 34 weeks, I documented everything I did to market to motivated sellers and discussed every single lead that came in along with the numbers. The results were 495 leads resulting in 11 deals. There were stretches of a lot of leads that were all duds, but I didn’t give up. Things built up and just kept going. So many people have told me how the project has really driven the point home that just sending out 50 letters and only getting 1 call does not mean what you are doing isn’t working — this really is just a numbers game and if I can do it, so can you. Give it a chance to work.
Photo: Ed Kohler