Last week I wrote an in depth post covering the topic of “How to Rock at Finding a Mentor in Real Estate”. In the post we discussed how one of the key components to getting the conversation started is by actually bringing a deal to the table that the seasoned investor can help you with (and make money from).
Well how do you do that when you are brand new to real estate and have no experience?
That is what I want to address in this post. Below are 5 simple strategies that I’ve personally used to generate deal flow and I have confidence that they will serve you well.
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1. Door Knocking/ Driving for Dollars
Door knocking is the acquisition strategy that I primarily use and it has yielded the greatest return compared to everything else I’ve tried so far. It can definitely be intimidating but the truth is, there is no better way to gain someone’s trust than to actually be present in person.
I primarily go after homes that have a trustee sale pending on their property but you don’t even really need to get that targeted (if you do want to, this is one of the places I get my leads from and it’s free: click here.)
All you really need to do to get started is drive around your neighborhood and look for older homes -one’s that are tore-the-heck-up! (cracked cement, broken garage doors, broken windows, peeling paint, overgrown lawns etc)
If you just look around you’re bound to find someone in some type of distress, and if you work hard and are diligent in your approach, I would bet that you’ll find a deal within a month.
You just need to be willing to grind!
Now note that the outcome of the face-to-face interaction has a lot to do with what you say and how you say it.
If you just go up to someone and say, “Hey -uh, I was kinda wonderin’ if I could buy your house.” You’re going to get the door slammed in your face every time!
Your approach should sound something like this:
“Hey there! Don’t worry, I’m not selling anything! My name is Jaren and I’m just going around the neighborhood introducing myself and letting people know who I am and what I do, and how I can potentially be an asset to them. People aren’t as friendly as they used to be and I’d like to change that!
What’s your name? Oh awesome (repeat first name) it’s really nice to meet you! How long have lived in this neighborhood? What do you do for work? (listen, ask questions, build rapport, and then when appropriate)
Oh awesome! Hey just so you know, I’m in real estate, but I’m not an agent (unless you are of course) I just help people out when they’re in a jam and need to sell their property quickly. If you happen to know anyone who has a property they need to get rid of, would it be okay if I left my phone number with you so you could pass it on to them?” (and return the favor. Whatever they do for work get their contact details and pass it on to relevant people -intentionally make it a win-win.)
If you take this approach and if that person so happens to be thinking of selling, then they’ll tell you right there and boom. You got a potential deal.
If the person is not thinking of selling, they’ll keep you in mind because you took time to get to know them and if someone in their network is needing to sell, they’ll most likely pass your information along and boom. You got a potential deal.
Either way, this is how you use door knocking effectively: by being a friend and actually adding value to people’s life by offering yourself as a solution.
2. Networking with Agents and Wholesalers
The two groups of people that bring in the most leverage for finding deals are investor-friendly real estate agents and reliable wholesalers. These are the people who understand the benefit of being in a relationship with investors and have ongoing work with them.
If you have key agents and wholesalers in your network you can coach them on what you (or your potential mentor) specifically look for in a deal and they can be a great resource for pre-MLS listings, distressed properties, and a utopia of knowledge concerning the market you invest in.
Wholesalers understand what investors are looking for better than anyone else because they, by definition, find deals that are at a steep enough discount to tact on their fee in addition to the deal having enough spread to make sense for the investor buyer.
If they’re legit, you can guarantee that they’ll be the most leveraged relationship you have.
But the catch is actually finding one that’s legit.
I personally have come across a lot of wholesalers who try to take out as much money out of the deal as possible without givin-a-rip about leaving any meat on the bone for their buyers.
With that said though, if you find someone who has a steady flow of off-market properties and they’re reasonably priced, then you’ve truly found a gold mine!
How Do You Actually Find Them?
The simplest way to find investor-friendly agents and wholesalers is to attend REI meetups and ask the organizer(s) of the meeting, (there are a lot of newbies that attend these things so in most cases, the fastest filter is to network straight with the one(s) hosting the meetup. Now note that I have had a completely different experience with meetups organized strictly for BiggerPockets members, but for the ones I’ve attended from meetup.com this advice holds true) and ask them if they have a real estate agent and/or wholesaler that they’d recommend.
If you’re successful in getting their contact information proceed to take that person out to sushi or to a Brazilian Steak House and treat them like the king/queen that they are.
You pretty much need to make an impression on these guys because if they’re referred by an active investor, it means they have a reputation in the community and understand the investor mind.
They are a valuable asset!
Most of the time wholesalers and agents tend to have an ‘inner circle’ of investors they bring potential deals to first, and then proceed to shop it out beyond that if no one in that circle wants it.
Starting out you will not be in that inner circle, but with some proper etiquette you should be able to grow into it (or at least close to it) relatively quickly.
The most crucial aspect is to be responsive. When someone contacts you with a deal, immediately run your numbers and get back to them with a yes or no, like asap.
99% of want-to-be investors hem-ha around and these agents and wholesalers don’t have time for it.
Second thing I’d mention concerning etiquette is when you turn down a potential deal, explain exactly why you’re turning it down.
Help them understand your margins and coach them on what you look for. That way, in the future they’ll be able to bring leads to the table that work for you.
3. Pulling a Vacant List and Skip Tracing
In certain cities you can call/ head down to the city and actually pull a list of vacant properties in the area. For example in San Jose, CA where my company primarily invests, you can go to the Code Enforcement Department and pay them to print out a vacant list, which potentially can be a very hot source of leads.
The catch here is you have to have access to a skip-tracing software so you can track down where the owner actually resides and that comes with a fee. The most bang for your buck skip-tracing software, in my opinion, is called TLO ($1 per search) but there is an application process and be forewarned, skip-tracing is a very tedious task.
The phone numbers seem to only work about 50% of the time so you may need to combine strategy # 1 and just door knock the alternative address.
If you can get used to the skip-tracing aspect this can actually be a great source of leads because vacant property are already something the homeowner is neglecting, so they’ll most likely be open to selling.
4. Estate Sales
Estate Sales can also be a great source for potential deals. My company has actually closed on 2 deals from estate sales within the last couple of months one of which had an ARV of over 1 million dollars.
The key here is to find estate sale postings on Craigslist and then actually go show up as a normal spectator. Next, you want to causally ask the host(s) what happen, who’s estate is it they’re selling, why they’re selling it etc. Then when it’s appropriate, ask them what the plans are with the actual house.
If they’re thinking of selling it in the future, let them know what you do and how you could pay cash making the transaction very smooth and headache free.
If they already are in the process of getting the house on the market with an agent, that’s fine, contact the agent and see if they’ll entertain pre-market offers. If they do, this would be a perfect point to get your potential mentor involved. Tell the agent you’ll get back to them and call the investor asking for help.
5. Craigslist Automation with IFTTT.com
This is a system of passive lead generation that uses a web application called IF This Than That to pull relevant posts from Craigslist that are then automatically sent to your email inbox the minute the posts go live.
We determine the “relevance” of the posts by searching for specific keywords in the “For Sale By Owner” section but we’ll go over all those details later.
Once this system is set up, you will get personally notified on every potential deal posted on Craigslist, the exact second it gets published.
It’s pretty cool huh?
You see, the “For Sale By Owner” section on Craigslist has pretty much become a mini off-market MLS. A ton of investors use this section to find and sell deals every day.
It’s a very active community and it has a ton of opportunity especially if you’re new to real estate and you don’t have a lot of resources to play with.
Once everything is set up, really the only next step is to set aside time to filter through all the dirt to find the gold and you’ll be on your way to getting your first deal.
So let’s set it up!
Step 1: Create a New Dedicated Gmail Account.
You really want to have a dedicated email account for this system because your inbox will get flooded with leads. Additionally, you need a Gmail account to actually sync with the IF This Than That web application. So go create a new Gmail account and come back.
Step 2: Click Here and Come Back.
Step 3: Click Here and Do the Following:
1. Create an account and login
2. Select “Create a Recipe”
3. Select “This”
4. Scroll down until you find the Craigslist Icon and then select it
Step 4: Go Back to Your Craigslist Tab I Created for You in Step 2 and Do the Following:
1. Go to your relevant section of Craigslist, (ie I’d go to “California,” then ”San Francisco Bay Area”)
2. Go to the Housing section and select the link at the very bottom titled: “Real Estate for Sale”.
3. At the top, directly under the city sub names (for example mine says “San Francisco; South Bay; East Bay; Peninsula; etc.) select where it says “owner.” This means you’re cutting out postings from agents and working directly with homeowners or other investors.
4. Then type in your relevant keyword(s).
5. Here are some I use that you can take to get started with:
Fixer, Cash Only, Cash Offer only, Reno, Motivated, Will Not Quailfy, Unpermitted, Upside, TLC, Tear Down, Sold For Land Value, Sold ‘As Is’, Lots of Potential, Needs Work, Lot of Work, Handy Man and etc.
6. Then hit enter on your keyboard or select “search”.
7. Go to the address bar at the top and copy the entire URL (for a shortcut you can click on the address bar and when you see your cursor flashing, hold down the “ctrl” and the “A” key on your keyboard simultaneously, and then once everything is highlighted blue, hold down the “ctrl” and the “C” key simultaneously)
Step 5: Go back to the IFTTT.com Tab and Do The Following:
1. Click on “New Post From Search”
2. Paste the URL from the Craigslist tab (“ctrl” + “v”)
3. Then Select “Create Trigger”
4. Select “That”
5. Then scroll through until you find the Gmail icon and select it
6. Select “Send an Email”
7. Type in the email address you created in Step 1
8. Give the search a title like “Craigslist Deals” or if in the future you are using several recipes with different keywords you can use the name of the keyword like “Fixer”
9. Then select “Create Action”
10. You’re done! Check your email frequently and embark on your craigslist domination!
How Do You Determine if a Deal is an Actual Deal?
I want to finish this post going over how to actually run some numbers. Even if you do everything listed above, it won’t help if you can’t figure out if the lead is a deal or not.
Before we get into it, let me throw out a disclaimer:
There are different strokes for different folks.
Depending on the market and depending on your strategy in that market, these numbers may need to be severely adjusted. This is just a very common bare-bone formula to get you started.
If you begin here and acquire some deals that work according to this formula, it will very much accomplish getting the attention of a potential mentor and ultimately that’s the goal anyway.
Once you find a mentor, run numbers according to how he/she tells you to run numbers and forget everything I say below.
So here is the formula we are going to unravel:
(ARV x .75) – Expenses = MAO
1. Define The ARV (After Repair Value)
The After Repair Value is the value the property would sell at after it is renovated. It is an important figure to know because it defines how much money you can make when everything is all said and done.
If you purchase a property at $1oo,000 and have $50,000 in expenses, and you can sell it at $200,000 (pay attention! This last number is the ARV) then you will profit $50,000.
In order to determine the ARV you have to know how to run comparables (I am going to call them comps from this point on) and in my opinion, the most reliable comp is to determine the cost per square foot for a given street/neighborhood.
To do this, type in your desired address into Zillow or Trullia and set your search criteria for the last 90 days (if you can’t find anything that sold within the last 90 days, go out 6 months, but the closer the sold data is to the current date, the better) and a 1 mile radius of the property (half a mile is better, and the same street is the most ideal).
Next look for properties that have as similar as possible square footage and bed and bath ratio to the property that is the potential deal. Then make a note of the how much these properties sold for.
For example purposes, lets say you want to know what the ARV is for a property that has 1,200 sq ft, and is 2 bed/2 bath.
You type the address in and on the same street there has been 3 houses that have sold within the last 90 days.
Property 1: is 1,100 sq ft, 2 bed/1 bath and sold for $100,000. (we are just using easy numbers).
Property 2: is 1,300 sq ft, 3 bed/2 bath and sold for $200,000.
Property 3: is 1,250 Sq ft., 2 bed/2 bath and sold for $150,000.
Our first step is to determine the average square footage of these properties. So it looks like this:
Property 1: 1,100 sq. ft
Property 2: 1,300 sq. ft
Property 3: 1,250 sq. ft
add them together: 3650 sq. ft
then divide them by the number of properties you used:
3650/ 3 properties = 1,216 sq. ft
This number is the average square foot for that particular street. Obviously the more properties of the street you use in the equation, the more accurate the outcome will be.
Next you determine the average for the what the properties sold for.
Property 1: $100,000
Property 2: $200,000
Property 3: $150,000
add together: $450,000
450,000/ 3 = $150,000.
This number is the average price that houses sell at.
So finally, you then take the average sold price and divide it by the average square footage and that determines the cost per sq ft ratio.
150,000/1,216 = $123 per sq ft.
Next you take this number and multiply it by the sq ft. of the potential deal and that will determine a fair ball park for your ARV.
Earlier we said that the subject property has 1,200 sq ft. so:
123 x 1,200 = $147,600
To be conservative, I always like to round down.
So lets say for our example, ARV is $145,000.
Now there are a number of different factors that can affect your ARV both negatively and positively that are not inherently mathematical.
For instance, if your property faces a busy street, or if the best school in the county happens to be a mile away, then your property will go up or down in value based on these factors. But again, what I’m sharing here is just the basics and a starting point for you to work with.
Once you have the ARV the rest of the formula is pretty simple.
For a refresher, here is the formula again:
(ARV x .75) – Expenses = MAO
2. The .75
This is just a metric to represent what percent on the dollar you want to purchase the property at. This number, again, is subject to your market and particular strategy, but a good rule of thumb is 70- 75 cents on the dollar.
This number really is dependent to the amount of work the potential deal needs.
To really master determining expenses I’m going to point you to J Scott. He has an entire book on Estimating Rehab Costs that covers everything you’d need to know.
To make a long story short, for our example, we will use $30,000.
4. MAO (Max Allowable Offer)
So finally, here is the formula worked in full:
(ARV x .75) – Expenses = MAO
(145,000 x .75) = 108,750 – 30,000= $78,750.
The $78,750 is what is known as your MAO, or in other words, the most you can justify spending on the deal.
If you can get the property at $78,500 -700 (don’t worry about the change, real estate is normally transacted on rounded numbers) or lower then it truly is a deal and you should move forward on it.
I hope you found this post helpful! If you’re reading this and your already a seasoned investor, what were some of the first things you did to get deals? Be sure to comment below!