Real estate investing may not be to everyone’s cup of tea, but many people who take the time to try tea know that it can be profitable. In fact, there are many different ways to make substantial profits on real estate investment deals. But it starts with you analyzing the deal to make sure it’s profitable. And when the deals are profitable, you are certainly well on your way to success.
So why is it so important to analyze the deal? In real estate investing, you make money when you buy, not when you sell. So finding a motivated seller, a homeowner desperate to unload their home for whatever reason, offering you a good deal in exchange for a quick sale, is the single most important factor in making the deal and the success of your real estate investment.
Surprise. Surprise. Most sellers want to sell their property for full fair market value. In fact, some homeowners are so proud of their real estate that they want you to pay MORE than fair market value. Most real estate sellers don’t want to offer you a 30% discount off fair market value. But this is what you need if you intend to repair and resell the property for a profit.
However, once you find a motivated seller, you need to be able to quickly and accurately analyze each real estate investment transaction to know exactly when to proceed and when to disconnect.
For junkers, you will need to know how to find the post-repair value (ARV) and the cost of repairs. If you are just starting out, you will probably depend on a real estate agent to help you obtain “compensation.” “Comps” or comparables are recent sales of similar properties in nearby areas that you will use to help you determine the market value of a property.
Even if you find the right property at the right price, determining the cost of repairs is the second crucial piece of information you need to make the right investment decision. Again, if you are new to real estate investing, you will depend on contractors to help you determine the cost of repairs. You’ll want to call at least two contractors for repair estimates.
Once you have determined the value of subsequent repair and the cost of repairs to the property, you will apply a proven formula to help you decide what to offer the seller for the property. The standard formula: Your “Maximum Allowable Offer” (MAO) is 70% of a property’s projected “After Repair Value” (ARV) minus repair costs.
Let me reiterate that this is the maximum bid allowed. It would be wise to submit an offer that is lower than the MAO to give you room to negotiate with the seller. The MAO provides you with an objective measure to use when submitting an offer. Better to leave a “seat of your pants” approach or “trust your gut” or “feel lucky” to fiction writers and their novels. Experienced and successful investors always know the ARV and the cost of repairs when looking at the deal.
Taking shortcuts, whether by design or ignorance, will put you in a financial ditch that will cause you to give up on real estate investing. Give up real estate investment and you give up a lot. Unfortunately, I have met some people who gave up on real estate investing prematurely, but will never know that they lost their future.
If the seller accepts your maximum allowable bid, you have a good buy. You should always have a surety agreement with you in order to close the deal. You are on your way to a profitable deal.
However, if the seller is unwilling to accept your offer for whatever reason, then it is goodbye. Of course, not all goodbyes are permanent, so make sure the seller has your name and phone number in case your circumstances change and you decide to sell.