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High Profit Real Estate Investing--Make a Good Deal Every Time!
Knowing what a Good Deal is - Is the Key to Success inReal Estate.
Take this little survey: The most important key to Real Estate Success is:
1. Finding Motivated Sellers
2. Funding Your Deals
4. Knowing a Good Deal when you see one.
Yes all of them are important. And if you answered #4 - you're righton the money. Why, because if your deal is a not good one, all your other skillsand marketing and power will not make you money, and may even lead to disaster.
On the other hand, if you can unfailingly target good deals, you will alwaysbe successful and all the other skills and your marketing methods will serveto increase your success.
What is a Good Deal?
It's a lot easier to state the question than give the answer. Why? Becauseit depends on many factors like:
- Market value and purchase price
- Expenses, carrying costs, repairs
- Cashflow and profit
- Holding time
- Loan terms
- Risk factors
- And more . . .
And most importantly, it depends on the type of deal you're doing. For example,if you have a loan on a property that you intend to rent or sell on a leaseoption, the terms of the mortgage, future tax increases, and current area rentsare critical to consider in insuring a positive cashflow. However, if you areplanning to do a short rehab job, and sell or just flip to another investor,rental income is irrelevant as are future tax increases.
It's What You Don't Think About that Can Get You
The thing that trips up many investors, is that in our enthusiasm to do a dealthat we've found, we don't take into consideration "hidden" costs.
For example, if you're doing a renovation and you've done your due diligenceon contractor costs, have you also considered your carrying costs such as mortgagepayments, utilities, etc. not only during the renovation, but also the timeit will take to sell and close with a new buyer?
Or if you're using a realtor to sell the property, have you calculated the effectof a 6-7% commission and the closing costs the seller will pay on your bottomline. A 10% profit margin can shrink pretty quickly to zero under those circumstances.
Read Those Loan Terms Carefully
Or have you taken into account, not just your loan to value ratio on the property,but your investment to value ratio (e.g., the total of all outstanding loanbalances plus the additional funds you've put in from your own cash or borrowedfrom your home equity line or friends and family)?
And on the income side, have you calculated how long you should hold the propertyto receive a significant profit from the pay down of the mortgage. With a new30 yr loan, you may have to wait 5-10yrs to get the same pay down you'd getafter a few years from a 30yr loan that's been seasoned for 10 years.
And did you carefully read the note contracts to take account of adjustablerates and pre-payment penalties?
Checklists aren't Enough
A number of courses and real estate gurus will give you checklists. That's helpfulin not forgetting something, but it doesn't help you with the laborious andcomplex task of putting all the numbers together.
There's just something about working with the actual real numbers, that bringsthe reality of the deal into actual focus. Our hopes and wishes dissolve beforethe actual profit and loss calculations.
Moreover, the numbers can pinpoint the weaknesses in a deal, and point the wayto a solution. No mere checklist can do that.
What About Risk?
I think you'll also agree that a Good Deal, is not just High Profit, but also,most importantly Low Risk. Many a dream of a golden future has come crashingdown because some little thing went wrong.
Many a would-be mogul, is now working at a 9 to 5 because their killer dealwas wrecked by an unforseen glitch. This is what we mean by high risk.
The successful investors do deals with low risk. Deals that are so robust thateven if almost everything went wrong they'd still come out with a profit.
Build In A Safety Margin
For example, suppose you have a rental with a positive cashflow. Is your cashflowhigh enough or your option payment big enough, that even if you had to evictyour tenant for non-payment and it took you 2 months to fill it with anothercash-paying customer, you'd still come out ahead?
Or, is your investment to value so low that even if you had to offer your buyera big discount for a quick sale, you'd still walk away from the closing tablewith a fat check?
In real estate things can and usually do go wrong. It's Normal. So, wouldn'tyou like all your deals to have these kinds of safety margins?
Fixing the Problems with Your Deal
Now, if you knew in advance that your risk was too high, or your cashflow wastoo low, or your profit over the life of the deal wasn't enough, you'd wantto think of solutions.
This is what is meant by being a "transaction engineer". Find thesolution, fix the problem, test it on the numbers, and then negotiate it intothe deal.
And if you can't find a solution (but there always is one) or the seller won'taccept it-NEXT!
I can tell you from real experience, a bad or risky deal is NEVER WORTH DOING-nomatter how enticing the vision. The personal stress, heartache, and loss ofconfidence can be even more harmless than the potential financial loss. In thewords of an ex-president's wife, if you are faced with doing a bad deal-Justsay No!
What's the Answer?
Some experienced investors have a feel for good deals, and can avoid troublemost of the time. Others only do a particular type of deal and use a rough "ruleof thumb" to evaluate their risk and profit.
However, what's really needed is a "calculator" or computer programthat will take in all the variables and
1) Calculate the exact profit and cashflow for all kinds of deals.
2) Measure and Evaluate the financial risk in the deal
3) Use standard and safe criteria for what constitutes a good deal
4) Suggests alternatives to fix what is wrong
The Deal Evaluation Tool
We've taken tons of real estate courses and looked at all kinds of real estatesoftware, and nothing has come close to what we as investors need. So we decidedto create our own Deal Evaluation Tool.
Well after several months of testing and improvement, we now use it for allour deals-short sales, subject to, lease option, rehab, wholesaling, andeven some commercial.
Since we can try out different "what-if" scenarios, it's kept us awayfrom some real pitfalls, and helped us negotiate better profit margins. We wouldn't"leave home without it".
Constantly Meeting The Needs Of Investors
Well, some other investors wanted to try it, so we put it on our website. Muchto our delight we now have a community of users and a users group that sharestheir insights about doing deals and creative ways to use the Deal EvaluationTool.
Their suggestions, are leading to a rapid improvement of already incrediblyuseful tool. There is just nothing out there like it. We've also put a demoup for those investors who would like to get a feel for using it. And we holdclasses for new users.
Knowing all the numbers, and having evaluated our risks with the Deal EvaluationTool gives us more confidence in negotiating deals with sellers and more consistenthigh profit real estate deals.
And that's what we all want, isn't it.
Richard Odessey along with his wife Michelle have the premier site on the internet - http://www.InvestorWealth.com for training and teaching real estate investors to do high profit deals. They offer regular Free Teleseminars by the top real estate investors in the country, the best tools to enhance your real estate success like the Deal Evaluation tool. They also offer 4-8 hands-on training seminars with personal advice from experts that investors can take from the comfort of their home. Richard and Michelle have been investing for over 5 years and personally teach and mentor other investors.
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