A Quick Formula for Eliminating Non-Deals
|Indecision can be paralyzing. You can protect your valuable time and experience less frustration the sooner you identify which deals deserve your immediate attention and follow up. Then trash the non-deals so they do not clutter your mind or office. |
Closing out (or dropping) those things that are incomplete in your life frees up your mental and physical energy. Having stacks of leads that you haven't made a decision on can drain you. "Potential good deals" can get lost in the paper shuffle amongst "iffy" property files.
Prescreening potential properties to buy can also be time-consuming. When I have a potential deal, I need to analysis and research the facts prior to meeting with the seller. This may take 30 to 60 minutes of research each. I currently pay someone to do most of the research to leverage my time. Somewhere between taking the initial call and investing 60 minutes, you'll want to "pigeon-hole" your leads into simple categories. Here are mine:
A. ACTIVE or GOOD DEAL: The seller is flexible and motivated. Your creative buying strategies could likely solve the seller's needs. You see several ways to resell or occupy the house based on its location and condition. You've identified enough "good stuff" to set an appointment. You expect to get it under contract on the first visit, or at least on the follow up. (More than half of the properties I buy are put under contract later, after the seller rejects my initial offers.). Based on the facts gathered so far, you want to own this house. This is a good lead and should get your priority attention.
B. FOLLOW-UP: This deal has potential if the current situation changes given time. You're not going to buy this house now but you'd like to buy it for the right price or terms. The seller currently is too rigid or not motivated enough. Seller currently believes they have other options and time. Seller may think they can get more money selling on there own or listing with an agent. Or the seller is not willing to PAY YOU to buy their over-financed property. Or the seller currently insists on all cash for their equity.but at a price that doesn't work for you. Or they currently insist you get their loan out of their name.but at a price that doesn't work for you. Most potential deals start like this and ripen over time.
C. NON-DEAL: (Again, my definition) Seller wants to stay in the house and buy it back from you later (some investors do this but I don't want the trouble that can come with it). Property is over-financed and you're not interested in negotiating discount payoffs from current lien holders. Loan is in default and there's not enough time to find a buyer with enough cash down to cure the default prior to the foreclosure sale date (and there's not enough equity to persuade you to use your own money). House is too far away, or located in a poor area. The property is functionally obsolete (too small, too large with only 1 bath, or too funky is some way). The house has problems that demand too much money or time to fix. All in all, you simply have much better deals to buy or follow up on.
Working your ACTIVE and FOLLOW UP leads is non-negotiable. It's a key ingredient to marketing and sales success. Making A LOT of money (i.e. big bucks) as an entrepreneur comes down to getting the right MESSAGE to the right AUDIENCE at the right TIME. You can control the message. You can control who gets it. But what you can't control is the timing of when they'll be ready to do business WITH YOU. Hence the need for ANY TYPE of follow up "system."
Above is a systematic approach for sorting leads. I recommend you develop a "system" for following up automatically with letters, post cards and phone calls.maybe even a monthly newsletter. NON-DEALS can go into the trash.immediately. I know, I know. You may want to keep your options open. In that case, carefully stack these files in a box labeled "Non-Deals," hold for several months, and then toss!
Determining if a lead is a deal or not may take a lot of your time. And you value our time, don't you? Time IS more precious than gold. You can always get more ""gold but you can't buy more time. Let's create a simple tool, or a quick formula, so you can sort out non-deals even faster. Apply these steps
1. Use the W.O.W. formula.
a. What the seller thinks their house is WORTH,
b. What they OWE on the mortgage or liens,
c. What they WANT if you gave them the best terms (all cash, closed quick, no contingencies, bought as is.)
2. Choose a potential RESELL PRICE.
Until I prove differently, I assume the value and amount owed is correct. I can usually get a resell price accepted at $10,000 or 10% above normal market value if I offer the house for sale with flexible terms (owner financing, rent-to-own, lease option, etc.).
3. Subtract your EQUITY SPREAD.
You decide this number. For any house you don't immediately quick-turn, I recommend you shoot for a minimum gross profit of 10% on the RESELL PRICE, but no less than $20,000. As a rule, I expect to incur $5,000 in expenses to buy and sell so I'll expect a NET profit of $15,000 on a deal with only a $20,000 EQUITY SPREAD. Recently I've upped my preferred equity spread to $30,000. I violate it occasionally, but I'm making a conscious decision to do so.
4. Estimate REPAIRS. Roughly estimate cost of the REPAIRS or the fix up needed based on what the seller has told you on phone.
5. Determine your MAXIMUM ALLOWABLE OFFER (MAO). Subtract REPAIRS and EQUITY SPREAD from RESELL PRICE for MAO.
6. Compare the MAO to what they OWE. If the seller owes more than your MAO, then it's only an ACTIVE or FOLLOW UP deal if:
a. They PAY YOU CASH for the difference to buy the house, or
b. A strong positive cash flow overcomes the lack of equity, or
c. You want to own this property for other reasons.
7. Compare the MAO to what they WANT. If they WANT more than MAO, then determine if they NEED it. If they need to get their asking price, otherwise they won't sell then I'll let'em know I can't help. At this point (since I know I can't buy the house now) I will tell them "the most I can pay as an investor, based on the market conditions, is $(MAO), and I don't even know if I can do that until I come out and see your house. Should I come take a look?"
When the seller wants more than your MAO, then it's only an ACTIVE or FOLLOW UP deal if:
a. They don't really NEED what they say they wanted, or
b. They have some good equity and they'd consider waiting for it, allowing you to make a positive cash flow to compensate for price.
I tell the seller when I call back that if they truly need the price the said they WANT then I cannot buy the house.
OK, let's plug in some numbers and see how this works:
1. Use the W.O.W. formula.
WORTH = $125,000
OWE = $100,000
WANT = $115,000
2. Choose a potential RESELL PRICE.
I'd plan to sell this house for $139,500. But a more conservative plan would be $134,900 (about a $10,000 premium). I'll test $139,500 first but settle for $134,900 if needed.
3. Subtract your EQUITY SPREAD. We'll use a $20,000 minimum spread.
4. Estimate REPAIRS. They say it is in good shape so we'll assume $500 in minor fix up.
5. Determine your MAXIMUM ALLOWABLE OFFER (MAO). Subtract the REPAIRS and the EQUITY SPREAD from the RESELL PRICE:
RESELL PRICE = $134,900
minimum REPAIRS = $500
EQUITY SPREAD = $20,000
MAO = $134,900 less $500 less $20,000, or
MAO = $114,400
6. Compare the MAO to what they WANT or OWE. They want $115,00 and MAO is $114,400. Close enough. The numbers work. This is a potential deal. At this point I will go meet with the seller. If you use a better way to eliminate non-deals and prescreen sellers before spending too much time on any given deal, I'd love to hear about it. Until then, try out these ideas to help save you time and money.
|Full-time investor Richard Roop has been called The Marketing Consultant for Real Estate Entrepreneurs. He is the President of Bottom Line Results, Inc., a real estate acquisition company located in Woodland Park, Colorado since 1996. As a successful marketing consultant since 1984, Richard specializes in providing innovative business and marketing advice to real estate entrepreneurs. He is the author of the "How to Sell Your Home in 9 Days" book. Richard Roop's articles have appeared in various entrepreneurial, real estate and marketing newsletters across the nation. |
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