I’ve been an investor for over fourteen years, but I can still clearly remember in those early years how I struggled with knowing how to analyze a deal. I wasn’t sure how to calculate the numbers, and it was awkward for me to analyze deals quickly. Because of that, I know it’s a struggle for most of you investors out there who are new to this game.
In this teaching, I’ll point out some of the more common mistakes to avoid. This way you can learn from my mistakes and the mistakes of others, and save you lots of misery and headaches. Below are nine mistakes that could possibly plague you as you learn how to analyze a deal. Let’s get started!
Deal Analysis Mistake #1: Taking Too Darn Long
Some investors have a tendency to think a deal to death. If you spend more time analyzing a deal than you do looking at the property, then you may have a problem. Good deals don’t wait for indecisive people. As my friend, Steve Cook, likes to say, “You can’t steal in slow motion.”
Remember that the purpose of your initial offer is not to try to get it accepted, but rather to drop your lure in the water and see if you get a bite. Your initial offer should be aggressive anyway, so just make the offer!
If your struggle is due to avoidance behavior it may mean that you’re anxious or nervous for some reason. To put your mind at rest, put provisional clauses into the contract. This could include making the deal contingent upon inspection; or contingent upon the approval of a silent partner. Or it might be contingent upon financing.
You don’t need a ton of clauses, but put a few in there to relieve your anxiety. Tie up the property quickly and figure out the details later. This is how successful investors operate.
Deal Analysis Mistake #2: Not Clearly Defining Your Deal Criteria
Can you articulate the types of deals that you’re looking for? Have you thought it through? (Hint: “Whatever makes me money,” is the wrong answer.) You need your own litmus test by which you measure every possible deal that comes your way. If it doesn’t pass the test then you move on. (Even if you think there might be a way to make money on it.)
Clearly define what types of deals you want. Will it be wholesale? Rehab? And what kind of numbers do you need to see? Write it down. Once your criteria are in place, execute offers only on the deals that match your criteria and ignore the ones that don’t. This method will save you a ton of time.
Deal Analysis Mistake #3: Fudging Numbers to Make the Deal Work
Have you ever caught yourself thinking that it’s okay to fudge the numbers a little to make the deal work? If so, then beware. Newer investors have a tendency to play with the numbers to make a marginal deal look better than it really is. This usually happens because the newbie is desperate to make a deal.
Here’s a tip: If you feel you have to tweak the numbers to make the deal work, it’s probably not a good deal in the first place. It’s time to move on to the next. A marginal deal is no deal. Don’t step over dollars to pick up dimes.
Deal Analysis Mistake #4: Blindly Trusting the Seller’s Numbers
Sellers are not a reliable source for intel. They are motivated for a reason and anything they tell you should be seen or heard through that filter. I’m not saying they don’t have good intentions, but most sellers are not experts. They are inherently biased.
Gather whatever information you can while talking to them regarding the estimated value of the property and the repair estimates. But at the same time, don’t expect them to be spot on. Rely only on your own due diligence when it comes to actual numbers.
Deal Analysis Mistake #5: Blindly Trusting a Previous Appraisal
You may not be aware of this, but you could hire five different appraisers and get five different values. This is because value is subjective. Even if all five appraisers had gone through the same training and used a similar system, it’s still based on human assessment.
Also, an appraisal is subject to outside influence. I can influence an appraiser to appraise a $200,000 house for as low as $175,000, or as high as $225,000. That’s a huge difference; and can adversely affect a marginal deal. So take any appraisal with a grain of salt.
In my opinion, the only appraisal you can trust is when you hire the appraiser, you give the instructions, and you hand the appraiser the check.
Deal Analysis Mistake #6: Over-Estimating As-Is Value
No matter how much you want this deal, be conservative in your estimate of the as-is value. One of the worst things you can do is over estimate the as-is value. It then affects everything else negatively. If you’re conservative in your estimates then, worst case scenario, you’ll make more money than you thought you would.
If you have the cash flow to do this, here’s a great idea. Put an ad in CraigsList to hire a deal analyzer. This might be a realtor, or a retired appraiser, looking to earn extra money. Pay this person $25 - $35 bucks to give you a soft-pass value assessment. You can do this before you actually pull the trigger to make the purchase.
This will not be a full-blown appraisal, but you’ll have a chance to see the deal through objective eyes.
Deal Analysis Mistake #7: Overestimating Market Rents
Market rents will not apply to every investor, but since I see it happening a lot, I’ll add it in here. The way you know local market rents is by conducting a market-rent survey.
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Call a few property management companies, or check out their websites for properties in the area.
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Check for houses listed in the Section 8 office for your area.
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Google houses-for-rent for your area.
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Search for houses in that school district getting as close to the address of your property as possible. This search will lead you to sites like:
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Zillow.com
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Trulia.com
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ForRent.com
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RentRange.com
If this sounds like too much grunt work, hire a Virtual Assistant to do it. Give them one day to complete the task, and for a few bucks you can get the job done.
Deal Analysis Mistake #8: Over-Estimating ARV (After-Repair Value)
Once again, my advice is to be conservative. I suggest you look at the clean REO value. I got this idea from my friend Bob Norton. Bob says he looks for sales that are bank foreclosures, but they were clean and needed hardly any rehab.
Sometimes wannabe fixer-uppers will buy a clean REO, and these types of sales can be used to ascertain what the ARV is on wholesale.
Also, look for what I call the “fire sale in 60 days” price. This means look for comps of REOs that sold in 60 days or less. What did they sell for? This is usually from 85% to 92% of the ARV that you see on other houses that took 60+ days to sell.
Deal Analysis Mistake #9: Under-Estimating Holding-Time
This point is especially for the rehabbers. Don’t underestimate the time it will take to fix up and sell the property. Underestimating the holding time will incur costs that can eat your lunch. These costs can literally suck all the profits right out of your deal.
Sometimes I see newbies holding out for the price they have in mind. But the holding costs are costing more than if they would slash the price, sell the property, and move on. There’s something to be said for the velocity of money. Money loves speed. The faster you can turn that deal and earn that money – even at a discount – the better it’s going to be for your business.
Believe me, I’ve bought a lot of houses from investors who got stuck with holding costs that were too much for them to handle. I don’t want that to be you!
Bonus #10: Broke Spreadsheet Ninja Syndrome
I promised to give you nine deal-analyzing mistakes, but here is a tenth one just because I like to over-deliver.
What is a spreadsheet ninja? This is a person who can manipulate a spreadsheet and make it sing. They can make it calculate 10-year pro forma, depreciation scales, rental rate escalations, and so on. This may be valuable information, but if you’re spending hours creating a spreadsheet and haven’t started on your first deal, then you might be a broke, spreadsheet ninja.
Keep in mind that you don’t have to have this stuff to make a deal. Many investors don’t have a clue about creating a spreadsheet, but they’re still making a lot of money.
If this is your skill, and it helps you, great. Just be careful not to use it as an excuse not to make deals. Don’t get bogged down on the busywork of “spreadsheet ninjery.” (My own made-up term.)
Get out there and look at properties and learn the art of the quick-draw offer. That first offer is an aggressive no-brainer. You are fishing for deals; get a nibble then you can run with it. So just do it!
There you go. Not just nine, but ten deal-analysis mistakes. Hope that helps all my real estate investors out there.
Go forth and make a truck-load of money!
Realize that analyzing deals is a skill you can learn.
Use this teaching as a guide to help you avoid the common mistakes.
Understand that the first offer is aggressive – it’s a lure to draw the seller in – so just do it!
Use a few simple provisional clauses in the contract to alleviate your anxiety.
Stop over-analyzing – no amount of lengthy analyzing will make a deal better or worse.