When I was a new investor, one of the first lessons I learned was this:
If you want to buy properties for a fraction of market value, you'll have to send out A LOT of offers.
Finding deals with massive amounts of equity is a numbers game… and while this isn't a terribly difficult concept for most of us to grasp, there remains a major obstacle that gets in the way of many new investors. When I was first trying to figure out this whole “investing game” – I used to get totally hung up on the ridiculously time-consuming task of property research.
Let's face it, there are a lot of things that can throw a wrench into any prospective real estate deal (a dilemma that was always in the back of my mind). I used to spend hours upon hours researching the heck out of every single property before I felt comfortable making an offer. It ate up a TON of my time… all because a little voice in the back of my head kept telling me:
“You have no business making an offer on this property until you know everything about it, inside and out.”
I was being a perfectionist. When I made offers to people, I wanted to be 100% certain about what I was getting into. I did NOT want to be one of those “cowboy investors” who would flippantly make offers without thinking them through, only to weasel out of the deal at the first sign of trouble. It just seemed like a sleazy thing to do.
The Problem With “100% Certainty”
I know it sounds like a noble aspiration, but there is actually a serious problem with being “100% certain” about a deal BEFORE you make an offer.
It's pretty much a proven fact that 90% or more of the people I talk to won't end up accepting my offers (trust me, when you're sending out offers for 10% – 30% of market value, this is just a natural law of the universe). In a perfect world, we'd have plenty of time to go slow and unearth every potential problem about a property before finding out if the seller is even interested… but this is the real world, this is time we don't have.
With this in mind, my #1 priority became very simple:
Find the sellers who are willing to sell their property for a laughably-low price, and do it in the least amount of time possible.
The 3 Things You Need To Know
While my new priority was very simple, I knew that there was another critical aspect to consider.
There are a lot of garbage properties out there! I couldn't be sending out offers on just anything. In order for this approach to work, I had to be fairly confident that if/when a seller accepted my offer, it would actually be a GOOD THING. At the end of the day, I didn't want to make an offer on anything that wouldn't end up being a legitimately awesome deal.
It took me a while to figure this out, but I eventually nailed down 3 Essential Pieces Of Information that I simply had to have in order to make an educated offer on any piece of real estate. They are as follows:
1. A Parcel Map Of The Property
Whether I'm looking at a house, apartment building, vacant lot or some other type of property, I need to understand the lay of the land. The idea is to find out things like…
- Who are the neighbors?
- What is the size & shape of the property?
- How desirable is this property's location?
- Will this be easy or difficult for me to sell?
In most cases, I'm able to see a detailed parcel map (with satellite image overlay) using a service like AgentPro247 and I'm able to take a 3D tour of the property and its surroundings via Google Earth – both of which will allow me to understand the basic characteristics of the potential investment I'm looking at.
2. The Property's Market Value
I really can't make an educated offer on any piece of real estate without some inclination as to what the property is worth. Granted, my valuation of the property doesn't need to be flawless, but I need to at least explore the situation, keeping in mind that whatever number I come up with, I'm only offering a small fraction of that value… so there is a built-in “buffer” that usually protects me, even if I do get a little too optimistic about a property's value.
3. Some Indication That I'm Dealing With A Motivated Seller
When I'm talking with a seller about their property, there are a few key phrases I love to hear. They usually go something like this:
“Send me an offer, I'll consider anything!”
“I have no idea what this property is worth, I was hoping you could tell me?”
“Oh yeah, that property. I haven't seen it in over 20 years. Just let me know your offer and I'll get right back to you.”
These kinds of statements are a pretty clear indication that I'm dealing with someone who is highly motivated to sell. Sometimes it's because they can't afford the property, sometimes it's because they just don't care about it, but whatever the reason – these are clear indicators that you're talking to the right kind of seller and they're willing to work with you.
Living With An Imperfect System
It goes without saying – these 3 items aren't going to give you all the information. This is an admittedly high-level overview of a property and it isn't a guarantee that it will come out “clean as a whistle”. There are all kinds of issues that can be hiding beneath the surface of any property, which is why every property needs to be thoroughly researched… but not until AFTER your offer has been accepted.
The real differentiator with this approach is that we're finding out which sellers are worth our time and effort. The LAST thing I want to do is gather enough information to write a short novel about a property… only to find out that I didn't even have a shot at it in the first place.
Too Much Preliminary Research Can Be Dangerous
When we invest too much of our time researching properties on the front end, many of us can get lured into making decisions that are emotional, irrational, and deceptively foolish. I've seen it happen over and over again (and I've even done it myself on a few occasions). Some people are so thorough, it becomes their biggest liability.
Do you know how it feels to pour a lot of time and effort into something, only to walk away empty-handed? It feels terrible! As a way of dealing with this oncoming disappointment, some of us will subconsciously feel the need to justify our actions by “staying the course”… even when it doesn't make financial sense!
It's an issue of sunk costs. I don't know about you, but when I invest hours, days, weeks or even years of my life into something, I want to see some kind of tangible result. “What was the point of all that <<monotonous task>> if I'm not going to walk away with <<desired result>>?? What a waste of time!”
It IS a waste of your time, that is – until you know you're dealing with a serious seller.
Get Comfortable Walking Away
Obviously, if you're going to make offers without having all the information at your disposal, you need to be comfortable with the probability that you will inevitably have to walk away from some deals.
This kind of thing is understandably disappointing to many sellers, and some people might even say that this is a lousy way of doing business. To the contrary, I would argue that walking away from a deal (after you've discovered a relevant problem through further research)… is actually the norm.
Look through any purchase agreement with an “Association of Realtors” stamp of approval on it, and I can pretty much guarantee that you'll find some kind of “out” clause that will allow the buyer to walk away from the deal (and get their deposit back) if they need to. Don't believe me? Check out Paragraph XIV of this contract from Florida, or paragraph 14 of this contract from Michigan. This is standard language that is baked into virtually every purchase agreement in America!
Making offers without having ALL the information is a perfectly standard way of doing business and you shouldn't feel guilty about walking away from a deal if it's what you need to do.
If your purchase contract is clear about the fact that your commitment is contingent upon an acceptable inspection of the property, then there is nothing dishonest about waiting until AFTER the acceptance to do your final research. Sometimes the deal will be a slam dunk, and other times you'll have to renegotiate (or walk away) once you learn the rest of the story behind the property.
For this reason, it is imperative that you keep a very loose grip on any property until you know you're dealing with a seller who is serious. The seller (in most cases) is the biggest, most important, and most stubborn factor upon which everything else hinges, so until you know all systems are “go” from this end – do yourself a huge favor and don't feel like you have to spend hours researching a property before making an offer. Put it through this initial “stress test” (described above), make your offer (if/when the property fits the bill) and carry on.