The Science of Finding Real Estate Deals - Part 2 (How to MAKE Deals So You Can BUY MORE Deals or Make MORE Money Per Deal!)

[Wendell De Guzman]

During the launch of the NW Chicagoland BP Meetup (where I was the guest speaker), I was asked the question:

"Wendell, how do you find all these good deals?"

My answer: you got to boil down finding deals into a science. Only science gives repeatable results. Only science gives CONSISTENT results.

Hence, I started this forum post series to share with you BP Nation, my Science of Finding Deals.

In Part 1 of this multi-part forum series, I talked about the concept of LEAD PIPELINES. Most successful real estate investors I know have lead pipelines and they have MULTIPLE lead pipelines. No matter what happens in the real estate market, they never run out of deals.

Today in Part 2, I will talk about the importance of having MULTIPLE ENTRY AND EXIT STRATEGIES. The more entry and exit strategies you know, the more you can profit from the leads that come through your lead pipeline. You can see deals and make deals happen when the ordinary investor does not see a deal.

First, let's define what entry and exit strategies are:

ENTRY STRATEGIES - an entry strategy is how you can ACQUIRE or CONTROL a piece of real estate. Most real estate investors know 1 or 2 entry strategies. For example, most investors know how to buy a property CHEAP using CASH. They approach a hard money lender, or private lender to raise cash to buy a property (or they save up their own cash). Another well known entry strategy is to get a mortgage from a conventional bank or mortgage lender plus 20% downpayment to buy a property (typically a property that can be rented). For this entry strategy to make sense, the property's cashflow and cash-on-cash return has to make sense (assuming the EXIT strategy is RENTING the property). 

With these 2 entry strategies, you can make a lot of money and you can buy a lot of properties. However, if all you know are just these 2, you will MISS out on a lot of deals. One example is what I described in my podcast (http://Biggerpockets.com/show65) where I bought a house for 93% of market value and yet I made over $30,000 on it. I did it by using an ENTRY strategy called SUBJECT TO. That entry strategy - subject to - is only one of the myriad of entry strategies that are not well known and not well used by a majority of real estate investors. Another entry strategy used by sophisticated and big investors like @Brian Burke, @Ben Leybovich and others (specially apartment investors) is SYNDICATION. 

@Brandon Turner wrote a book on how to invest in real estate with little or no money down. The examples he laid down in his book are examples of different ENTRY strategies.

EXIT STRATEGIES - an exit strategy on the other hand is how you can DISPOSE or MONETIZE a piece of real estate. Most newbie investors have heard of fix-n-flips or rehabbing or retailing (@J Scott is an expert on this). As discussed above, you have RENTING or buy-and-hold as another exit strategy (@Brie Schmidt also from Chicago loves rentals and have accumulated a lot of rental units quickly!). Again, if all you know are these strategies, you could be missing out on some profit-making opportunities. For instance, at the recently concluded FUNDING Summit that was held last June, I revealed a strategy how I can buy (and fix) a house for 80% of the after-repair value and yet I can make MORE money than the typical fix-n-flip investor (or rehabber) even though they have to buy (and fix) the property at no more than 65% of the after-repair value. My exit strategy that I use to make more money even while I pay more for a property is RENT TO OWN (@Brian Gibbons is an expert on rent to own). Below is a screen shot of what I shared during the FUNDING Summit (which I have no time to cover here though):

The point? If you're limited with your exit strategies (say all you know is fix-n-flip or fix-n-rent) and you're limited in your entry strategies, you have limited TOOLS in your real estate investing toolbox to take advantage of the leads that come through your lead pipelines. Another example - I just had lunch with a newbie investor named Brian today: he got a list of 10 houses from a local bank and he said he does not want houses in Waukegan IL. I told him - we can WHOLESALE houses he does not want. He didn't consider wholesaling as an EXIT strategy for properties in areas he does not want. He would have missed out making money on those properties! Or what if you encounter an AWESOME deal but that property is 1,000 miles from you? I made money while sitting in Chicago on properties as far as FLORIDA through wholesaling.

By having multiple and creative real estate entry and exit strategies, you can MAKE deals happen (when most investors can't see a deal) and therefore, you can buy MORE deals or make MORE money per deal.

So, what about you BP Nation, specially the more experienced investors out there? 

What are your favorite ENTRY and EXIT strategies that make you money in your real estate market right now?

[Jason Hatfield]

Originally posted by @Crystal Smith:

Originally posted by @Wendell De Guzman:

 Before answering your question.  I've always thought of Syndication as a funding strategy, not an entry strategy.  I guess it's an entry strategy if one considers that w/o the syndicate you may not be able to complete the deal.

We don't have any favorite exit strategies.  As opportunities present themselves we just try and make sure we explore multiple strategies.  Strategies we've used in the past, not in order of preference: Fix & Flip; Rental; Owner Finance (On both the buy side & the sell side);  Joint Venture w/ the owner- Occasionally we'll find property owners that are open to partnering w/ us to renovate their property & share in the profits when it's sold.  It's a win/win- We save upfront $ on acquisition/closings.... & the owner usually makes more than they would from a straight sale.  This works best if there's no mortgage on the property & the owner must allow us to secure our investment against the property.  

We will also sell properties we control to other investors.  

Thank you all for the great posts.  I agree with you @Wendell De Guzman.  I think many people get tunnel vision.  They look for certain things in the deal or the home and then they move on too quickly if both don't have everything needed to fit their mold. 

Great points @Crystal Smith. Having all of those strategies in your tool bag is critical.  Yes they will they help you close more deals and make more money but I believe their is tremendous value in being able educate your seller on the different strategies and even presenting them with two or three purchase offers utilizing those strategies.  I believe doing this builds credibility and a reputation that is priceless.

I'll give an example of a house I put under contract today.  It's currently rented for $1,000 and worth $120K as is.  With $15K worth of work it will rent for $1,250 and be worth $150.  I'm in MD and the seller is in FL.  The house is PA.

After a few conversations and a walk through I called the owner and she stated that she wanted $100K.  I told her my cash offer was $70 and then I thoroughly educated her on how the costs of a cash purchase, rehab, and refi were driving the offer price down.  I then said if we can get creative then maybe we can cut out some of those costs and increase the offer amount.

After some back and forth I was able to offer her a subject to at $85K.  Mortgage only has $70K on it so I'm giving her a second mortgage for the additional $15K that is due as a single balloon payment in three years.

My only cash out of pocket for this house will be the closing costs.  I will then immediately have a rented property cash flowing almost $400 a month after budgeting for everything.  Now, if I were to hold the property as is for the full three years and just throw all of the monthly cash flow into a savings account then I would have $14,400 of the $15,000 balloon payment already in savings. So essentially the monthly cash flow pays off the ballon.

I'll go one step further.  At the current amortization schedule the $70K mortgage will have $67 left on it 36 months from now.  So let's say at this point I decide to do the $15K renovation and then refi or sell.  So far I've only laid out about $3K of my money total because the only thing I've paid for is the closing costs.  Add the $15K rehab and another $5K total for misc to the mortgage balance and I'm all in on a $150K property by today's value for just $80K