Adding value to the deal
Everyone wants to get involved in real estate. We all watch Flip This House, or Flip or Flop or Fixer Upper. We hear about people wholesaling or renting, but we don't really dive into how you are making money on that investment property. It’s not just about the exit strategy, but your value-add strategy.
We don't talk enough about value add in this business. This really gets under my skin with wholesalers. These wholesalers will bring me deals and I love most of them, but with the new ones out there, the problem we run into is they're not bringing additional value.
To just be a middleman and buy a house for $50,000 and say, “Here it is for $60,000,” and not have any value added in there, it becomes a little complicated. If you're not willing to die for your deal then your deal will die.
Die for your deal
Here's my acronym, because isn't that what all gurus do? We have to do some sort of acronym to help explain things, so for this case it's DIE. D is for data, which is where the wholesalers are falling off.
I can't count how many times a wholesaler’s brought me a deal and I say, “Alright so you got it for $50,000 and you want to sell to me for $60,000, what does it need?” They say it needs $10,000, or $30,000. Well that's a big price difference.
How did you come up with that number? How'd you calculate that? How much in labor or materials and what are you doing for that? Give me some data. And how much is it worth? They say the ARV is probably around $100,000 to $120,000. Well what is it? What are those houses looking like? What is the market time on those houses? Do they sell quickly? What kind of rent does that property bring in? They say they aren't real sure. They aren't sure if it has a paying tenant or not.
My point is that getting the data will help me make an educated decision. A confused mind will just say no, so, you've got to provide the data.
The second way to add value to a property is income because without income a property's not an asset, it’s a liability. If you have a vacant property and pay me a property in disrepair and it's not feeding you income, you’re getting eaten up with property taxes with insurance, water bills, grass cutting, snow plowing, repairs and city violations. So now instead of making you money, it's costing you money.
Ironically, a lot of investors have properties right in their hometowns that they're doing nothing with; they’re just costing them money month in and month out. It's not cool to have a vacation home ten minutes from your house, so, figure out the income on the property. What kind of income doesn't currently generate or what kind of income could it generate? Show the potential income. Don’t just show the potential income with a hypothetical tenant, but a tenant that is fully committed to actually moving into that property with a set price. For example, saying that you know this tenant is going to move into this property provided we put $2,000 of repairs into it and they’re going to pay $900 a month on a 12-month lease and they're going to pay their own water and sewer. Now you can work your numbers backwards and show that this property has the potential to produce $10,800 in income with a $2,000 in repairs. Again, it's taking the guesswork out of it and putting it right in front of the investor and adding value.
Finally, the E in DIE is for equity. You can actually add equity. This happens naturally if you're in California, or some other hot area where you can buy a property today and then a week later it’s worth $100,000 more, it seems. Unfortunately, in Northeast Ohio, it doesn't work like this so much. So, you have to have forced appreciation; you have to push that appreciation. You get that equity by doing remodeling on the property, by adding value.
A lot of times by taking a two-bedroom and finding a way to chop a big bedroom in half and making it a three bedroom by adding a half or a full bath, or by converting a sunroom into another bedroom or more living space, you can make that property more valuable to give you an equity spread. That's going to give you the money in the back end.
To recap, to “die for the deal” is to gather all of your data that you can possibly can. If the taxes are too high, show how you can get them lowered. If you can cut expenses by passing water and sewer bills to tenants, show that. If you can show that it's going to be X amount of dollars, get three quotes of how much X amount of dollars is to fix that property. Get some people that are committed to renting or run an ad and show how many people called on that ad showing they were willing to rent it at a certain price. And finally, going back to the rehab portion to show what kind of equity you can put in the house. And if you are going to do that project then you can go ahead and move forward and get the equity.
Financing
A good way to wholesale or resell a property is to line up the financing. That's a really great way to find your buyer and really add value. If you can put the deal together and find your buyer the financing through a private money lender or a traditional bank that's easy to work with, that's going to make it much easier for you to sell that property and add value than it would be to do cash-and-carry.
Think about if you're selling a car in your front yard versus selling it in a car lot. If they can go to a car lot and walk in and sign their name and take that car over, it's going to move much quicker than it would selling your car in the front yard and them having to go find the money on their own.
Remember, as a real-estate investor, your job is to be connected and knowledgeable on how to put these deals together, how to find financing, how to run contractors, how to find tenants and how to manage the properties. You have to understand a lot of different aspects to really make money in this business. But that's okay. All the information you could ever need is all over the internet. You just have to sit and study it and plan on how to put it all together to make the property profitable. If you're not willing to die for your property then your property is probably going to die on you and you're not going to get a deal done.
Truly yours,
