By Nate Kennedy
on March 05th, 2012
Avoid these common investor mistakes and you will prosper more and be more efficient.
Mistake #1: They don’t set up a marketing campaign to drive motivated seller leads to contact them. Instead, they drive around looking for and chasing deals. They follow all those standard cheap or free approaches that you hear about: working with real estate agents, calling the ads in the paper, driving around looking for vacant houses, writing down ugly houses in the neighborhood or target area. These tactics only work if the goal is to buy only a small few houses a year. If, however, the goal is to create a transaction machine, then these tactics consume too much time with too little results.
Working with Realtors is inefficient because motivated sellers, which are the sellers we need, do not typically list their houses. I am not saying that you will never find a house this way, but there is not enough volume. We want to create a business completing multiple deals per month. You won’t find a consistent number of leads coming from the MLS. Motivated sellers are overwhelmed and do not take proactive action. When they think about having to list their house with a real estate agent the first thing that goes through their mind is: “I probably can’t afford the real estate commission” or “I can’t afford to wait until they find me a buyer”. I need a solution right now. When I look back at all the deals I have ever done, I would say that less than 5% of the deals came from houses that had ever been listed with a Realtor.
Calling ads in the paper is a common method that is often taught with the idea that if you call enough ads you will eventually find a deal. Well that’s true, but there are literally hundreds, maybe thousands of ads in the paper. After numerous weeks of calling ads in the paper you may finally find a deal. Again, this is not a method for a high volume business. Motivated sellers don’t run ads in the paper. They are overwhelmed and not willing to learn how to sell a house on their own. It’s not just running the ad. They must also handle all the incoming phone calls, schedule appointments to show the house, complete the paperwork, then “sell” the house to the prospects once they finish viewing. Assuming that works out, they must complete a Purchase and Sales Agreement and set up a closing which they have no idea how to do. That is more work than a motivated seller is willing to do. The idea of finding a bunch of deals in the classified ads is nothing more than a myth.
Some investors drive around their target farm area looking at vacant houses or writing down the ones that don’t seem to be kept up. Again this is consumes a tremendous amount of time for little results. A lot of effort can go into just finding a few leads only to have it go nowhere.
Real estate investing is a numbers game. You have to talk to a lot of leads to secure one deal. The ratio is about 25 to 1: contact 25 prospects that have responded to the advertising to find one large profit margin deal. That ratio is far greater with outbound calls to prospects. A prospect is anyone who might have a house to sell. A lead is someone who has expressed an interest by responding to advertising.
Houses that are for sale either as a FSBO (For Sale By Owner) or listed in the MLS with a realtor are not leads. Those are simply houses for sale. Simplify the process by implementing a marketing campaign that sifts through the prospects and drive the bona fide “leads” to contact you. If not you are going to go crazy trying to find enough leads.
Investors that don’t have a marketing process in place usually become motivated buyers because their lack of leads forces them to accept low profit margin deals that later they can not sell. Avoid this problem by utilizing both online and offline marketing to drive leads to you.
Mistake #2: Investors don’t brand themselves. In other words they don’t come up with a company name that their customers will easily recognize. Every company in every other business I know brands themselves. You want an identity so that your customers can differentiate you from your competition. In the real estate world it seems that everybody wants to be “We buy houses” and “I buy houses”. That’s crazy especially when you consider the fact that a consumer with no other criteria with which to make a decision will use brand familiarity as their sole basis for selection. This is a marketing principle that reaches beyond just real estate investing and affects any product or service: a customer with no way to discern a difference between one product and another product uses brand recognition to make a decision. Motivated sellers definitely fall have no other criteria to use. They have never been in this situation before, so they now don’t know how to pick an investor. They see all of the advertising for “I Buy Houses”, “We Buy Houses”, “Sell Your House In 5 Days”, “Stop Foreclosure”, and all of the other similar advertisements, but have no way to decide which is the best one to call. If there is one investor who has branded themselves, they’ll stand out against the others. That is the one that the motivated seller is going to call. Shouldn’t that be you? Shouldn’t you brand yourself and differentiate yourself from the competition?
Mistake #3: Investors waste time looking at houses they are never going to buy. I see investors drive all around town looking at houses listed in the paper or MLS. They look at fifty houses in the course of a month and they think: “Wow, look how productive I have been.” The chance of buying any of those houses is very slim so that’s quite an investment of time for dismal results. A strategy that is often taught is: drive around and visit the homes listed in pre-foreclosure, knock on the doors, and offer the seller a solution. This is simply a huge waste of time. The proponents of that system defend the strategy offering that if you knock on 50 doors you’ll get one deal with a yield of $10,000 minimum. The logic being that it is worth the time to knock on 50 doors to make $10,000? When you look at it from that logic I understand it. The question is whether there are more productive ways to utilize your time. Remember, the 50 homes will not all be concentrated in one area. They will be in various places around town. Upon arrival, there’s a good chance that no one will answer the door. If they do, very few will invite a stranger in to talk – especially one that knows about their foreclosure. My point is that there are much easier ways to locate deals that require much less time. It would be almost impossible to accomplish multiple deals per month by visiting 50 foreclosures for every one deal. With more efficient methods available, why implement this strategy?
It is more productive to drive leads to a phone number and/or website then prequalify those leads before ever visiting the house. The prequalification process should test for two things:
1. Is the seller is truly motivated?
2. Do the numbers work?
If the answer to either is negative there is no deal there so why go out and see the house? Remember, this business should be fun. We want to make it easy. Make a lot of money and not waste a lot of our time.
Mistake #4: Investors don’t see their deals through the eyes of the potential buyer. They get so excited with the potential of the deal that they forget to look at it through the eyes of the buyer. For instance, with a wholesale deal: an investor might get wrapped up in the excitement of the negotiations with a seller and concede on price just to get the contract signed without considering the ultimate buyer: another investor.
The investor buyer evaluates the deal based on the profit potential. In a Buyer’s market they’ll also want additional “cushion” in the deal. Let’s suppose in this example that the original wholesaler had allocated $30,000 in profit, but reduced that to just $20,000 in order to get the seller to sign. They may have a deal on paper, but will anyone buy? Let’s further compound the problem with a $400,000 purchase price. Any investor buyer is going to pass on a $400,000 property that yields just $20,000 potential profit in a buyer’s market. All the original excitement is lost when the wholesaler can not sell the deal because they did not negotiate with the buyer in mind.
Let’s change it a bit. Suppose the original investor’s plan is to renovate and sell to an owner occupant. Before negotiations begin with the seller, the potential buyers’ point of view must be considered. Are they going to want this house? Does it have the features that a family will want? For instance, are the bedrooms large enough? How does the yard look? Would a family be comfortable living here? If you are only looking at the potential profit of the deal, but not at whether your family would be happy living there then you are going to make a mistake.
Common areas that are often missed are: the bedrooms being too small; the layout does not flow well; the rooms are too boxy; there is not a laundry room; the surrounding area is not favorable. You can’t just look at the numbers. You have to consider your potential buyers and what they will be looking at when they see the house. The best suggestion is to step back a moment when you are looking at a potential property and look at it through the eyes of a buyer. What are they going to see and how big of an issue is that going to be to them? Can that issue be overcome by price or more renovation? If so, have you allocated that into your formula so that you are buying at the right price to make a profit? Always buy with the end in mind.
Mistake #5: They don’t have a plan for their business. A 4-6 month marketing plan should be laid out which includes the budget, the marketing mediums to be used; the dates of distribution, and who is responsible. Most investors market randomly and achieve random results!
Many investors don’t plan out their rehabs. They don’t look at the property they are about to rehab and decide exactly what they are going to do and figure out how much it’s going to cost. They don’t really have a financing plan so they don’t know where the money is going to come from to do a deal. They just figure they will get the money from somewhere. Since they haven’t planned out the rehab, they are unsure of how much it will cost and usually run out of money resulting in a reduction in the quality of the rehab. This then hurts the sale of the house because the most common things to be cut from a renovation is all the “extras”, or the stuff that the customer actually sees. All of these problems come simply from a lack of planning in the beginning.
Determine the goals for the business. What are the financial targets? How will they be met? What type of portfolio mix is required to sustain the business long term? What additional resources are required? Is there additional training that is needed? A well thought out plan will ensure long term success.
Mistake #6: They don’t study and know the marketplace. In other words they don’t try to really find out what is going on in the market. What’s selling, what’s not? What’s a hot area, what’s not? Is it a buyer’s market or is it a seller’s market? You can make money in either type of market, but as an investor you need to know which market you are in so that you know how to structure your deals. You have to understand what your buyers are looking for. What price range are they looking for? What amenities are they looking for inside the house? If you know all of this information, you will know exactly what to deliver your buyers.
If you are going to renovate a property the best way to be sure that your house is sold first is to give the best price and amenities. Make sure your house is priced properly for the marketplace it is in, and that you have the right amenities as compared to the other houses on the market. You have to go and see the other houses on the market. You have to know what’s happening. What are the buyers looking for? What type of buyers are in the market? Are these second time homebuyers or first time home buyers? Are these people more selective about their house or less selective? Even if you are wholesaling it is the same idea. You have to understand the marketplace you are in and if it is hot or not because your investor buyers are going to be doing that same homework. So why would you want to be marketing in an area where nobody wants to buy? Make sure you are out studying the marketplace and know what other investors are doing, what other homeowners are doing, and what your buyers and other sellers are looking for.
Mistake #7: They don’t know the maximum price to pay for a house. Always start with the end in mind and know your exit strategy before you start negotiating. What is the exit strategy: wholesale; rehab; or hold it as a rental or lease option. Whatever the exit strategy decide it up front prior to the start of negotiations so that the purchase price is correct and leaves sufficient profit and/or equity in the deal to make it attractive after all expenses. Always utilize a formula for your deals according to the exit strategy(ies) and never veer from the formula. Before you get involved in negotiations you determine what your maximum offer price is. In other words, that price needs to be the deal breaker. If you don’t know what your drop dead price is before you start negotiating, it is easy to get caught up in the moment and go over that price.
Don’t fall into the trap of allowing the seller to set the price. Regardless of the price the seller is asking, there is a maximum price that can be paid. Negotiations should start well below the maximum – even if the seller is starting at a price $100,000 higher. The way I look at it is I don’t really care what the seller is asking. I only care about what I can pay for the property. Work from your price not theirs. They might say the market price is $150,000 and are willing to sell it to you for $130,000. That means nothing to an investor. All that is important is what the property is worth to you as an investor. Using the numbers I just quoted, suppose your formula indicated that maximum price for this house is $100,000. The goal is to move the seller below the $100,000 point – not below the $130,000 price. Many investors think they got a good deal if they can get the seller to come off their asking price. That may be true when buying as an owner occupant but not when you are buying as an investor. Remember, if the seller can not meet your price you can always go buy another house. If the numbers aren’t right then just pass on the deal.
These were seven of the most common mistakes I see real estate investors make. The bad news is they can be very costly. The good news is that none of these are really difficult to resolve. It’s just a matter of thinking ahead and planning, and not jumping into deals simply for the sake of doing the deal. If you just take a step back and think through your business and plan it out, most of these mistakes will be gone just from that simple step. Think of this as a business not as a hobby. Don’t look for the home-runs every time. Look for the base hits. Just keep making the base hits. If you do that and you have your singles and doubles eventually you are going to hit the grand slam and get rich. Don’t try to do that right off the bat. If you avoid these mistakes I guarantee you are going to be successful.
I know that running a business alone can sometimes get a little overwhelming. I went through all of these mistakes as well until I found my first mentor, and then things started to change. And now I’d like to offer you the same benefit. If you would like for me to mentor you and show you how to successfully run a Real Estate business, then find out more now by clicking here.
P.S. The fastest way to build a profitable business is to be mentored by someone who is already successful. I’m looking for a few people to personally work with this year. Click here now to find out more.