The 6 Crucial "Way-Points" Of Any Real Estate Deal
So I gotta say, my years in real estate investing thus far have really taught me the value of little bite size pieces.
You know, it’s the old, proverbial “How do you eat an elephant? One bite at a time” type thing we’ve all heard before, right?
The fact of the matter is this: A much saner, more realistic and less overwhelming way to tackle processes that seem ominous or complicated, is to simply break them down into smaller, more digestible chunks.
That said, my last few years of coaching and mentoring have enlightened me about one specific elephant that a number of folks seem to often struggle with, especially early on. And that is, the step by step process of doing a typical real estate deal from start to finish.
So with this in mind, I’d like offer you an overview look at the lifespan of a typical real estate investing deal, broken down for you into six digestible, easier to consume pieces.
If you’re playing in the residential real estate arena, regardless of your particular niche, business structure, or the type of deals you focus on, these six steps or "way-points" will almost certainly be at play in your deal flow.
Step 1: Get Started (Your Etch-A-Sketch)
OK, I know this analogy’s a little out there, but work with me here… ;-)
Step one is ground zero. You have to get your business up and running, right? So your first and most essential way-point is getting your business, brand and infrastructure setup and ready to rock.
Imagine every deal you do is a new picture you draw on an Etch-A-Sketch. So whenever you do a deal, it’s like you’re drawing a new picture. Then when you’re done, you shake it all up real good and start over from scratch on the next one.
(Man, had me some good times with old Etchy when I was a kid...but I digress...)
Now I want you to think of everything here in step one like actually buying the Etch-A-Sketch. In other words, these things comprise the very platform upon when you are able to craft deals. Without them in place (without your own Etchy), well you can’t very well draw a darn thing, can you?
So this includes things like:
- Creating your clear mission statement (more important than most people know)
- Defining your target market (who are you targeting exactly)
- Developing a marketing plan (a specific, proven one)
- Setting up your entities (incorporate, EIN, DBA, bank account, etc.)
- Setting up your tech (URLs, websites, Google Voice number, etc.)
- Setting up your power team (critical pros who are going to help your business)
As you can see, this is a lot of the one-time, up-front stuff. Once you do everything in step one, you kind of mark them off the list. You might have to come back and tweak them later as things in your business tweak a little now and then, but it’s not really stuff that’ll actively change with each deal.
In my experience it could realistically take you maybe 15-45 days to get things setup and running, depending on how tech savvy you are and how fast you are in general.
But remember, you can’t go to step 2 until you have your “Etch-A-Sketch” items in place first. Every deal you do is built upon them.
Step 2: Marketing (Go, Go Gadget Marketing)
Once you’ve got everything setup and ready to go, it’s time to turn on your marketing. This means taking that marketing plan you whipped up in step one and pressing the “go” button.
Now there’s a whole slew of ways you could skin the marketing cat. Entire courses have been written on how to market for quality buyers and distressed/motivated sellers.
On top of that, there’s been a ton of really great resources and services have emerged in recent years that can make this process truly turn-key for investors like me and you. I won’t go into now, but I certainly have my favorites I like to use and recommend to others, and I’ll be glad to share with you sometime.
As I see it, there are basically two levels of REI marketing:
- Finding Buyers (Retail buyers and/or cash investor-buyers)
- Finding Motivated Sellers (Distressed sellers and/or distressed properties)
Bear in mind that the particular marketing blueprint you'll follow here should come directly from the planning you did in step one. You should already know who you're targeting and how you're planning to reach them. Now it's time to follow that plan.
My advice is don’t aim at first for being all things to all people. The more targeted your market, the more effective your marketing will be, and the easier it will be to create and execute an awesome marketing plan that brings you a steady stream of qualified deals and buyers. And that is, after all, the name of the game.
And remember this: Marketing is the core of your business. It’s one of the most important – if not THE most important – activity you do. You might even say that you’re not really in the real estate business, but in the marketing business.
Step 3: Due Diligence (Deal or Dud?)
Once the phone starts ringing or the leads start flowing into your inbox, you need to know how to talk to those leads. You need to know how to do good due diligence and discern whether it’s a deal or a dud.
This is all about inspection and analysis, and typically involves:
- Quickly pre-screening the lead (You or maybe an employee/VA)
- Meeting with the seller (Simple – meet them and view their house)
- Determine their motivation (Hear their story, build rapport, uncover their real wants/needs)
- Run the numbers (Can you make it work? Is it a viable deal or a dud?)
- Choose your acquisition strategy (Cash? Terms? Combo play?)
This part’s a little “science” and a little “art”…
There’s the science of knowing how to estimate values, repairs and opportunity markets, as well as just how to calculate a profitable deal.
And then there’s the art of knowing how to build rapport, read between the lines with the seller sometimes, and figure out how to craft a win/win offer.
Both are critically important, and can be a little intimidating to newer investors, I know. Trust me, I remember what it was like. But in my experience these things can absolutely be learned and even mastered by anyone who wants to.
Step 4: Acquisition (Let’s Make a Deal)
The next step is to actually purchase the deal. You’re going to make your offer(s), negotiate and ideally find a great win/win that serves both you and the seller in what you each really need out of the deal.
This means you’re going to:
- Formulate and deliver your offer
- Negotiate with seller
- Get offer accepted
- Determine best exit strategy
What’s your exit strategy? Could there be more than one? Maybe you want to try wholesaling this deal first, then fall back to a rehabbing/retailing it as Plan B, and even keeping it as a rental for plan C?
These are some of the key questions you’ll answer for yourself in step four.
Step 5: Get Funding (Show Me the Money!)
Once you know your exit strategy, you need figure out how you’re going to fund this thing.
- Are you going to get a conventional type loan of some sort? If so, can you/the property qualify?
- Are you buying with cash? If so, will it be your own money? Hard/private money? Transactional funding? Partnership with another investor?
- Or maybe you’re going with creative financing on this one. Maybe you've asked the seller to carry back some or all of the financing for you. Remember seller financing is still funding, right?
A lot of people mistakenly consider "funding" only to be things like private money, hard money, cash, transactional funding and conventional lending. I've probably used hard money a couple hundred times throughout my career. Hard money and I have had a great run together. But you've got to learn there are other creative financing techniques besides the traditional bank or a hard money lender. For example, if the seller's willing to carry back a note and you know how to creatively structure that deal, and let's say you work out principle only payments -- well you just scored the best funding possible, didn't you? You just hooked up with the best private money lender in the world. It just happens to be the seller. Some folks will say "financing doesn't matter if you're a wholesaler." I beg to differ. Whatever source of funding your end buyer's using matters to you. All you need is for your "cash buyer's" money to suddenly fall through, thus killing the deal for you, before you figure out real quick how much it matters to your deal.
Bottom line here is, you’ll need to consider all the ways you could potentially fund this deal, and which of these options will work for the way(s) you’ve decided to structure this particular deal.
Step 6: Close It!
That's right, it’s time to:
- Open title/escrow
- Market for a buyer
- Sell, renegotiate or walk away
- Pick up your check (Cha-ching!)
This means having your relationship with an investor-friendly title company / closing attorney already established (see step 1). It means understanding how to market for buyers to get your hot new deal in front of the hungry group of buyers you’re aiming for. It means understanding how to negotiate the best terms to get a cash buyer into a deal, so you can net the most money, how to read HUD-1 settlement statements, and how to deposit a check (hopefully you’ve got that one down pretty good already ;-) )
These are the six primary steps or “waypoints” you’ll follow for most any residential real estate transaction. These are the individual “bites” of the real estate investing “elephant”.
Now that you understand the individual transaction process from the 10,000 foot view – all the different tasks involved each day to move any real estate deal forward, I suggest we take a step back and ask:
What kind of business you really want to build?
When it comes down to it, most folks just sort of pick a spot – be it wholesaling, fix and flip, rentals or whatever – based on whatever the latest, hottest thing on their brain might happen to be. It seems most people tend to jump in without really taking the time to consider:
- What are your short-term and long-term goals?
- What are your current resources?
- What kind of activities do you actually enjoy doing?
- What kind of business track will really best advance you in the direction you want to go?
Like I said, there are a thousand and one different ways you can skin this real estate investing cat. But choosing the right way for you is worth a little pondering, don’t you think?
In my next post I’ll delve into something I like to call the “Fast Track Money Matrix”. It's a lens of sorts through which I like to view each and every deal that comes my way -- something I recommend for you too, depending your short and long term goals in real estate.
I like to show people a number of different ways to present offers so they can put pretty much any deal into one of two "transaction baskets" depending on the answers they get from the motivated seller. Then from there, they can decide what they want to do with the property to get either a chunk of cash today, long-term cash flow over time, or maybe even both.
So in my next post I'll take you into the Matrix with me. :-)
Talk again soon,