Let me share with you, in a concise format, the three steps
I take to make sure a deal is a winner.
Step One: The “Quick View”
My first step is to see it the property is worth spending
time on doing the real due diligence work of step two. I do NOT start this first step until one of
two criteria has been met:
1.) I have the property under contract (usually after having
met with the owner in person and signing up the deal)
Or
2.) If the property is far away from me then I will do my
Quick View (along with a careful phone qualification of the seller’s situation
and motivation) before I put in the energy to drive or fly to meet with the
seller. (Better choice is to negotiate
the deal over the phone first, then do Quick View fast, then go to see the
property to do step two of your evaluation)
The Quick View for single-family houses consists on checking
two very important numbers:
1.) Check the purchase price as it relates to the TRUE market
value of the property in its AS IS condition… This view tells me if I have equity.
2.) Check the market rent for the property as it relates to
the total outflow of money you’ll have to pay for the property each month… This view tells me if I have cash flow.
Step Two: The
“Realists” Check
This second review is the time to look at the deal fresh and
make sure the numbers really do make sense. This is after that first blush of
initial excitement has worn off and you make sure that the deal really is a
keeper.
Questions to ask:
- Is the
price really right?
- What
assumptions am I making in my forecasts and projections?
- What
realistically could go wrong with them?
- How
will this affect me?
- How
would I handle this?
- Can I
build a safety mechanism into the deal to handle this contingency?
- If
not, am I really willing to live with this risk?
- If I
had ZERO time in this deal and ZERO psychological commitment to see this
deal happen, knowing what I know now, would I move forward in this deal?
- Can I
handle the consequences of this deal NOT working out?
The bottom line is that the second view is your chance to
CHECK YOUR ASSUMPTIONS and make sure you are making an intelligent and balanced
decision.
This is also the time that you complete your due diligence
checklist (e.g. checking title to the property, inspecting the house, etc.)
Step Three: End
User’s Determine Value
You can do all the fancy analysis you want. You can create spreadsheet after to
spreadsheet “proving” the deal is a winner. But if you can’t sell, rent, or flip your purchase then the deal is a
dog.
This means get real data from REAL buyers/renters
(i.e. from the end user for the property.) The only way to KNOW you have real data from them and not just fluff is
to have them get out their wallets/checkbooks and give you CASH!
It’s that simple. If
they pay, they mean what they say!
So don’t make the cardinal sin of waiting to market your
property until you close on it. Start,
right away, aggressively selling/renting the property. A cash deposit in hand from a willing
buyer/renter is your best insurance that the deal is a keeper. (Even better is a whole long waiting list of
salivating buyers/renters ;)
To Your Success,
Peter