Every moderately experienced real estate investor knows that the best deals come from a motivated seller.
The more motivated – even desperate they are, the greater the potential profit potential. In fact, if you are not dealing with a motivated seller you are 99.9% of the time just wasting your time. Just because a homeowner wants to sell their house doesn’t mean it will be a good deal. I can’t even begin to tell you the number of times that an investor has asked: “Lou, I negotiated with this seller and they came off their asking price $20,000. Isn’t that a good deal?”
Who knows? Was their asking price already $40,000 more than you should pay? What are the values of similar comparable sales in the area? How much is needed in repairs? What is your exit strategy? You need to have a trusted formula which you follow 100% of the time to ensure it is a profitable deal. The seller’s asking price is totally irrelevant to what you should pay for the house (unless their price is less). A highly motivated, even desperate seller with the right house and the right numbers will lead to profits.
On the flip side, you don’t want to become a motivated or even desperate buyer. A desperate buyer is an investor who is in such desperate need to have a deal, that they will buy almost anything that remotely resembles a deal. The problem is that in best case they’ll have greatly reduced profits. Worst case, they will actually incur a loss.
Unfortunately in this business, there is so much hype about how fast profits come in and how much money you can make in a relatively short period of time, that it sets up some unrealistic expectations. Everyone talks about wholesaling and the fact that you can close deals that earn over $10,000 in less than 30 days. And it is all true.
The hole in the story – the omission – is that it takes time to get started. It is improbable – maybe even impossible – to start from scratch, market, negotiate, sign contracts, and get the deal sold and closed in a month. That happens when you already have your marketing machine running and you’re already closing deals.
There have been many times that a lead comes in, we sign a Purchase & Sale Agreement, I advertise it, assign it and get it to the closing table with a total elapsed time of less than 30 days. So what is different? I have an established marketing campaign that is already regularly bringing in leads. What many investors that start marketing fail to realize is that there can be a long gap between when prospects initially see your marketing and the time they actually make contact.
The likelihood of reaching a prospect at the precise right moment that they need to take action AND are ready to take action are slim. Even the homeowners that call me off a direct mail piece that I just sent out will tell me that they have seen my marketing for a long time, and when I sent this mail piece, they decided it was time to call.
Add to that – even when prospects do call, you’ll only close about one out of every 20-25 leads that you get. You have to be generating enough leads to sift through to find the good deal. I ask my personal mentoring candidates if they are willing to talk with 20-25 leads to close one deal that earns a minimum $10,000. They always say Yes. What they really mean is they are willing as long as the deal comes within the first 1-5 people with whom they speak. It sounds funny when you say it, but it is a very real anxiety for investors.
Seasoned marketers will tell you to count on it taking 4-6 months to close the first deal with an average marketing spend of between $1000-$2000. If the investor hasn’t properly considered this timeline, they will often run out of marketing dollars before reaching their first deal. Even worse, some investors begin with the idea that deals will come quickly so they can pay their current household bills. All of this increases their anxiety which quickly leads to desperation.
A desperate buyer is likely to secure a deal that will ultimately result in losses rather than profit. Don’t become a desperate buyer.
Now here is the good news. Real estate investing is a fast paced, high dollar transaction business through which you can make huge profits with limited investment. I cannot think of another business where that requires so little upfront capital, so little monthly expenses, yet generates such high returns.
Using my earlier figures, let’s say that an investor spends $2,000/month in marketing for a full year. That’s $24,000. Let say that for the first six months they did not close a single deal. And then they closed an average of one per month thereafter with that marketing budget. And let’s say that each deal was the minimum profit of $10,000 each.
Revenue for the year would be $60,000 ($10,000 * 6 months). Expenses would be the $24,000 in marketing, for a Net Profit of $36,000 for the first year. The second year – still doing a deal a month would yield Revenue of $120,000 with the same $24,000 in marketing for a Net Profit of $96,000 – and that is assuming they did not increase their marketing to bring in more deals, and they only earned the minimum profit on each.
Remember – that is earning $96,000 a year closing just one deal per month! What happens if you double your marketing budget – you double your Net Profits!!!! And you’ll still be working part time.
The key to becoming successful in this business is planning for that first six months. Don’t count on the business paying your bills. Have sufficient funds to market successfully and you’ll see the deals start rolling in.
If that initial marketing budget is too much to handle, follow the advice I give my mentoring clients. I show them how to close on a simple rehab, using none of their own money, and profiting at least $20,000 on a cosmetic rehab. With those profits, they have the working capital to fund their marketing and are on their way to huge profits. Follow my lead on this, give your business the time it needs to produce, and I promise your life will change forever.
Expect abundance,
Lou Castillo
