It’s a Numbers Game
How and why do real estate investors buy property without seeing it?
Easy, it’s a numbers game. Whether or not you see the property before you make an offer isn’t nearly as important as making sure the numbers make sense and MAKING THE OFFER.
An associate of mine used to just send out offers on hundreds of MLS listings at a time, offering 30% less than the asking price on each one. Occasionally a few sellers would accept his offers. He never had to look at the homes beforehand. Including an “inspection and approval” clause in the offer meant he could always back out of the deal later when he saw the house. Meanwhile, he efficiently found the truly motivated sellers.
***SIDENOTE*** The inspection and approval clause allows you a set period of time to inspect the property and ultimately approve the deal or kill it. I usually write my contracts with 14 day inspection periods.
This demonstrates that with a good clause or two in the contract, you don’t have to worry about making an offer before you see a property. When it isn’t everything the seller says it is, you can reject the deal with little or no loss.
So why wouldn’t you want to look at the property?
The main reason you might skip looking at a property before making an offer is time. As your wholesaling or rehab business grows and time becomes more and more precious, you simply will not have time to see every property offered to you. This is certainly true if the property is far away. If you don’t get a price that makes sense, why spend your time traveling to look at the property.
The price and terms are what makes sense – these are the important factors. Of course you’ll probably want to look at the actual property eventually, but looking at the numbers is how you invest. Although, we all have helped motivated sellers and gotten emotionally attached to their situations, at the end of the day the numbers also have to make sense.
Investors value income property according to current cash flow (or should if they want safe and viable investments), so start by verifying income. Get the actual income figures for the past 12 months. Always consider the potential income if rents are raised, vending machines are added, etc., but base your offer on the current income.
Verify all expenses with investment properties. If any expenses listed by the seller seem unusually low, they most likely are. Just substitute your own best guess in place of any suspicious numbers.
After you determine the net operating income, calculate your loan payments (talk to your banker), and see how much cash flow you’ll have. Then you can figure your cash-on-cash return based on how much of your own money you put into the deal. Just divide the cash flow by your investment.
When the numbers work, you can safely make an offer. Inspections will tell you if there are problems that will affect the cash flow. You can always renegotiate if there are such problems (assuming you made your approval of all inspections a contingency of the offer). Of course, you can even go take a look now that you are truly ready to buy that investment property.
Ask any investor and they will all tell you the same thing…..Real Estate Investing can be as hard or as easy as you make it. We’re here to try to make it a little easier on you.
Take Care and Good Luck Investing
Kent Clothier
800-SELL-NOW
