Re: Best strategy for Newbies??? - Posted by Ed Garcia
Posted by Ed Garcia on January 04, 2001 at 09:45:37:
George,
Since there are many ways to structure deals. I’m going to share with you an article I wrote that’s in the How-To Articles. This article shows you how to view a deal, making money on the buy. Like you said George, you need to start somewhere, and that somewhere is to be able to identify what a deal is. A deal is, when the smoke clears, you’ve made some money. Your goal should be to make as much money in a deal as you can, with as little risk as possible.
Here is what I tell beginners…
First, evaluate how much time you can
commit to real estate. If your approach is
“hit or miss,” your results will be too.
Second, go to the street. It is the best
teacher. Rather than talk about doing
deals, reading in the library, getting more
courses, JUST DO IT.
In the long run, you’ll find that the street is the best teacher. Not
only that, but by getting out an doing it, you’ll learn your MARKET,
meet people to build a NETWORK, learn the demographics and
geographics of your area, and of course you will have overcome
the biggest obstacle in getting started: PROCRASTINATION.
You need to do what we call “penciling out a deal.” When doing
that, we ask ourselves a battery of questions necessary in
structuring a deal. I’m going to give you five steps to get you
started.
How Much Do You Want to Make?
So many times I hear someone act as if they are afraid of loosing a
deal because they need to make a low-price offer. Forget about it.
I’d rather be sorry about the deal I did not make, than the one I
did. The profit is what protects you in a deal. Don’t be afraid to
make it. When doing a deal I want to make at least 30% and,
believe me when I tell you, when I structure a deal with 30% in it,
I never get it. Somehow the profit always dissipates, even after I
thought I figured it to the penny.
Would I do a deal with less profit? Yes, but I would do it as a flip,
a lease option, or as a leveraged deal with positive cash flow.
Determine the Value of the Property
The next thing you must do is determine what the property is
worth. The obvious thing to do, is comp it. Don’t let the seller or
real estate broker tell you what it is worth. Get it comped yourself.
Deferred Maintenance
Usually I figure my profit after taking off the deferred maintenance,
otherwise it distorts my profit. So it must be figured in the
beginning to determine your profit.
Game Plan
What do I want to do with the property? Do I want to fix it and
sell it? Do I want to keep it long term or short term? When I buy a
property, I have a plan for it. And usually I buy it with that plan in
mind.
This part is so important. I’m going to go into more detail by giving
you an example. Remember, you make your money on the buy.
EXAMPLE
Each deal speaks for itself. For example, if I bought a house for
$50,000 and had to put $10,000 into it for fix up, I’m in this deal
$60,000. Now what would that house have to be worth in order for
me to feel comfortable to buy it, and debt service it on my line of
credit?
$70,000? No I don’t think so. I would have no room in this deal for
error. What if after a month or two I don’t sell it? Now remember,
we can play the “What If” game all day. I can create a fast Sale
for the purpose of this article to make myself look good, but that’s
Not the answer. We always have to be careful with hypothetical
questions and answers.
The profit structure on this deal is not good enough for me to do
the deal.
$80,000? Were getting better, but No. I have to keep in mind that
things can go wrong with my deal. What if I sell it after two
months, and then the sale falls through because of financing after
being under contract for 45 days. Now I have had the property for
3 1/2 months and have to put it back on the market again.
Also, what if the market changes or slows down?
Even though I show on paper that I have a $20,000 profit, that’s
not so. For the fun of it, lets take this so-called paper profit of
$20,000 and structure a Game Plan around it.
(1) I plug in six months worth of debt service on my deal. I’m in
the deal $60,000. Interest, let’s say for the benefit of our example,
is 9.5%. Our payments would then be $475 per month. 475X 6 =
$2850.
(2) Whatever market value you come up with, always cut it by 5%
to 10%. Realistically, the potential buyer is going to want you to
discount your price. Now if you don’t have to, great. But lets face
It. If you were trying to sell it for $80,000 and someone offered
You $76,000, you know you wouldn’t want to wait for another
Buyer. You would still be debt servicing the deal. With your luck,
you wait another month or two and the next buyer would make
The same offer. Terry Vaughan will tell you, that the first 10% of a
deal is air. I agree with Terry, but for the purpose of this deal we’ll
just keep it at 5%. So lets take off another $4000.
(3) I always plug in a Realtor. Now I know that there are a lot of
Geniuses out there that don’t need them. They are so great that
they can sell the property themselves. Great, you plug in a
Realtor. 76,000 X .06 = $4,560.
Lets recap. A sale of $80,000, gives us on paper a $20,000 profit.
$20,000 Paper Profit
- 2,850 Debt Service
- 4,000 5% Discount
- 4,560 6% Sales Commission
= $8,590 Potential Profit
As you can see the profit disappears quickly. Personally, I don’t
think $8,500 is enough profit to take the risk.
How about $90,000? Now all of a sudden the deal can make sense.
We have between a $17,500 and $18,000 profit.
Lets look at our LTV (loan to value). 60,000 divided by 90,000 =
67% LTV.
So you see, the deal speaks for itself, but the structuring of a deal
with a Game Plan is what will let you know if you should do the
deal.
Financing
How am I going to take my deal down? Am I going to create a
seller carry back, and use a lender to give some money to the
seller? Will the seller carry back the whole deal? Will I have to buy
it with a combination of down payment and financing? Or will I pay
cash and then refinance it later, getting all of my money back?
These are just a few basic fundamentals of doing a deal. I hope
this is some help to you.