I read once that the great football coach Vince Lombardi would start each football season by holding up the ball and saying, “this is a football.” A very basic statement when his audience was professional athletes that most likely knew what a football was. But he continued to stress basics and fundamentals and you would not get an argument from me if you said Vince was the one of the best coaches ever.

If I could, I would stand up in front of you right now with a house in my hand (OK maybe a picture of a house), and say, “this is a house.”

It is time for real estate investors to get back to the basics.

I have spoken with multiple investors over the last few days and weeks in private coaching calls that need to get back to the “basics.” Good sound investing principles are more important than ever. Especially since most housing markets throughout the US have been adjusting over the last few months and will most likely continue to correct for the next 6-12 months.

People did some crazy things over the past few years. It was interesting to watch some people buy properties at full retail value because they knew that the market would go up and they could make a profit by “flipping” the house in 6 months and make $30,000 plus.

I am not necessarily saying that they were using a bad strategy. But I do continue to hear some ugly stories from some investors that are now stuck with properties that they paid too much for and they have actually dropped in value by 10%.

At a recent school event for my daughter, a local real estate agent told me she had a house that I needed to buy because it would be a “great investment.” I calmly asked, “why would it be a great investment?” She proceeded to tell me how pretty the house was. That is was on the main street in town, needed just a little work and she repeated that it would be a great investment.

I repeated my question, “why would it be a great investment?”

She started again and I tried to politely stop her.

I explained to her that an investment to me was something that was going to pay me right now. Cash is my favorite payment but I will settle for some good equity also.

To her an investment was something that might make you money sometime in the future…maybe.

I can’t run my business that way and I do not think you should either. There is always room for adjustments and every deal should be evaluated but you must know what you are looking for.

What are the basics in your business?

What type of deals are you looking for?

It can get confusing when you start working with short sales, REO properties, subject to deals, etc…

Don’t get confused. You need to be able to answer two basic questions.

If I pay cash for the deal, what is the most I will pay?

If I can buy the property by keeping the existing financing in place, what is the most I will pay?

Answering those 2 questions will keep you out of trouble AND keep your business profitable.

Let’s take a quick look at some real estate basics and then I will tell you how I answer those 2 questions.

First – make sure you know what the property is worth. Some people call this the appraised value. Some call it the after repair value (ARV). Realtors like to use a term called competitive market analysis (CMA).

All of these numbers should be close but each is a little bit different. I have never had an appraisal done on a property before I made my decision to purchase, but I have looked at recent appraisals that the seller may be able to provide.

Second – you should have at least an estimate of what it will take to make any repairs. More on that in another article.

Next – decide what you are willing to pay. Everybody should have their own criteria and formulas. I notice that many newer investors try to decide the offer that the seller – and sometimes the bank if it is a short sale – will take instead of deciding what the maximum dollar amount that they would be is.

I hate to be blunt, but I do not really care what the seller will take or even the bank if the deal will not work for me. My goal has always been to have so many deals on my desk that I can make offers using my criteria and then only work with the sellers that want to play ball with me.

That is very difficult to do if you have one lead from a motivated seller on your desk and you have been staring at that one deal for 8 weeks. Not a very powerful negotiating position!

Now that we have addressed a few basics, these are the numbers that I use 99% of the time.

If I am paying cash, I feel good about the deal if I can acquire the property for 70% of the value. I have paid as high as 75% if I like the house and the area and I am comfortable with my exit strategy. But that is my max. I never want to have less than 20% equity in a property.

The formula is just a little more complicated if I do not need to take money from an investor or out of my pocket for a deal. In other words, I can use some different numbers if the seller will allow me to leave their loan in place.

I usually base my analysis on my return on investment (ROI) for the cash that I invest. I like at least a 200% return. In other words, if I will need $10,000 for repairs, holding costs, marketing costs and money to the seller, I need to be able to see at least $20,000 in profit from the deal.

Remember to stick to the basics.

About The Author

Tim Winders knows what it means to build a business fast.  He and his team built a real estate business from zero to a value of $12.7 million dollars in 35 months.  He was able to buy, sell and hold over 110 single family homes during that short time frame and continues to actively grow his business while holding almost 100 properties.  He is now considered one of the top real estate business coaches in the country.  For more information on Tim and to access FREE Real Estate training that will help you build your business fast, go to www.theFreedomEquation.com

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