Finding great deals to invest in is the most difficult and most important part of real estate investing. Experienced real estate investors understand that they make their profit when they purchase the property, not when they sell it.
Each property has numerous characteristics that must be examined, and one specific issue with the property may end up being a deal breaker that forces the investor to keep searching. One overlooked detail about the property can turn a the predicted profit into a sizable loss.
Many real estate investors subscribe to the “100:10:3:1 rule” (or some variation of it):
- An investor must look at 100 properties to find 10 potential deals that can be profitable
- From these 10 potential deals an investor will submit offers on 3
- Of the 3 offers submitted, 1 will be accepted
Finding a suitable investment property opportunity is a very time-consuming process, but the effort is absolutely necessary to find the right property that will produce a solid return.
Lost Deals = Lost Profits
What if the investor doesn’t get the “1” and loses it to competition? Failure to secure the “1” deal after the immense amount of time and effort needed to find quality opportunities can be an enormous waste of an investor’s resources and major loss of potential profits.
Missing out on 3-4 good deals per year could cause the investor to lose out on $75,000-$500,000+ of profit per year. If the investor isn’t able to acquire the good deals they find, why waste the time of looking for them in the first place?
Don’t Get Sucked into a Bidding War
Simply offering the highest amount for the property is not the answer. Increasing the bid may improve the likelihood of having the seller accept the offer, but every additional dollar bid by the investor is a dollar that comes straight out of the investor’s profit. A bidding war will quickly take the potential project from profitable to a project that will just break even or worse.
How can the investor quickly secure the property without simply increasing the offer and paying more? The investor must set their offer apart from the competition by presenting an offer that results in the seller getting their money as quickly and easily as possible.
Offer with Cash
Offering all cash is an option that will grab the seller’s attention. No financing contingencies and an easier, quick close. But tying up a large portion of the investor’s capital in one property may prevent the investor from being able to act quickly on another opportunity around the corner.
If the property being purchased will be rehabbed, the investor must keep enough capital on hand for improvement costs and a reserve fund just in case. Whenever possible, it’s best to keep a sufficient amount of cash in the bank account.
Offer with Hard Money Financing
An offer with a hard money loan isn’t as strong as an offer with all cash, but it can be the next best thing. Hard money gives the investor the ability to close quickly and the flexibility to keep more cash on hard. Many hard money lenders are able to fund in 5-10 days and require a down payment of around 25%.
An experienced seller (or experienced seller’s agent) understands that hard money loans are funded much faster than conventional bank loans. A hard money lender is also less likely to find some little detail about the transaction at the last minute and back out of financing the deal (something banks are known to do occasionally).
Conclusion
While a full cash offer is often the best way to secure a property at a good price when there is competition, it’s a luxury few investors are able to bring to the table. And the consequences of missing out on future deals while the cash is tied up in the current project could also prove to be costly.
When a cash offer isn’t possible, or the investor wishes to keep enough funds on hand for another potential project, a hard money loan may be the best option for offering a quick close and setting themselves apart from the competition to secure their current “1” property.
North Coast Financial, Inc. is a hard money lender in San Diego, California with over 30 years of experience. For more information about our loan programs or to inquire about a loan please contact Don Hensel. [email protected]
760-722-2991
