Epic Real Estate Investing - EPREI 007 : The Biggest Mistake Investors Make

Episode Date: July 18, 2011

It's the ol' investors creed... "You make money when you BUY real estate!" That being the case, how you buy is vital to your real estate investing success. Tragically, the biggest mistake investors make is improper property analysis; And improper property analysis leads to bad buys, of which leads to money lost. On this episode learn how to know if you have a deal or not in seconds, and how to virtually eliminate the risk from your real estate investing. Learn more about your ad choices. Visit megaphone.fm/adchoices

Epic Real Estate Investing Podcast, episode seven. You're about to meet a man that can show you how he took control of his life and financial future, and how you can do the same. He's never been on TV. He's not a millionaire, and he does not know Donald Trump. He is a full-time real estate investor, newly discovered offer, and family man. He does not report to a boss. He creates his own schedule and takes his family on a few vacations every year.

He got started investing in real estate with almost no money in a really crummy credit score. And he's going to show you exactly how he did it and how he continues to do it. You will have to work. You will have to be responsible. However, laying by the beach sipping fruity drinks is a reasonable goal without further delay. Your guru. I'm sorry, your guide to a better life through real estate investing. Matt Terrio.

Hello and greetings from the epic real estate investing podcast, the podcast that will show you how to create wealth through conventional and creative real estate investing so you will have the option to realistically retire in the next 10 years or less and enjoy the good life while you're still young enough to do so. My name is Matt Terrio, author, full-time real estate investor and family. man. If this is your first time listening to the show, you want to do two things. One, go back and listen to episode one to get the gist of what the show is about and why it's here. I mean, everything we discuss from that point forward, it's going to make a whole lot more sense to you.

And two, download the free real estate investing course, how to do deals, no money required. And you can get that at free real estate investing course.com. The step-by-step course of which I reveal everything that I do, everything that I say, everything that I use, including the documents and contracts to invest in real estate using no money or credit, and that's yours for free at free real estate investing course.com. All right, one of the biggest mistakes investors make. In fact, I think it's the biggest, is they improperly evaluate property, particularly a property's value with respect to the exit strategy the investor intends to execute, meaning

a property's value can vary greatly based on how you expect to actualize your payout, and we'll get into exactly what I mean by that before the end of the today's show. But I have a feeling many of you will never look at a property's value. in quite the same way again. So let's get right into it. The epic approach, as we've covered it up to this point, breaks down the entire process of a deal like this. E stands for evaluate and decide.

P is for present and get consent. I is for investigate and negotiate. And C, come in with the cash and close. And as promised from last episode, we're going to take it from the top and discuss the E of the epic approach and discuss it in great detail on how to evaluate and decide,

how to tell whether you have a good deal, or not and do it in a matter of minutes. I mean, it's in the evaluation where fortunes are made. It's also where they're lost. Now, the intent of this step is to run a brief evaluation of the property in question and come up with your own initial opinion of value. Now, I repeat, your own initial opinion of value. I stress your own initial opinion of value

because you can really lose your shirt investing based off of someone else's opinion of value. of which so many people do. For example, you may hear someone say they purchased a property 60 cents on the dollar. And what that translates to is 60% of fair market value, a 40% discount. But whose dollar are they talking about? Whose opinion are they talking about?

Are they talking about the seller's opinion of the dollar? Are they talking about the buyer's opinion of the dollar? The realtors' opinion of the dollar, the appraiser's opinion, the bank's opinion? So I stress, you must become proficient at determining and making your own investment decisions based off of your own opinion of value. You can lose everything if you don't, and you'll be out of investing faster than it took you to get in,

and I don't want that to happen to you. So I want you to know how to, and I'm going to teach you how to, determine your own accurate value. Once your own initial opinion of value is established, you can then decide whether the property is worthy of more of your time, if you should present an offer or not. I mean, that's all that you're concerned with during this step. Do not spend a lot of time investigating every nook and cranny of the property in the market

conditions. Not yet. There'll be plenty of time for that, but I don't want you to do that yet. And there are two reasons for this. One, you're going to have to sort through a lot of deals to find the good ones. I mean, if you spend too much time on every deal, the time in between deals will be too long, which means your paychecks will be too far in between. Not to mention the likelihood of you missing some deals.

And two, you'll have plenty of time later to conduct. a more thorough investigation, and it'll be a much better use of your time later as well. And I'll explain why shortly, but for now, all you want is an initial opinion of value and to make a decision whether to move forward or not. Within the epic approach, there are three levels of evaluation, and two of them are covered in this step.

Level one evaluation consists of a few questions. One, does this fit my criteria? Now, we established criteria in a previous episode, and each and every one of you will have a different criteria. Is the subject property in the right area for you? Is it the right type of property for you? Is it in the right price range for you? If your answer is no to any of those questions, you're done.

Drop it. Your evaluation is complete. I mean, move on to the next deal. If your answer is yes to all of those questions or specifically to the one question, does this fit my criteria? The subject property is in my desired area. It's the right type of property

that will move me towards my goal of either cash or cash flow, and it's in the right price range. I mean, if all of those apply, then we move on to the next question. Question two, who is in control of the property? Am I dealing with the property owner, a realtor, a wholesaler, a bank employee, or a guy that just knows a guy?

I mean, if I'm not talking to the person that has the power to make a decision of whether they sell to me or not, I move on to the next deal. I find more times than not, if not always. I mean, I'm sure there are some exceptions out there, but I find more times than not, the middleman is going to either waste my time

and or cut into my profits. So if you are dealing with the decision maker, then you can move on to the next question. If you're not, move on to the next deal. So the next question, number three, does this person or this entity or organization or institution doesn't matter who you're dealing with? Do they want to sell or do they need to sell?

I mean, as investors, you'll want to work with the sellers that need to sell. I mean, that's where the deals are. If they merely want to sell or they're only interested in selling, I mean, it can be a frustrating experience, if not a painful lesson in futility. You'll come out of those types of experiences saying stuff that are thinking stuff like this doesn't work.

All this stuff I'm learning, it doesn't work. No one's buying it. No one's biting. No one's taking me up on my offers. Well, the reason they're not is because they're just interested in selling. You're looking for the people that need to sell. Now, I conduct a brief seller interview to determine whether they work. want to sell or if they need to sell.

And this interview also reveals to me what the seller's true needs are, of which is the root of getting a great deal for yourself and for them as well. And I conduct this interview using a seller information questionnaire. Now, I've included that questionnaire, the exact questionnaire that I use in the free real estate investing course, how to do deals no money required. I even included a role play video of what my typical interview looks like. And I can conduct this interview over the phone or in person. I prefer to do it in person.

However, I do have three key questions I will ask over the phone before I ever conduct that interview. These three questions will reveal to me if there's any motivation or do they really need to sell. And those questions are, for example, the phone rings. They call me off of one of my yellow letters or one of my signs or one of my internet ads, whatever it may be, and they ask me, hey, I've got a property to sell. And that statement comes in all shapes, form, sizes, and fashions, and different expressions and different expressions and different intensities, but generally that's the gist. They're calling me because they've got a property to sell. So my first question is, what's your situation? Tell me about your situation. And then I just shut up

and I listen. Just listen. And you can agree with them and relate with them as they're explaining the situation, but don't interrupt them, don't cut them off, let them fully explain their situation. The next question I ask them is, after I feel that they've explained their situation and full to me is what do you want to have happen? What is their desired outcome is what you really want to know? So you ask them the question, what do you want to have happen? And then you just be quiet and let them answer. Be careful not to interrupt. You are listening for very important clues, very important hints. You're trying to establish, is this going to be worthy of your time or not? You want to hear if there's motivation in their speaking, if there's motivation and they're wanting

to sell. Excuse me, motivation in their needing to sell. That's what you're really. listening for so what do you want to have happen that's the second question and once you feel they're complete and they've expressed everything that they want to have happen the third question is if we could put something together how quickly would you like to sell and be quiet wait for the answer if we could put something together that would be mutually beneficial if we could put something together that you were happy with whatever phrase it however you want if we could put something together how quickly would you like to sell. And you really want to hear something like ASAP, or you want to hear something like

right now, or you want to hear something like yesterday. And that answer also is going to come in various shapes, forms or sizes. You're going to have to use a little bit of your intuition. And if at this point that intuition has led you to believe that this seller needs to sell, you'll want to schedule a time ASAP to visit the seller at the property to take a look and conduct the rest of the seller interview. So, you know, at this point, there's a pretty good chance you've got a deal. So you want to take this part seriously. You don't want to delay. You want to schedule your time to go over there and meet with the seller so you can complete

your seller interview. And if you can discover that they have a need, you can satisfy without money. I mean, there's even a better chance that you've got a great deal. And I want you to notice right now, more times than not, you will have come to this conclusion without ever leaving the office or exerting any extraordinary amount of effort either. This is why I only want you to determine an initial opinion. of value. Most investors do all of the physical work and time-consuming work without knowing the basic information, the basic information that we've been able to acquire up to this point

through our level one evaluation, the basic information that will determine the possibility of a real deal or not, and determine that up front. Make sure the previous questions are the first questions to be answered when evaluating your deals. Does it fit my criteria? Who's in control? And do they need to sell or do they want to sell? You'll save yourself a bunch of time and frustration if you get these questions answered first. There, level one evaluation is complete. The property fits your criteria, you're speaking to the person that's in control, and they need to sell. Now we can move to level two evaluation, going over the numbers and determining your initial opinion of value.

Before we can do that, though, let's go over the basics of evaluation. And I'll do this verbally because, well, it's basically my only option at the moment. But so you know, there is a video within the free real estate investing course, how to do deals, no money required, that has many visuals to help explain this. So if you're not following along, make sure you get that course. I mean, depending on how you best retain information, that's something you're probably going to want to check out. Or this might be enough.

Either way is fine with me. I just want to make sure that you get it. Now, I consider property evaluation one of the most important skills as an investor, as money is essentially made or lost when you buy. I mean, you get paid when you sell, but you make your money when you buy. And surprisingly, I find that a good number of investors, novice and experienced alike, they lack a solid understanding of the basics. And it's a shame because it can really dig into their profits.

So let's go over the basics to increase the likelihood of you making money. And actually, much of the risk that people associate with real estate can virtually be eliminated with sound evaluation. And it's funny that more investors don't take this more seriously because it's not that difficult. And yet it's so important. Let's begin with the basic terms of evaluation. You'll hear many of these terms used interchangeably,

but they are distinct. cost that's the amount paid for a property they cost the amount paid for a property price that's the amount asked for a property value the amount a property is worth to some one then there's market value or fair market value that's the amount that appeals to many buyers and causes a sale within a reasonable time and for me a reasonable time is 21 days I know if I don't receive at least three to five offers within 21 days, I'm likely asking too much for the property. So what characteristics of a property have the biggest influence on the property's value? Now, you've heard, I'm sure, a million times before, and here's one more time.

Location, location, location. A property's location, it can account for up to 95% of its value. I mean, typically 75% to 85%. And this is important to understand because a property's location, it's fixed. It is where it is, and there's nothing. anyone can do about it. The second most influential characteristic of our property's value is the size. Now, don't get caught up too much in bedroom and bathroom configurations. Although that does have some influence on value, as an investor, you'll want to pay more attention to square footage.

And that's square footage of the lot or the land, and that's the square footage of the improvements, or in other words, the building or the structure that sits on the land. Now, sometimes people will debate me on this next one. But as an investor, time is money. And that is the third characteristic that influences value, time. And when I refer to time, I'm speaking of how much time would it take to sell or how much time would it take to rent, meaning if you had a property valued at $100,000,

but it took you nine months to sell it to receive your $100,000, what were those nine months worth to you? I mean, personally, I always take the fast nickel over the slow dime. And there's nothing worse than idle money. And what I mean by that is I'd rather have that nickel working for me than waiting nine months

to put the dime to work. but that's my personal preference. You see, this is why it's important to be able to determine your own opinion of value. We all have different wants, different needs, and different goals. Now, I frequently receive debate on this one. Quality, condition, and amenities.

They are the last characteristic that influence value. And they have a minimal impact on value. I mean, a lot less of an impact than most people think. Keep in mind, a property with high-quality fixtures in immaculate condition with luxurious amenities will not cause a property to be worth more. They may cause a property to sell quicker, and they may cause a property to sell at maximum market value,

but they do not increase the property's value. You see, as an investor, it really makes no difference to me if a property has travertine tile, imported Italian tile, or basic linoleum flooring in the kitchen. As long as it has a flooring of which I don't have to repair, hey, it is what it is. It's a functioning floor. However, poor quality, condition, and amenities, they can certainly bring a property's value down,

and that's why I listed as one of the four characteristics that determine value. They don't increase value, but they can decrease value. Now, this is one of my favorite aspects of the basics, opinions of value, and they are just that. They are opinions. A buyer's opinion of value is always at the bottom of the opinions. A seller's opinion of value is always at the top of the opinions. That's just fundamental real estate thinking. That's the way it has always been, and that's the way it will always be.

Now, in the middle, you have agents and you have appraisers' opinions of value. Agents, they tend to be a little more optimistic than appraisers, but at the end of the day, they too are just opinions. Even the appraisers. I mean, many investors think that an appraisal is some sort of official certification of value. Not so. It's just another opinion. And what most people don't realize is that that appraiser's opinion of value tends to favor

whoever paid for the appraisal. So don't be fooled by appraisals. They're just another opinion. And then, right in the middle of them all, we have market value, or sometimes referred to as fair market value. And in some respects, a buyer's behavior is the most influential characteristic of value. Even more than location.

And what I mean by that is, what is a property really worth? Quite simply, it's worth what someone is willing to pay for. Nothing more, nothing less. Never lose sight of this aspect of real estate. I mean, at the end of the day, the buyer that actually buys trumps everybody's opinion

and yes even yours so how do buyers determine value now this is a simple one also they compare that too is how it's always been and how it will always be and that's where we get the word comps it's short for comparables now another aspect to never lose sight of

is that today's buyers are informed they're sophisticated and they're savvy more than they've ever been and in most cases they know more than the sellers because they're out there shopping. They know the market better than anyone. I mean, with the advent of the internet, I mean, today's market is completely transparent. It's kind of like playing poker with all of the cards facing up. There are no secrets. The pertinent information is readily

available to whoever wants it. It's important to know this as an investor, particularly if you intend to flip a property, because when you're flipping the property, you are the seller. And knowing what other buyers are aware of in determining value can help you make a significantly better decision in buying a property that you intend to flip. So when pulling comparables, you'll look for similar properties based off of characteristics previously mentioned that influenced the value. You're going to want to look at properties within a relatively close proximity, similar location, where I invest, I mostly look at properties within a mile radius.

However, that can vary greatly depending on your area. I mean, there are some areas where neighborhoods can change within a couple blocks. And there are neighborhoods like giant subdivisions of where you could expand that radius to as much as four or five miles and get relevant comparison. parables. I guess that's somewhat where the expression real estate is local comes from. You've got to know your area, or at least be working with someone that does, someone that you trust, preferably. Now, of the properties within the relevant location, you'll narrow the search further by square footage. Now, I choose plus or minus 15 to 20%. Those are my numbers.

You can use your own numbers. And then I further narrow the search by the time of when those properties actually sold, how long they were on the market. Typically, zero to 90 days is an adequate time. Now, there are many schools of thought on how to read comps and how to formulate an opinion of value. But my school of thought is to look at only the solds. I mean, all I care about is what the comparable property sold for. I don't care what a property didn't sell for. I don't care what a property might sell for. I don't care what a property almost sold for. I simply look at what it did sell for. Now, I'll pick the lowest five properties sold and simply average them together to formulate my initial opinion of value. Could be high.

could be lower, but that just helps me formulate a conservative opinion of value. Now, if I can't find five properties, sometimes four will be sufficient depending on my exit strategy, or I might broaden my search a bit, for example, go back 120 days instead of 90 days, or maybe I'll up the square footage in my search to 25% plus or minus, just to try and bring at least another property or two into the equation so that I have five that I can take an average of. Now, if I can't find four or five properties to complete this formula, I mean, that raises concerns for me. I mean, will I be able to flip this property? Is there enough market activity in the area? Or do I have a very unique property that doesn't sell very often in the area? And those are

things I'm going to be thinking about if I can't find enough comparables. Or I might have to reevaluate my exit strategy, of which will definitely influence my opinion of value. So I'm going to use different parameters based on my exit strategy. But I don't want to get too deep into that right now, but we will in the very near future, I promise. I just want to cover the basics of evaluation for the moment. Now, some people look at the active. to help determine value of which I sometimes do, but later on down the road, of which we'll get to, but I don't waste my time with them too much

when formulating my initial opinion of value. And if you don't know, actives are properties that are currently for sale. And you know what? All that really means to me is they have not sold yet. Besides, the active prices are set by the seller, and we all know where the seller's opinion of value sits. It sits at the top of the opinions, right?

But if you want to incorporate these into your evaluation, you can take the average of these also. I just don't think it's a very useful number. I mean, this average, however, could be a good indicator of where you might want to price a property if you're going to flip it. Okay, so those are the basics. That's it for today's show.

Next episode, we're going to take this information and we'll complete level two evaluation of which will lead you to your first opportunity to actually make some money. Now, until next time, as a very wise man once said, a wise man makes his own decisions. An ignorant man follows public opinion.

To your success, I'm Matt Terrio, living the dream. Thank you for spending this time with Matt Terrio and the epic real estate investing podcast. When you have a moment, stop by iTunes to leave your comments and let us know what you think of the show. And if you haven't done so already, get started investing today by visiting free real estate investing course.com. To access Matt's free course, how to do deals, no money required. Until next time. To your success. To your success.

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