Epic Real Estate Investing - Should I Lower My Deal Standards for Shifting Market Trends? | 3rd Degree Thursday

Episode Date: September 18, 2014

The market has shifted and it's time for you to shift your focus. Should shifting your "minimum deal standards" be one of your shifting foci? ------- If you have a question, comment or concern that you’d like Matt to address live on the show, send it to him at [e-mail] and type "3rd Degree" in the subject line… or leave him a voicemail on the Epic Hotline at 1-888-891-7203. See you tomorrow for a new episode of Financial Freedom Friday!     Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello and welcome. Welcome to Third Degree Thursdays, the show where I subject myself to you giving me the third degree. Okay, got a question via email from Joseph Nelson out of Kentucky. And Joseph writes, hey, Matt, my wife and I have been listening to your show since September of 2013. Since then, we have been able to buy 14 properties totaling 18 doors. Congratulations to you. My original goal for 2014 was 20 doors. I have since increased that to 25.

Awesome. One of the properties is a flip still under rehab and the rest I intend to hold. It all happened from reading Rich Dad, Poor Dad, and then Googling Rich Dad Poor Dad Podcast. We found you. Very good. Glad that you did. And let's see. He writes, most of the deals.

I have acquired have been what I will call lazy deals because I found them on REO websites. But what I learned from your podcast about buy and hold has given us the confidence to go into this business without reservation. I could go on, but that's for another time. The deals, quote unquote, as I've heard you mention, have become more scarce. I have been networking with other local investors and wholesalers try to get on the ends, quote unquote. I have money investors in place and we look great to the banks for long-term financing so money has not been the issue.

What I'm finding is the other investors seem to want to pawn off on me the stuff too skinny in my estimation to mess with. The cash flow minimums I have set for myself are, I think, within reason going by what your starting standards were. I want it to cash flow during the seasoning period while using hard money. I will break even if I have to, but have not had to as of yet. So far, all my deals have cash flowed at least $100 a month while using hard money. After six months, they then push to around $400 a month.

Super. Some of the deals, some of the deals these others seem to expect me to buy from them are negative cash flow during the six months, and I barely, over $100 with traditional loans. barely cash flow over $100 with traditional loans. Now, some look decent on paper with some equity built in, but it is speculative at best. Here's the question. Am I missing something and should I be lowering my deal standards to get in with these guys and should I consider any cash flow even after some negative months as good cash flow?

I am, let's see. I am concerned. I am missing a long-term vision and in the process missing an opportunity to be in the boys club where some good deals may be. I've heard you talk so much about being likable. It seems to upset these guys when I even hint that I would like more cash flow. Blah, blah, blah. I think you get the gist.

Any help would be, well, helpful. You are truly the man. And by the way, my wife started listening to your body do-over podcast. And let me just say, thank you. She was hot already. But now she's on her way to being dropped dead. Thanks for all you do, Joe Nelson. Well, Joe, you're very welcome.

And I'm glad that's working out with the body do-over podcast over there. I seem to be experiencing the same thing at home myself. So it was a good decision. Okay, so Joe, there's no right or wrong answer here. Okay? And I'm not totally sure what this boys club consists of. I mean, you have more information on the history of this club and the potential that may lie within this club or these clubs, these clicks of people that you might be interacting with. You have more information there than I do.

But I will share with you what comes to mind. Okay, and you kind of take with it what you want. This is just from an outsider looking in. hell no don't lower your standards not sure why you want to get in with these guys if their deals are falling below your standards are they really guys worth getting you know getting close to i mean these boys club uh or this boys club it's experiencing the same challenges that you are that's why they're pawning stuff on to you off to you that's all they got you know if they had better stuff they'd give it to you because they want to sell it so they're not finding as good of deals as they used to

either. So they're trying to, I don't know, maybe, I don't know, strong-armed people into buying them or really pushing the sales and trying to draw your attention to other factors other than the investment numbers. Listen, I've said it a thousand times, and I'll say it again, the most successful investors are shoppers of deals. Shoppers of deals, as opposed to being buyers of deals. You don't want to be a buyer. You know, in this analogy, this store, this boys club, they've got terrible prices. They may have the item that you're looking for, but as a disciplined investor, you're looking for your item at a certain price or at a certain ROI for you. And by the way, what's the ROI on negative cash flow, right? There isn't one. That makes it a liability. And you don't get

wealthy buying liabilities. You get wealthy buying assets, liabilities. Those liabilities, they eat you, the assets feed you, okay? Liabilities take money out of your pocket, assets put money into your pocket. You know that. I know I'm preaching to the choir there. And I see what you're doing. You've got this six-month hard money and you turn into traditional financing. Great strategy. If you've got the pockets to support that six months and, you know, sounds like you do. You said money isn't an issue, then maybe that is a good strategy. And maybe if you are negative for a few months within those six months. But you know, you know, you know, you know, you know, know you can get positive after the six months.

Like I said, you know your tolerance for, you know, the finances better than I do or the risk better than I do. But buying negative cash flow, waiting, expecting, hoping that there's an upside somewhere else down the road. That strategy right there is exactly how everyone lost their ass in 2007. If that market should shift, if this market should shift during the six months you're holding those properties. you know, watch out because that's what happened.

And six months is a long time for something to happen. I mean, when the market shifted in 2007, it went, boom, overnight. Okay? So be very, very careful with that and have plenty of reserves. You want to make sure, regardless of what financing you're using, that you're going to be able to sustain that property should something change in the market, something beyond your control. and going for 50 bucks, 100 bucks a month,

if you've got the finances to support that, the reserves to support that, should something happen with the property or something happened with the market or something happened with the tenant, then, you know, okay, that could work. But you're going to want a little bit more debt coverage there than $100 a month, okay?

You're going to want a little bit more, not debt coverage, but you want a little more breathing room there. That's kind of scary, all right? At least for me, I'm a little bit more conservative than most, but that's where I stand. Also, yes, you do want to be likable, Joe. You do. It goes a long way in this business.

I mean, people want to do business with people that they like. But you don't want to be likable to the detriment of your own well-being and your family's well-being. In this instance, you're playing with finances and your family's affected by your finances. So when it comes to working with other investors, being likable, yes, that's good. But being respected is way better. and by you sticking to your guns, your investment standards, that garners respect. And if it doesn't garner respect within this crowd, then there's nothing for you here in this crowd.

Okay, they're not for you. So here's the exception for you, though. If you know, absolutely know that by buying one of their, I don't know, I don't know, substandard deals will indeed get you into better deals somewhere else, somewhere else down the road, and you have money you can afford. to lose, then maybe, but that's a big maybe, I mean, I would need a lot more information to tilt me towards, okay, go for it. Okay, there's a lot of what-ifs in there. And if you've got the bank account to support something that doesn't go as planned, then maybe you can afford to play that game.

But I don't think it's worth it. I don't think you have to, I don't think you have to play that game. I don't think you have to be a part of that club either. I mean, here's what I see. The market has shifted. And just as I've mentioned on this show in several recent episodes, everyone is feeling it. No one is immune. The market is shifting. The amount of spread in the deals is thinning out considerably to the point where it's just no longer feasible for two or three people to be in that chain of the transaction. I mean, you can't go, you know, a lot of people are doing really well by having the A to B transaction, the B to C transaction, even C to D transactions. And still everyone in that chain was getting paid.

There's just not enough profit to go around anymore, though. I mean, the MLS is drying up, as you're noticing the REO sites are drying up, the auctions are drying up, deals are getting tight out there. As you put it, they're getting skinny. They're getting very skinny, but they're getting skinny by the last several years standards. They're not necessarily getting skinny by history standards, though. You know, everyone got lazy over the last few years. It was easy to go shopping online or at an auction or just get on a bunch of wholesaler

buyers lists and just kind of wait for emails. But that's all changed. The sterile and analytical market is disappearing and it's disappearing fast. Much faster than I thought. I mentioned this a couple months ago. I thought we had another six months to a year before it really started affecting everybody, but it's happening much faster than I thought it was. And so to adapt and survive now and into the future, all investors will have to focus on creating more of a marketing and sales-driven organization. You've got to go straight to the source. You've got to go back to the basics.

You've got to go straight to the source. Or you've got to lower your expectations. You've got to lower your deal-all standards like you're talking about. And or you're going to have to practice a lot of patience. So that's your choice. You've got to become a marketing and sales organization going straight to the source for your deals. Or you're just going to have to lower your expectations.

You're going to have to be patient. You're going to have to lower your standards maybe. And that's just the market right now. It is what it is. Okay? So, congrats though, Joe. Congrats on the way you and your wife have been able to do the deals that you've done. I mean, you've done a great job.

You should be very proud of yourself. I'm proud of you. And it's time, though, to start getting comfortable with what you did to get your success is probably not going to get you your future success. At least not the immediate future. I mean, what got you here ain't going to get you there. So it's time to switch it up. You got to switch up the strategy of how you acquire your deals.

You know, unless you've got an inn with a bank or an auction house or your best buds with a supreme wholesaler that's willing to share the bounty with you, you're going to have to go straight to the source, private sellers to get your deals. It's going to take some more effort than you're used to. There will probably be a learning curve that you'll have to deal with. It'll take more work than you want to do and in the beginning require more money than you probably want to spend. That's the bad news. Okay, so that's the bad news. The good news is, however, there is plenty of opportunity out there. Plenty.

Motivated sellers, those are people with problems, okay? Look at them that way. Motivated sellers are people with problems. There are lots of people out there right now that have lots of problems. And a lot of those people, guess what? They own property. And people with problems will exchange equity for people to make their problems go away. The people with problems will exchange equity for peace of mind all day long, every day of the week, twice on Sunday even.

So, and this actually goes for everybody, actually. You all should be looking for property owners who are experiencing some sort of life challenge or adversity that selling their property would solve or alleviate. You're looking for property owners with problems, problems like job loss, job relocation, divorce, late mortgage payments, delinquent property taxes, retirement. retirement, distressed property or properties, illness, death, inheritance, or any number of things that life may throw out a person that can cause some sort of financial distress. Look for people with problems. And the types of problems I just ran down, those types of problems happen to people

every single day. They happen every day. someone that's living life in the lap of luxury today can experience any one of those problems tomorrow. That means there will never be a shortage of opportunity for you to acquire equity, regardless of market conditions. I've said this before. There's no such thing as good markets or bad markets.

There are only up markets and down markets, and you can profit from both of them. You know, relatively speaking, there's always a low price at which to buy and a high high price at which to sell always don't let the market conditions or the media or or the network of investors out there don't let any of that influence your decision of whether to invest or not as long as you can solve the problems of property owners they will always give you equity in exchange there will never be a shortage of equity you can always find equity if you can find sellers with problems that's the strategy okay now the strategy of how you cash in that equity might differ with the fluctuations of the market, but property owners will always give up equity to the person, you, the investor, who can make their problems and stresses go away.

Embrace the concept of exchanging equity for peace of mind, and you and your family will never go without. So, Joe, start preparing your investing business to become a marketing and sales-based business. And don't worry so much about the REOs, the MLS, the boys clubs. You know, those aren't going anywhere. those are always going to be there. So don't worry about that so much and go straight to the source. That's what I'm doing. I got lazy too a little bit over the last few years and business has been really good and it's still good.

But our demand, just like you, you're looking for deals. Our clients are looking for deals. That demand is going up. So we're making some adjustments to create a situation where our supply can keep up with the demand. And what that is is we're not buying. from the wholesalers as much as we used to or the REOs or our bird dogs or or HUD or Fannie Mae or whatever it may be. We're going straight to the source.

We're getting back to business. We're rolling up our sleeves here. We're becoming going back to what got me here in the first place and becoming a sales and marketing based business. All righty. So that's what you're going to have to do. You're going to go straight to the source. That's where the money is.

That's where the deals are. And then, Joe, when your business is finding. deals when you've got this down, these boys clubs, they're going to want to get close to you. They're going to want to be part of your club. They'll want you to like them. They'll be like, wow, I hope Joe likes me. You got this, okay? You've already proven that you can transact real estate. Now, take your business to the next level and create real estate transactions. You know, just like the immortal words of Bruce Lee. To hell with circumstances.

I create opportunities. Joe, hope that helps. And thank you so much for the question. Thanks for listening. Thanks for your support of this podcast and the other podcast. Tell your wife, hello from me, and good luck to you both. And should you have a question, comment, or concern that you'd like me to answer here and address it live on the show, send it to me at mat at epic real estate.com.

Type third degree in the subject line. or leave me a voicemail on the epic hotline at 1-88-891-7203. All righty, I will see you tomorrow for a new episode of Financial Freedom Friday. This podcast is a part of the C-Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.