Deal Analyzation

Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investment industry teach quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Frank: Hey guys, Frank Cava again and here I am once again the host in the REI Classroom. I’m excited to be back. Today, what we are going to talk about is deal analyzation. You go, “That’s a pretty boring topic.” You’re right; it’s absolutely abysmally boring. But the upside of it is if you master this and you get really good at it, you can go from a hobbyist to a pro. You can go from making a couple bucks on a deal or not making money at all to making an absolute fortune.

Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.

Frank: Although this is the nuance to the business and it’s kind of the stuff that gets glazed over a lot, in my office, this is what we talk about more than anything. We talk about lead acquisition and then we talk about the deal and what to do with it. The “what to do with it” is really, really hard to share in just a couple of minutes. What I want to do is kind of give you the overview that we use and then you can probably, if you decide to, implement this into your business and then maybe help yourself get some really huge spreads.

But, as I said, I think this is the most important part of the business. Not only is this the important part of the business, but sometimes it’s the things that you don’t do that are the most impactful and the most important. I say this a lot to people, but the best deals we’ve ever done are deals that we didn’t do. The reason we knew not to do a deal is because we did deals, we lost money or we didn’t do well as we thought. Which we’re not perfect. Babe Ruth missed the baseball every once in a while when he swung. We’re not going to be perfect and you may not be either.

The goal is just to mitigate loss upfront and avoid, if you can, big mistakes and big problems. Making sure you get ahead of this on the front end is really important. The biggest mistakes that I see from investors in a lot of instances is you’re emotional, you want to do a deal and yo’are really excited. If you come at a deal from those perspectives, what ends up happening in a lot of instances is you don’t have a clear understanding of what the deal is and what your profit margin is going to be on the back end.

If you just take a deep breath, you relax and you look at it from a standpoint of, “If this deal doesn’t work, another one will.” When that changes in your life and your business, things drastically get better. The reason for that is because you’re no longer either coming from a place of desperation or having that emotional side of “I have to do a deal.”

We get, I don’t know, 250 to 400 leads in the door every single month. So we are selective on what we do. In the beginning, when you don’t have as big as of a marketing budget and you’re just excited, this mistake gets made a lot. I really belabor this point, but it’s purposeful. Don’t be emotional and don’t look at something from a standpoint of “I have to do it.”

The other thing to really pay attention to is the data. I told you this is a thrilling subject. When I say data in this business, what I mean is comps. I hear all the time from new folks. I host a local REIA and they’re always like, “I know it’ll sell for 160, but I don’t see comps.” Well, if you don’t see any comps, it’s not really a good scenario to focus on because if the data isn’t there, you’re guessing. In the beginning, my guess, unless you’re some trust fund kid with tons of cash, you’re going to be very, very, very . . . it’s going to be critical that you have a return on your asset in the beginning. You’re probably going to have an investor or somebody involved so you have to make money.

If you pick the wrong deal or if you sit on something, you’re not going to meet those terms and it’s not going to work out well. It might, but by and large it won’t. So what I’m telling you is don’t be overconfident. Let the comps steer and guide you. Don’t do it the other way, which is you say, “I know I can force this into the market.”

The other thing that’s really important with the analyzation of deals is working backward. So, “Okay, Frank, what does that mean?” Here is where I start. What’s it worth? Then I subtract out what the . . . well, there are two ways, right? There is after pair repair value or there’s the cash value, depending on what your exit strategy is. But what it’s worth is really important.

The next is, don’t forget this part, how much do you want to make? Add in your profit, then what is the repair value? Then you get your acquisition price. So if you can do those steps and have a clear understanding on each one of those numbers, you can be assured that you can make money. The problem with this business is that you can be wrong three times. You can overpay, it can cost more than you think and you can sell for less than you thought. If any one those three or all three of those go wrong, you can be in trouble. So if you do it from the top down and then arrive at your number and build a little bit of a cushion, it gives you a real opportunity to maximize your profits.

So I hope that helped. This is something we use every single day in our business and I think it will benefit you as well. So, once again, Frank Cava. I’m known as The Experienced Investor and I look forward to seeing you again real soon.

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