For the last few years, most places in the country have been experiencing tremendous appreciation in the values of real estate. For the longest time I talked about how my house went up in value and, daily, I hear many others talk about how their homes have appreciated in value. Well, I have news for you, houses do not appreciate in value. Yes, you heard me correctly. Houses do not appreciate in value. You probably think I’m crazy, but let me explain. At the moment, I happen to live in one of the hottest real estate markets in the entire country. While there are many people out there clamoring for deals, I’m passing on deals. While others think the market is drying up, I’m still finding more then I want to deal with. How can this be, you ask?

The difference between myself and many other investors is that I understand appreciation. I realize that houses do not go up in value. It is the land that the home is sitting on that appreciates, not the house itself. The house itself actually goes down in value. It will maintain value if you keep it up, but otherwise it goes down in value and it costs money to maintain. So in a hot market, I’m looking for land. I don’t care if there is a house on it or not, I’m looking for land. Land in good areas is like gold. A home will have a piece of land that someone will want. That person may or may not keep the house, but the land is the desired asset. Because land appreciates, it is a desired commodity in a hot market.

Here is an example of how appreciation of lands far outpaces the appreciation of a home:

A home in a $400,000 neighborhood that is appreciating at 10% per year goes up in value $40,000 per year. The lot next door may be worth $120,000, but in a year it also goes up $40,000, or 33% appreciation. Hence, the increase in value is due to the land, not the house which doesn’t go up in value. It costs the same to build a home whether you pay $120,000 or $160,000 for the lot. Of course there may be some changes in the cost of lumber and materials, but this doesn’t have much of an effect on the value of the home. The bottom line - the house on the property is always worth the same. You can replace it for essentially the same amount as you can two years from now. It’s the land that goes up in value.

Once you understand this you will begin to look at deals differently. You’ll see the small unattractive two bedroom rancher in a great neighborhood for the land that it sits on. You’ll see the home with an extra lot beside it as two deals. You’ll see vacant lots as gold mines and, yes, people go after land in hot markets like the gold rush of 1949.

Why does land appreciate? It’s a matter of supply and demand. The areas of the country which are experiencing the highest rates of appreciation are for the most part saturated. There is very little land left to be developed and the populations are growing. In some cases there is no land left and smaller cheaper homes carry a premium because of the land they’re sitting on. If you can pay market value for the “home,” you may actually be getting a “land” bargain. So when you pursue homes in very hot markets, sometimes you just have to look at the small home for what it can become. Don’t pull comps for the home as it is, but for what it could be. A two bedroom rancher may be worth $350,000 on its best day, but a new four bedroom, 2.5 bath, colonial may be worth $700,000. If you could buy the two bedroom ranch for $300,000 or full market value, the land beneath may be worth more when you consider the new home that could be built on it.

So I encourage you all to open your eyes, understand appreciation, and look at deals in a different light.

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One of the strategies that is in almost every real estate course involves finding a torn-up and ugly property at a cheap price, pay someone $300 to clean out the personal belongings of the prior owners (if you even do that much), and then resell it to a homeowner as a “fixer-upper” with little or no work. This type of deal seems to benefit everyone. You get a nice quick profit, and your buyer gets the house for a good price.

We love flips, and we’ve done many. However, you should be aware of a potential hurdle that you have to get over on this type of deal. With the information in this article, you can sell your ugly properties for more money, and to the correct buyer.

If you are selling the home to a homeowner, you generally will need the appraisal by their lender to say that the house is in “average” condition. This means that the home doesn’t have to be cosmetically perfect, but it also can’t be a total wreck. Nor can it have significant repairs that need to be made. Basically, it must be habitable, as a reasonable person would view habitable.

The “average appraisal” requirement almost sunk a deal for us when we decided to flip a foreclosure that we bought and sell it “as is.” It needed $25,000 in work. With that work, it could be sold for $160,000. We paid in the 80’s for the home, and priced the house for $120,000 “as is,” receiving a contract the same day. The house was not perfect by any stretch of the imagination. Problems with the house included broken windows, rotten exterior wood, no light fixtures (all removed). Some interior doors were torn off their hinges, significant holes in interior walls, and there was no carpet (only plywood floors) in the den.

We typically would market a home like this to another investor, but decided to try to retail it (selling to an owner occupant). The house was in a really sought-after neighborhood, and we knew we could get top price for the property from someone who was looking for a fixer-upper to live in.

The loan process was smooth, and the buyer qualified with no problem. The only condition left for getting the loan was a satisfactory appraisal, which meant that the house had to be in “average condition” according to the lender.

The appraiser came out to the house and almost killed the deal. The appraiser graded the property as being in “poor condition.” His report stated that all broken glass had to be fixed, that the plywood floor had to be covered with vinyl or carpet, that the exterior rotten wood had to be repaired and replaced, and the holes in the wall needed to be patched and painted to match the surrounding walls. He also took issue with the dishwasher, which had been kicked in, and the central air conditioning, which did not work. His opinion, and thus that of the lender, was that all of these items had to be fixed before the loan could be made. I thought this might have been a problem with this particular lender, that their requirements were more rigorous than most. I called my personal mortgage broker and he confirmed that residential lenders required average condition as a rule regardless of whether or not the house appraised for the loan value in its current condition.

Of course, I did not want to have to make all of these repairs, and sell if for only $120,000. If I was going to do all of that, I might as well rehab the house and get the higher money that it would bring fixed up. The buyer whined and complained, and stated that he couldn’t see fixing these items at his expense prior to closing. He didn’t want to invest his time and effort in case the house couldn’t close for some reason, which was reasonable.

To make a long story short, I decided that the other appraiser was too picky, and persuaded the lender to call a different appraiser. Basically we reached the same result, but the a/c and dishwasher did not have to be fixed. We did have to fix the windows, cover the plywood floors, and perform some of the other repairs. I offered to fix the windows, and do half of the repairs if the buyer would install the carpet and handle some of the repairs. He agreed to do so, and we closed.

You can make these deals work out, but do whatever needs to be done to get the average appraisal before putting it on the market to flip. I know that I could have gotten more money for the property if I had done these repairs before selling. If I had known this information at the time, it would have put an extra $10,000 in my pocket. It was a good deal for me at the price it sold for, but doing the repairs would have made the process go quicker, and probably persuaded some more timid “fixer uppers” to bite at a higher price.

Sometimes It’s Better To Sell To an Investor, or Educate Your Buyer on the Right Type of Financing

When we have flip properties that really need a significant investment to get into acceptable condition for a lender’s appraiser, these generally need to go to investors. If you’re going to take the time to fix a long list of items, you might as well finish the job and sell it as a rehabbed property. Investor loans usually do not require the house to be in “move-in” condition. The downside of this is that most investors will not pay as much for the house as an owner-occupant might, but if you really don’t want to do much work to the property, this is the way to go.

The total wreck property can be sold to an owner occupant “as is” if that owner occupant gets a property rehab loan. Under such a loan, the property would be appraised for the value that it would have fixed up, and the loan would be based on that value with the repair money left in an escrow account to be disbursed as the repairs are made. In real life, the example would work as follows: the buyer finds a property for $70,000. Fixed up, it would be worth $100,000. There are $30,000 worth of repairs that need to be done. The loan would be made for up to 95% of the improved value, or $95,000. The loan would thus be made to buy the property for $70,000, with $25,000 left in escrow to be disbursed by the lender after their appraiser verifies that work has been done on the house. As you are probably starting to guess, these loans are not obtained by many homeowners. These loans are complicated to apply for, and to underwrite. Most homeowners don’t really know about them, much less how to get them. If you are trying to flip a property like this, getting some information from your mortgage broker on this type of loan to give to prospects is a must if the house is torn up.

Conclusion

The quick flip is one of the most fun transactions in real estate. You can make almost as much on some of these then if you rehabbed and resold the property. Generally, a fast nickel is better than a slow dime. If the property needs repairs, you may want to do a few of them before putting it on the market so that you can get an average appraisal. In speaking to different appraisers, these requirements are: absolutely no broken out or boarded out windows, coverings of some kind on plywood floors, and light fixtures in all rooms, or blank plates over where light fixtures are wired. Exterior rot must also be repaired if particularly bad, as on our home. If the property is totally destroyed, you might do better to sell to an investor, rehab it yourself, or educate your owner-occupant on how to get a rehab loan so that the condition of the property doesn’t kill your deal.

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If it’s done correctly, a Comparative Market Analysis (CMA) can be the next best thing to an appraisal in approximating the value of a property. The purpose of the CMA is to analyze data from properties similar to the subject that have sold recently in order to project the realistic price at which the subject property would sell. RE agents and brokers tend to develop their own methodologies for doing CMA’s. I’m not an appraiser, but what I’ve always done is make upward and downward adjustments to the projected value of the subject based on features and characteristics of the comparables I use. Admittedly, these are subjective, and some are based on “gut” feelings while other adjustments come about through rules of thumb I have developed from experience. But putting a value on real estate is an inexact science at best, and this methodology has worked pretty well for me over the years in CMA’g residential properties. I use a completely different method for projecting the value of land and property with residential development potential.

How can you tell if the CMA is worth more than the piece of paper it’s written on? Here are some things to look for.

Location

The RE agent or broker who does the CMA should be very picky about selecting comparable properties. This means looking first for properties in the same neighborhood or subdivision since these are likeliest to be virtually identical to the subject. Differences in location can be very difficult to accurately adjust for, so the comps should resemble the subject’s location as closely as possible. If it’s necessary to look beyond the immediate surroundings, the search shouldn’t extend into other municipalities and school districts since property values there may differ significantly. Before I include a property as a comp, I drive by it.

Time

Next is the time element. When did the potential comps close? I try to use comparable sales data that is no more than 6 months old so I don’t have to adjust for older sales. However, this depends on current conditions, so if it’s a slow market, I may have to reach back farther in time. In addition, I only use closed sales, not those that are active listings or are pending closing. A sale isn’t a real sale until money and title have changed hands.

Housing Style & Use

Different housing styles can result in different values. So I try to stick with potential comps that are the same architectural style as the subject – 2-story, rancher, twin, townhouse, contemporary, split level, cape, etc. Land use or zoning needs to be the same or comparable. I wouldn’t compare a property zoned for residential with a commercially zoned property, even if the “comp” consisted of a residence.

Size

Size, both of the house and the lot, are relevant. For differences in house square footage (at or above grade areas only), I use a factor of around $35/SF. This is not intended to represent actual building cost but rather my estimate of the value that buyers in my area would place on the house size. Likewise, I use a value of about $10,000 per acre for lot size. So if the subject is on a 1.5 AC lot (and consists of only one separately deeded parcel), and one comp is on a half-acre lot, I would add $10K to the estimated value of the subject. Building lots in my area sell for much more than $10K, but in this example, the difference between the subject and the comp is just excess land area, not a buildable lot. If the subject or comp consisted of one or more separately deeded parcels (buildable lots), then the amount of adjustment would be my estimated value of the building lot.

Rooms

I also adjust for differences in the number of bedrooms and baths, as well as for family room or not, garage capacity, central air, public v. on-site utilities and basement.

Condition and Amenities

Adjusting for these elements can be tricky because my evaluation of potential comps is usually based on drive-by evaluations supplemented by MLS and database information and conversations with the agents involved in the transaction. Things I take note of include maintenance-free exteriors, decks, type of flooring, new or remodeled kitchens and baths and other capital improvements.

Age

There are many “other century” (18th and 19th century) structures in my area. If the subject, for instance, is contemporary (20th century vintage or later), I use a value of $1K for each year of age differential. E.g., the subject is 20 years old and one comp is 8 years old. I subtract $12K from the estimated value of the subject. On the other hand, if the subject is 18th century, I try to find comps from that same century, and use a value of $25K for each 50 years of age differential.

My CMA takes the form of an Excel spreadsheet. There’s one column on the subject and 2 columns for each comparable. The second column for each comparable contains the + or – dollar adjustments for each property characteristic (such as, age, lot size, house SF, basement, BR’s BTH’s, garage, C/A, location, utilities, date of sale, amenities & misc). The bottom line is the range of prospective sale values of the subject after the adjustments, positive or negative, are totaled. If I’ve done my job right, the prospective sale values should fall in a relatively tight range – the spread between the lowest and highest shouldn’t exceed 5%.

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How Builders Evaluate Land

Some builders search for property strictly by geographic area. Others search for parcels that would enable them to reach particular buyer sub-markets (housing type, price range, lifestyle, age group). Either way, builders begin the investigation by casting the net into their areas of markets of choice and sifting through potential acquisition candidates. They have to pick through dozens of properties before they find one they think they can develop profitably. Sometimes they can tell quickly if a property is worth pursuing further. More often, however, they don’t know this until they spend varying amounts of time, effort and money collecting information about a site. In either case, their investigation focuses on obtaining answers to five fundamental but critical questions: What can I build? How many can I build? What can I sell them for? How long will it take to sell them? What are the costs?

How to Subdivide Land

Zoning governs the uses that are permitted on your property, but it doesn’t deal with how and to what extent you can subdivide it to create two or more parcels. For these issues, you would need to consult the municipality’s subdivision and land development ordinance. These ordinances that are amended periodically spell out: construction and design standards for site improvements such as curbs, sidewalks and streets; safety issues (grades, street widths, angles at intersecting streets); other issues like street lighting, grading and landscaping; and procedural requirements dealing with submission deadlines, size or paper and types of data to be shown on the plans.

What the Land is Worth

Many factors determine what a parcel of land is worth, including location, uses allowed by the zoning, the projected sale price of the end product, the number of lots, and the costs of development. Basically, the value of land for residential development is calculated on a per-lot basis, not a per-acre basis. The reason for this is simple. A 10-acre property may produce 5, 6 or 8 lots, but it won’t produce 10 lots. Some part of the property will be “wasted” because of physical and other conditions. Consequently, the ultimate value of the land depends on what the parcel will yield.

Why Location is Important

We’ve all heard about location, location, location. But why is it so important? The answer is very simple: location is the only thing about a property that you can’t change. Wait a minute, you say. That’s not correct because you can move the house. That’s true. Maybe you can (although it’s often not feasible and it’s expensive to do). But even if you can move the house, you won’t change the property’s location because you can’t pick the land up and move it. It’s the land that gives the property its location, not the house. The house isn’t permanent. Only the land is permanent. For better or worse, you’re “stuck” with a property’s location. Location determines many things, including the current zoning, the types and values of properties in the vicinity, and the presence of public utilities. And if you’re thinking about developing a property, these issues can mean the difference between success and failure. learn

Land Features and Constraints

Your ability to develop a property hinges on several factors. The most obvious one consists of the man-made and natural physical conditions of the property. In addition to existing structures, man-made features could also include past or present land uses that have changed some physical aspect of the property, like regrading, creating a pond, or contaminating soils and groundwater. Natural features basically consist of everything that is not man-made, including topography, parcel size and shape, wetlands, rock and floodplain. Man-made and natural physical conditions are usually referred to as “features and constraints” because they have a tremendous impact on the ability to develop a property.

Not Just Price

Strange as it might seem, if you’re thinking about buying or selling land and development property, price is the last thing you should be focusing on and not the first. Why? Because price is relative to just about everything else relating to the property. This “just about everything else” that’s more important includes not only the suitability of the property for development, but the types of contingencies included in the purchase contract, such as a period of time to investigate the property and collect information. The wording of terms and conditions can make or break the deal and consequently, terms are often more important in the land transaction than price itself.

Some Terminology

As Is Where Is Sale: One in which the buyer is purchasing with no contingencies or fewer than the customary development contingencies.

Building Envelope: That area of a property remaining after marking off the front, rear and side yard setbacks being the portion of the property within which a structure can be built.
Conservation easement: voluntary limitation or prohibition of future development on property in exchange for owner receiving tax relief or other monetary benefit.

Deed Plot Plan: A “to-scale” plan generated from the legal description contained in the deed.

Impact Fees: One-time fees charged developers by local governments to fund the impact of the development on existing systems or facilities, such as fire protection, roads, schools and utilities.

Subdivision Plan: Collectively, a set of plans submitted by applicant for subdivision approval; first sheet in the set of plans that is recorded after all of the municipal requirements have been satisfied.

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The most common mistake that many beginning real estate investors make is that they pay too much for property. Fact is overpaying for property is often cited as the number one reason why so many newcomers fail to make it as profitable real estate investors. That’s because most beginning real estate investors are woefully undercapitalized, and they don’t have the deep pockets that are needed to subsidize their overpriced real estate investments.

For many neophyte investors, paying too much for their first investment property usually proves to be a very costly and fatal mistake, and marks the beginning of the end of their foray into real estate. That’s why it’s imperative that you learn how to accurately estimate the current market value of potential investment properties! As far as I’m concerned, it’s the single most important aspect of the entire real estate investment business!

A Fast $15,000 Profit for Knowing the Value of a Condemned House

I once bought a real estate option on a filthy, neglected, run-down, but structurally sound house in a neighborhood-in-transition in Winter Park, Florida, a suburb of Orlando, that had been condemned for building, safety, health and fire code violations. This place looked like something right out of downtown Baghdad, Iraq! It had what code enforcement inspectors commonly refer to as accumulations of every type of debris, garbage and junk known to mankind! The property’s owner lived in Westerville, Ohio, and wanted the steady stream of threatening letters from the Winter Park Code Enforcement Board to stop.

I had done my homework, and knew the property was worth at least $110,000 after it was cleaned up. I ended up paying $500 for a one-year option to purchase the house for $75,000. It cost me $2000 to have all of the accumulations removed from the property, and the house, driveway and walkways pressure washed. Three weeks later, I sold my real estate option agreement for a $15,000 profit! This never would have happened if I had been clueless about how to estimate property values. Since I had an accurate estimate as to how much the property was worth in its current condition, I was able to negotiate a below market purchase price that was based on the property’s filthy, neglected, run-down non-marketable condition, and not on how much it might have been worth after it had been cleaned up.

No Kelly Blue Book for Real Estate Investors to Look Up Property Values

Sadly, there’s no Kelly Blue Book equivalent for real estate investors to lookup used property prices in, so you’re going to have to learn for yourself how to estimate the current market value of potential investment properties. However, thanks to computers and the Internet, in most real estate markets it’s not that difficult to get a rough estimate of a property’s current market value. This is especially true for real estate investors located in counties where all property ownership, sale and tax assessment records are available online.

The Definition of Market Value

The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice, defines market value as: “The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the sale price isn’t affected by undue stimulus.”

The Difference Between Assessed Value and Appraised Value

The difference between a property’s tax-assessed value and its appraised value is as follows:

1. Tax Assessed Value: Tax-assessed value is the value established by the local taxing authority for a parcel of land and the improvements placed upon the land for property tax purposes. For example, in Florida, owner-occupied single-family houses are generally assessed at around seventy percent of their fair market value by county property appraisers.

2. Appraised Value: Appraised value is the value estimate given to a property by a licensed property appraiser using accepted appraisal methods for the type of property being appraised. For example, the accepted appraisal method to accurately estimate the fair market value for an owner-occupied single-family house is the comparison sales method where a property’s value is based on the recent sale of comparable properties within the same area.

The Three Common Methods Used to Estimate Property Values

The three most common methods used by property appraisers to estimate property values are the:

1. Comparison Sales Method: The comparison sales method bases a property’s value on the recent sale prices of properties that are within the same area and comparable in size, quality, amenities and features.

2. Income Method: The income method is used to estimate the value of an income producing property based on the net income the property produces.

3. Replacement Cost Method: The replacement cost method is based on what it would cost to replace the improvements on property using similar construction materials and construction methods.

The Comparison Sales Method of Estimating a Property’s Value

The comparison sales method of estimating a property’s value is based on the recent sale prices of properties within the same area that are comparable in size, amenities and features. In order to be accurate, sale price adjustments must be made for comparable properties that have been sold at unrealistically low prices or on overly favorable financial terms not readily available to the buying public.

The Income Method of Estimating a Property’s Value

The income method is used to estimate the value of an income producing property based on the net income the property produces. Under the income method value is calculated using a:

1. Capitalization Rate. The capitalization rate, or cap rate, is calculated by dividing a property’s annual net operating income by its purchase price.

2. Gross Rent Multiplier. The gross rent multiplier, or GRM, is calculated by dividing the purchase price by the property’s monthly gross operating income.

Watch Out for Owners Using Fuzzy Math

A word to the wise: when you read a property’s income and expense statement, you should always go under the assumption that the owner is probably practicing fuzzy math by fudging on the numbers, and telling little white lies to back them up. Also, use a monthly income and expense analysis worksheet like the sample copy below, to cross-check everything that’s listed on a property’s income and expense statement in order to reconcile the statement with receipts and tax returns against what’s shown on:

1. Schedule E (Supplemental Income and Loss) of the owner’s latest federal income tax return.

2. The property’s latest annual tax assessment income and expense statement on file at the county property appraiser or assessor’s office.

3. All of the rental agreements for the past year.

4. Water, sewage, solid waste, gas and electric bills for the past year.

5. Repair and capital improvement bills for the past year.

The Replacement Cost Method of Estimating a Property’s Value

The replacement cost method of estimating a property’s value is based on the cost of replacing the improvements on the property minus the cost of the land to estimate a property’s value. Replacement costs are calculated on a per square foot basis by dividing the total number of square feet in the building by the per square foot construction cost. For example, a two thousand square foot convenience store that cost $375,000 to build would have a replacement cost of $187.50 per square foot, $375,000 divided by 2000.

How to Get Free Building Replacement Cost Estimates

You can usually get a free building replacement cost estimate by calling a local independent insurance broker who represents insurers that specialize in providing property and casualty insurance coverage for residential and commercial buildings. When you call a broker, tell them that you want a replacement cost quote. Property replacement costs are calculated by using a replacement cost formula that’s based on the property’s geographical location and its:

1. Street address.
2. Age.
3. Type of construction.
4. Number of stories.
5. Type of roof.
6. Current use.
7. Heating and cooling system.
8. Square footage.

Use the Eight-Step Approach to Estimate a Property’s Current Market Value

Use the following eight-step approach and the current value worksheet on the following page to get a rough estimate of a potential investment property’s current market value:

Step # 1: Log onto your county’s property appraiser or assessor’s Web site to obtain the tax assessed value of the property under consideration.

Step # 2: Search your county’s property tax rolls for recent sales of three to five properties that are comparable in size, amenities and features, and located within two miles of the property under consideration.

Step # 3: Carefully analyze any comparable properties that you find, and make sale price adjustments for differences in amenities, special features and the property’s physical condition.

Step # 4: Verify the income and expenses that are listed on the income and expense statement of the property under consideration.

Step # 5: Analyze the property’s income and expenses for the past twelve months to estimate its net operating income potential.

Step # 6: Calculate the property’s capitalization rate by dividing its potential operating income by the estimated value that you derived from analyzing recent sales of comparable properties in step number three.

Step #7: Estimate the property’s value by multiplying its net operating income by the capitalization rate you came up with for the property.

Step # 8: Calculate the cost of replacing the improvements on the property using the same building materials and method of construction.

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Go to just about any town or city in the country and you’ll find real estate entrepreneurs and investors like yourself working far more than they should for the return they are getting. And this despite all the promises of “fast cash” and “easy money” that sold the courses that got them into the business in the first place. You see, the reason many Real Estate Entrepreneurs don’t do so well is not because of lack of intelligence or their willingness to work hard. It is simply due to being focused on the wrong area of their business. We come out our training very “deal” focused, and not motivated seller focused.

If there is one thing that is the mark of someone experiencing problems in our business, it is that they cling to marginal deals. This is directly related to not having enough qualified leads to work with. You know. You only got two or three interested sellers even talking to you in the first place, so if you want to eat you better close those deals! And that sets up the worst of all scenarios; a desperate buyer chasing a luke-warm seller. The solution to this problem is to have a continuous flow of sellers calling you so that you have a choice of who you want to work with. With so many people calling, you are in the position of not needing any one of them. If any particular seller is inflexible or difficult to deal with, you can legitimately walk away from them knowing that you having another seller to move on to right around the corner.

Where this leads in your deal-making and business is after a while you only talk to the most motivated people with the nicest houses where there is the most potential for maximum profit, people who are almost pleading with you to take their house! After all, it makes little sense to speak to anybody else. These deals are the cream of the crop. People whose houses have diminished in value in their eyes because they now want something else more, and their continued ownership of the house is preventing them from getting that something else.

These are your motivated sellers. And they are the only people you should ever consider dealing with. Try calling a seller who is still emotionally attached to their house with an offer involving creative financing. Your offer is an insult to them. But it is a godsend to a seller whose life is elsewhere now and no longer wants his house.

Well how do we get so many people to call? And how do you get the right people to call? The answer lies in the basic principles of Direct Response Marketing, and Emotional Direct Response Copywriting.

As business owners our overarching goal is to make the most profit, incurring the least cost, with (preferably) the least effort. As Real Estate Entrepreneurs that means talking to motivated sellers as much as possible, avoiding time-wasting unmotivated people as much as possible, and using a system to deliver those results predictably and consistently for us. Nothing achieves this better than Direct Response Marketing! With Direct Response we decide who our best prospect is first, attract only them, then put a message in front of them that is more difficult to ignore than it is to respond.

A very successful direct marketer named Gary Halbert sums this up succinctly by asking a question. The question is: “if you were in business, say the restaurant business, and you could have one ultimate advantage over the rest of your competition, what would that advantage be?” People usually fumble around with things like best service, best food, etc. But no, that’s not it. The answer? “A starving crowd”. So obvious. So simple.

By targeting precisely the high probability sellers (i.e. the starving crowd) you want to go after, putting a piece of paper in front of those people with a message on it that speaks directly to a burning frustration they are experiencing, and then tells them exactly what to do to get relief from that pain, your odds of being on the phone with a motivated seller go way up, as the odds of you wasting time with unmotivated people still in love with their house go way down. That’s what we want. Only real motivated (”starving”) people calling us one after the other, uninterrupted, so we can concentrate on our most profitable business activity; CLOSING DEALS.

Mastering the basics of Direct Response Marketing will take you from wherever you are now to a rare place in the business world; having predictable, reliable, profitable marketing systems that will provide you with all the deals you want.

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It is no secret that attorneys deal with clients on a daily basis who have a “House Problem”. It still amazes me to this date how few investors are going after this niche market for real estate deals. Now, I do not want you to think that this is the “Holy Grail” of getting deals and that you will retire in one month from marketing to attorneys, however once you have built up a few contacts you will be amazed at how much less you will need to rely on the mainstream advice on how to get deals such as:

* Bandit Signs

* Mailing Postcards

* Classified Ads

* Bus Bench Ads

* Flyers

* Business Cards

There is a place for these marketing strategies however they all cost money. If you are on a tight marketing budget( like many of us when we got started) then building up business relationships with attorneys for referrals is a great way to go.

“Which Attorneys should I target” you might ask ? Well, let’s think.
Do you think maybe:

* Divorce Attorneys have clients that will need to sell their home.

* Real Estate Attorneys have clients facing foreclosure.

* Bankruptcy Attorneys have clients that are fighting foreclosure.

* Estate Attorneys have clients who have inherited homes they do not want or can afford.

This is a sample of attorneys that you cam market too. Workers Compensation and Criminal Law attorneys are also a great resource of getting deals from. How will you get them to refer you deals? Simple, your job is going to be to show them the ultimate benefit why they should send you business which is that you can save them time and money and help their clients who are facing the risk of losing their home.

If done correctly and in a professional manner you will be amazed at the quality of leads that will come your way.

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This one of those questions that must be answered by another question, to wit: what’s a good deal? And this is not a facetious question, because the answer depends on:

1) Your exit strategy.
2) Your financial resources.
3) Your skills.
4) Your goals.
5) The risk and hassle involved in a particular property.

So let’s say this: I’ll let you in on my favorite ways to find good deals—after I explain why they’re good deals to me.

First, let’s talk about exit strategy. If I put a property under contract, one of two things is going to happen to it. If it’s in very poor shape or out of my “farm”, I’ll wholesale it to another investor for a quick cash profit. If this is the case, a “good deal” is a 1-3 unit building that I can get under contract for about 60% of its “as is” value. The other thing I might do is to close it and lease/option it for a year or two. In this case, my “good deal” will be a one family that needs cosmetic work in a decent area that I can buy for 70% or less of the as-is value. In any case, my exit strategy determines what I think is a good deal. If I find a 40-unit apartment building that can be had for pennies on the dollar, I won’t necessarily consider it a good deal, since I have no desire to be a landlord, and know few wholesale buyers who want such things. Ditto a commercial property or a historic rehab.

Your financial resources, including the cash and credit you have available to you, also determine what a good deal is to you. Imagine you have no cash and poor credit, but find an owner who will finance with no money down If you pay 100% of the value of the property, but his terms are such that you can still rent it out for a $300/month positive cash flow. Is this a good deal for you, despite the fact that you have no equity? Could be. Is your time well spent looking for these types of deals? Yes, since they are what you can manage. Is mine? Probably not, since I can find lots of deals that cash flow AND have 30% equity the day I buy them. What’s the difference? I know how to offer owners cash. You can’t.

Your skills also matter. If you don’t understand repairs, looking for properties that need major mechanical work in order to rehab and resell it isn’t the best use of your time. And for heaven’s sake, don’t start looking for “good deals” in large multi-families until you’ve taken at least one landlording seminar! If a deal doesn’t meet your goals, it’s not a good deal no matter how cheap or how good the financing. If your goal is to hold properties long-term for the tax advantages and avoid major rehabs, no junker should ever turn your head. If you flip it, you’ve created a capital gain that you don’t want. If you rehab it, you haven’t met your own goal of avoiding rehabs.

Finally, the risk and hassle involved in a deal affects whether the price and terms are “good” or not. I’ve noticed that my wholesale buyers will pay 70% of the after repaired value of a junker property less the cost of repair—as long as the cost of repair doesn’t exceed about $15,000. More than that, and you’re talking really major rehab. Buyers of these types of properties typically want a higher overall profit. Similarly, people who buy rentals in warzones often look for yearly returns approaching 50% of the purchase price. Why? Management hassles, rent collection hassles, hassles with the city…you get the picture.

So, in light of what I consider a good deal (a 1-3 family property that I can get for 70% or less of the as-is value by offering cash) what are my favorite ways of finding good deals? In order of importance:

a) Direct mail.
b) My ad in the paper.
c) Referrals from other investors and wholesalers.
d) The MLS.
e) Door-to-door flyers.

There you have it!

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Back in about 1963 the market in Las Vegas was overbuilt with new homes. The builders were going crazy trying to figure out how to sell these new houses. Terms were being used like: the market is flat, the economy is in the toilet and the housing market bubble has burst. A lot like some of the stories you read from some of the investors in certain areas of the country.

As hard as the builders tried there seemed no way to sell any houses. This looked like the perfect opportunity for a creative real estate investor. I went to the largest builder in the city and asked him what his largest housing development was. He replied, “there was a sub-division with about 85 tract homes sitting vacant that he owned”. I said, “if I can sell all your houses in one day would you give me a free house?” You know how you get one of “those looks” like you don’t have all your marbles? His look did not bother me. He must have figured, what the heck, what do I have to loose? He agreed and we drew up the paperwork to cement the deal.

I picked a Saturday for the great give away spectacular. I ran ads in the newspaper, offering a Free Bar-B-Q with hot dogs, hamburgers, soda pop and all the great gourmet items. The headline of the ad read $5000.00 to $10,000 off the price of every house for the lucky ones only. How lucky are you? I had pre-arranged with the owner concerning the prices of the houses, so we were fine there. I instructed the tract salesman not to sell any homes until 1 p.m. It was a great turn out; hundreds of people enjoying themselves with a FREE meal.

At exactly 1 p.m. , the helicopter flew in. Inside the helicopter were thousands of Ping Pong Balls with $5K and one ball with $10K (complying with the advertising laws) imprinted on them. The balls were released over the crowd. My plan was excellent, except I for forgot about the big whooshing blade of the copter. Ping Pong Balls went hither, dither and everywhere. Fortunately the customers were pushing and shoving chasing them down to find the lucky ping-pong ball. The sub-division was sold out that Saturday with back up offers on every single home.

Creative advertising works to sell your property. The next time someone tells you the real estate market has gone bust, rent a helicopter and take him or her for a ride.

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At one point of another, you’re probably heard that “marketing” is the key to successful business. “If you’re not marketing, you’re not in business.” Or, perhaps more harshly . . . “If you’re marketing your business, you’ll soon be out of business!” But something you may not realize is that “marketing” is not just about advertising and sending out smoke signals to bring in customers. At the heart of it, marketing is simply about effective communication to get what your want. This is an essential skill not only for running a business, but also for being successful in all aspects of life. If you can effectively “sell” your ideas to the masses – or even just to your smug boss – you could stand to make a lot of money. Your ideas will earn more respect. Your confidence will grow, and as a result, your credibility among your co-workers will skyrocket.

Want to strengthen your relationship with your spouse? Communication + Getting What You Want = Marketing.

Need to train the dog not to sleep on the furniture? Yup, that’s “marketing” too.

Solid communication is essentially the key to the door of success – in all aspects of your life. But for now, “back to business,” so to speak. It’s agreed that in order to reach as many potential clients as possible, every business – large or small – needs to establish a well thought out marketing plan. There are as many ways to market as there are businesses. Just to mention the most general categories, there’s Internet/web, radio/TV, print ads (magazines, newspapers, industry journals, etc), and direct mail (postcards, flyers, etc). There are specific techniques and methods that apply to each of these methods, as well as different “tweaks” that would be employed for each type of business or product. Still, there are basic concepts behind marketing that always apply, regardless of the company type or marketing method. Take a good look at these established “do’s and don’ts” list. There are probably at least a few tips below that you can incorporate into your business practice immediately to increase your marketing effectiveness.

Grab Your Potential Client’s Attention

Perhaps more than ever before, people are distracted and have a short attention span. Use a compelling, involving image to your advantage. If you’re creating a marketing piece with text, make sure to “sell” the reader with your first sentence. The first sentence of anything you write – whether that is an email subject line, an opening to a promotional letter or the headline of an online ad – is the most important part of the whole piece. After all, if the customer never starts reading, they’re zero chance of them reading anything that comes afterwards! When there’s a lot of text, it’s not the reader’s job to stay interested and keep reading – it’s your job to grab their attention and keep it. When in doubt, cut text down! Never make it longer than it needs to be. Don’t overload your potential customer or client with extra information and data in a business card, post card, flyer, or radio ad.

Keep It Personal

“Dear Friend, I have to tell you a secret. People yearn for personal, one-on-one contact. I think they want to be treated as unique individuals.” Did the above statement hit you a little differently than the rest of this article? If so, you can see that in anything you write – even an Internet ad – you should make your potential customer feel special. There are many ways to do this. In email or letter correspondence you could use a personal greeting, or their name (if you know it). Or, you can make the customer feel like they’re part of a very special, small group. No one wants to feel like just another face in the crowd!

Make It Clear What You Want Your Customer To Do

While none of us are likely to admit we like to be told what to do, in reality, it works well for advertising and marketing. We like our advertising to tell us exactly what our best option is.It’s your responsibility as a marketer to command your reader. Tell them exactly what you want them to do.

“Order now by clicking here…”
“Get started today by calling…”
“Call your personal consultant right now…”

And, here’s a related idea. Americans love choices – in fact, we’re used to having too many choices in our land of plenty. Perhaps you have stood confused in the aisle of the supermarket, trying to decide which of the hundreds of kinds of cold medicines to buy. A similar “paralysis of analysis” can happen to your customer if you offer too many options in your marketing. Don’t risk confusing your customer by putting too many attractive choices in an ad. You run the risk of inviting your potential client to ponder which one is best, and the result in no choice/sale at all. Whatever it is that you want your reader to do, make sure you tell them - in plain English.

Be Accessible

Have you ever seen an advertisement or come across a website that promoted a service or product you were interested in? But, when you went to find a phone number, physical address, or email contact, it was hard to locate. If you’re the impatient type, you might have even gone to a competitor instead! Don’t be that “hard to contact” business. Always include an e-mail address, a phone number, and any other critical contact information in easy-to-spot locations on all of your printed documents, your website, or any other marketing pieces.

Be Honest

We humans are funny creatures… we won’t do much of anything if we don’t trust someone. You need to build that trust through your advertising, through your communication and through your support. But you don’t always have the ability to build a lot of trust in one specific marketing piece. So, you need to work extra-hard to establish this critical “relationship” between your company and the customer. Your claims should always be believable. You simply can’t trick someone into buying something (well, you don’t want to at least). Most savvy consumers can sniff out a scam. If you’re going to make claims in your marketing, back them up with facts or proof.

Get Emotional

We’d all like to think of ourselves as highly rational and intelligent beings. But . . . the fact remains that its our emotional side that often spurs us into action. Design your marketing to invoke your target customer’s emotions. Firing up feelings of desire, curiosity, hope, fear, surprise, respect, humor, or even anger can make your message (or what you want them to do - #3 from above) that much more powerful and memorable.

Show Them How You Can Improve Their Lives

A related way to really connect with your potential client in marketing is to show them how your service can make their lives better. It all comes down to a “problem – solution” approach to ad creation. Before starting any marketing campaign, you should first consider these simple questions:

• What are my customers’ problems?
• How does my service solve those problems?

Remember, you’re still relying on basic human emotions. We all have real problems, and we carry them with us through our day. So by employing the “problem – solution” marketing method, you appear to present a perfectly rational argument. But, when the customer sees the benefit, it produces an emotional response of “wow, that would be really great!” or “that’s just what I need at the end of a long day . . .”, etc.

Don’t Self-Promote Yourself and Neglect the Customer

It’s fine to give the client compelling reasons to spend money with you. But if your marketing campaign brags about the size of your operation, how your product blows away the competition, focuses on your company growth, and doesn’t once mention how much your product or service benefits the customer, you’re possibly ignoring – and insulting – the very people your ad is targeting.
Consumers typically want the following two things in order to spend money:

• Be shown a solution to a problem they have, (or make them aware of that problem)
• Be offered an attractive solution to that problem.

Provide compelling reasons that your business provides the best way to address that problem, and acknowledge the customer’s belief that they are the most important part of the business transaction. Do this well, and your marketing efforts are sure to be a hit.

Follow Up!

Don’t assume that a customer remembers what you discussed last week, or that they received (and actually read) that pretty sales flier you mailed out a month ago. If your business deals with a limited number of clients with highly personalized service, consider calling them a week later. Or, if you have hundreds or thousands of people in your leads list, mail a follow-up marketing piece or email that reminds them of the special offer you made previously. One of the cornerstones of marketing is repetition. And, you will often be rewarded for going the extra step to remind a customer of what an incredible offer you extended to them previously.
Sometimes, that additional contact is all it takes to convert a consumer who is on the fence with a “hmm, I like this, but I’ll decide later” mindset into a “I shouldn’t put this off any further – I need to do this now” customer. Use the above eight tips to make your “pitch” compelling – then help your customer to take the next step in completing the buying process.

Monitor and Adjust Your Marketing

You’ve invested both time and effort you’re your marketing strategy. Maybe you’re convinced it’s the best campaign possible. But don’t be “sold” on the merits of your own work and ideas. Take a hard look at the results, track how your marketing performs over a period of time (don’t make a decision to change things too quickly) and be open to making adjustments if necessary. It might be worth hiring an outside consultant to review your campaign and results. It’s better to have to spend more money retooling your marketing program into something that brings positive results than to keep pushing out a weak or ineffective message, or the right message by the wrong channels of communication.

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