I hear a lot of this, mostly from residential Realtors: "I really like to work with people and can help them buy the homes of their dreams! I got into real estate to make money by selling beautiful homes to them!"
After talking to some of these people, it is apparent that many have no clue about how their markets and the numbers complement each other in real estate. Many of the residential Realtors I met a year ago now have second jobs at the local Burger King (subsitute your favorite greasy spoon diner here), or are out of real estate completely and working an hourly job somewhere. Most of them know their markets but few of them understand how to apply the numbers to their markets. For example, it is common to most markets that most people want a 3-bedroom/2-bathroom house...BUT...
Only 30% of them have "A" credit and can qualify for conventional loans while the other 70% have to obtain "subprime" loans because of dinged credit and/or low income (ref. Robyn Thompson). These days, because of the mortgage loan mess we're in and the elimination of most subprime mortgage loans, I'm guessing that the percentage of people with "A" credit is even lower than 30% now and there are even fewer retail buyers than ever before. By knowing this, you can quickly weed out the suspects from the prospects and stop wasting your time with people who can't buy any house you have for sale. Also, most Realtors only want to serve that 30% of the population with "A" credit. Why not avoid the fierce competition in that relatively scarce market and figure out a way to serve the remaining 70%? Hint: seller financing.
What are some other numbers that can help you with your real estate business? I give some below. Every time I've violated the numbers, I've been burned. So if you learn nothing else from this post, just learn that if you break the "rules" of this business, you'll eventually pay a price to relearn those rules.
Many gurus sell wholesaling courses and proclaim how "You, too, can become a millionaire by wholesaling 10 houses a month like me!"
There are gurus who have wholesaled their ways to millions but let's look at the numbers (ref. Ron LeGrand, Marko Rubel):
Only 25% of the good deals are "ugly house" deals (rehabs, wholesales) while the remaining 75% of the good deals are "pretty house" deals (subject to's, lease-options).
This tells me that you have to have an a$$ load of marketing to "wholesale your way to millions". I know of one full-time wholesaler in Tampa, Florida (Mike Collins) who said he spends about $8000 per month in advertising to get enough leads to be able to sustain his business. If you are charmed by the wholesaling gurus into thinking that you don't need any cash or credit to become rich as a wholesaler, would this little statistic maybe help guide you to a better plan? I know a person in Augusta, Georgia whose business model involves buying houses "subject to" and then reselling them with lease-options ("pretty house" deals). He owns more than 50 houses this way and has done very well by paying attention to the numbers. His marketing is less than $1000 a month, versus the $8000 a month he might need to maintain his business at the same level as a full-time wholesaler.
A few other statistics that might help you design a more efficient business:
- Over 80% of the people in preforeclosure who manage to stop the foreclosure process by catching up payments, declaring bankruptcy, or other means end up losing their houses to foreclosure in the end (ref. Mark Klee and Caryn McKinney). This tells me not to stop marketing to people in preforeclosure just because they somehow get the foreclosure stopped. They'll be back and probably more motivated than ever to sell you their house. As a caveat, I've violated this rule four times by lending people money to catch up their mortgage loans and it's cost me about $57,000 in "tuition" to keep repeating this class. Hey, I'm a slow learner, so shoot me.
- Most of your buyers will be in the median house price range for your area plus or minus about 20%. If the success of your business model depends on quick resales of the houses you buy, do you really want to buy those $1 million mansions in your market if the median house price is only $170,000? What if you had a short-term, high-interest hard money loan on one of those $1 million behomoths? If you go against the flow with this statistic, just make sure your mortgage loan isn't from Tony Soprano or Don Corleone.
This blog post was part informational and part rant. I hear all the time from Realtors and others trying to get me to overpay for a house by telling me about "how great a deal it is" or how "it has so much potential" (a favorite Realtor phrase). Whenever someone says that to try and get me to buy into a deal, I look at the most important number of all: How much of their own resources do they have at risk in the deal.
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