Real Estate investing can be fun and rewarding. At the same time, it can be frustrating and time consuming without much reward if you don't know which areas to avoid and which mistakes to avoid.
The following five (5) reasons cause 50% of investors to fail in their first year.
1. Lack of Target Market
2. Lack of Focus
3. Taking uncalculated risks
4. No lead generation systems
5. NO systems to make offers
6. No system for funding deals if you do get them
1. Lack of Target Market: One of the biggest mistakes I see people make is starting out by running generic untargeted ads with no clue why they're doing it. Who do you want to target? This fundamental begins, first, with some studying of the market -- or you can check with your local realtors to see if it's a buyer's market or a seller's market.
Target marketing is not about you, your service, your knowledge or your lack of knowledge in the market...it has to do with who your TARGET MARKET IS. Well...Who is your target market? Where are they and how do you reach them?
As of the time of this writing I have two favorites.
The first is free & clear property. By this I mean no mortgage (or very small mortgage relative to value) on the property. Many of these sellers do not have an immediate need for cash or they would have already pulled it out of the property. If there's a lot of equity in the property then that gives you many different ways to exit (profit) on the deal.
If there's no equity, you're stuck trying to do a discount with the bank (called a "short sale") and/or negotiate with the seller and if you do purchase it you're waiting over time and praying for the market to push things up to capture appreciation. This is no fun. Why waste time on these types of deals. Now, there are cases where sellers are behind on their payments and the house is over leveraged (owe more than it's worth) and in that case you can refer to a real estate agent that is familiar with selling homes via the short sale process. If you are an agent, there is a hidden gold mine here for you.
Other advantages of this target market of free & clear include:
" Lots of free & clear property owners are older and prefer to take monthly payments on the property versus cashing out.
" Many owners of free & clear properties do not want to face the tax consequences of selling outright and, therefore, prefer payments.
" Many times you'll find owners of these properties have several others in their portfolio.
These advantages are all good news for you. I recently received a call from a gentleman with three properties. Think about that - a target market that produces three or more leads from one letter.
I sent a yellow hand written note to a listing that had expired in my local market place. Come to find out, the owner owns many more properties. I'm going to see these properties next week. You can ask me what happened next time you see me, but I would say that was money well spent. A piece of paper, my daughter writing the letters (or you can outsource when bulk mailing) and a .41 cent stamp. That one deal can be worth several hundred thousand in equity over the next several years.
My second favorite is expired listings. Expired listings are always great because they have been on the market with a realtor being marketed the conventional way. By that I mean - the property was stuck on MLS (multiple listing service), ads were run, maybe there were some open houses (which don't work) and then they left it, hoping it would sell. Well, if it didn't sell, usually the owners do not want to speak to another agent. In comes you - the transaction engineer - to solve their problem.
I remember Earl Nightingale saying that our compensation will be directly proportionate to the demand for our products or services. One of my mentors talks about us getting paid in direct proportion to the size of the problems we can solve for the home owners.
If a listing expires, even in a sellers market, there's an opportunity for you. These expired listings become quite plentiful in a down real estate market. As of the time of this writing which is January of 2008, the market is still a buyer's market and there are hundreds of expired listings in my market place - and yours.
I've given you two targets that I like right now, but here are some others just to get you thinking:
" Divorce
" Probate
" Bankruptcy
" Geographic Farm Area
" Ugly Houses you spot driving around or from referrals
" Frustrated landlords
" Attorneys
" People who cannot afford payments
" People who have lost their jobs
" Death of a loved one
" Failing health
" Failing business
" Job Transfer
" Retiring owners
" In foreclosure
" Just before foreclosure
" Absentee owners (another one of my favorites)
2. Lack of Focus: One of the first thing I ask clients is what they spend their time on. Your time and focus must revolve around cash flow at the beginning or you'll have no business. Some questions I like to ask and that I urge you to consider:
1. What is my break even point with my family's budget? How much bare minimum, in other words, do I need to pay all my bills and break even?
2. What is my break even with my new investment business?
3. Is what I am doing each hour of the day moving me closer to my goals (I like that to be on an index card in front of you or on your desk where you can be reminded daily to stay focused)?
4. What should I spend my time on to make certain my family and business goals are met?
5. Who am I surrounded by and listening to? I call it the dish rag theory. Many speakers and trainers will tout their system and try to throw a dish rag to slip you up - stay focused.
6. Do I have systems in place to weed out the time wasters?
3. Taking uncalculated risks: Real estate investing can be very lucrative if you avoid taking uncalculated risks. Some of them include: Not getting comparables or totally forgetting to verify comparables, writing personal checks instead of being creative (a transaction engineer), forgetting the basics, signing personally for debt instead of being creative with your sellers and failing to dig into the details of loans you take "subject to".
4. No lead generation systems: It never ceases to absolutely amaze me that realtors, real estate investors and many other business owners don't even include lead generation in their thought process and/or business plan. I remember when I was a realtor (prior to learning how to capture all sellers via my investment division) learning methods from my coach Mike Ferry. Mike used to tell stories about how he had to do calls, write letters, run ads, etc - generate non-stop leads. It used to motivate me to go do that in my business. I recommend to any business owner to concentrate on LEAD GENERATION.
My son Nicholas started his own speaking business in 2007. His mornings now are filled with making calls, visiting schools and nonprofit organizations, sending out his audio interview CD, etc. - generating leads. This fundamental is critical to your business. Now, an important distinction that I want to make here is the difference between automated direct mail and other automated systems versus cold call prospecting and other phone prospecting. What is a better use of your time - finding a needle in a haystack or speaking to needles that find you?
I'll show you how to speak to only the needles shortly...But first, what do all business owners hate? They hate being advertising victims. By that I mean - receiving mail from people who have wasted money on advertising, not knowing exactly what to do, but feeling that they HAVE to advertise just for the sake of it. This was me in my building business in the early 90's and in my realtor business in the mid 90's until I met Dan Kennedy. He taught me what he calls Magnetic Marketing a dynamic system for attracting your most desired leads without you chasing them. Business owners also hate not knowing where their next customer is coming from - uncertainty.
Before we go further, let's be certain that we understand what business you're in. You're not in the real estate business...you're not in the investment business; no, you're in the marketing business.
You're going to generate leads by delivering the right MESSAGE to the right PEOPLE at the right TIME. The second you fully understand that, you'll start earning big profits.
Next you can mail a simple hand written yellow note to them. Yes, a hand written, personalized note on a yellow piece of paper. When you do this you'll want to use a hand addressed envelope that is the size of a card or invitation with a regular stamp - not from online stamp print outs or bulk mail. This gets your mail opened.
Even if you have an incredible message in your envelope, if the note never gets opened because the envelope contains a typed label on the outside and a computer generated stamp, it might as well have never been sent. It's going to end up in the basket. Don't you sift through your mail? This yellow letter in an invitation style envelope that is hand addressed will increase your chances of it getting opened.
You can look at an exact sample that we get done through a service. Here is a format you can use on your letter - remember, hand written:
"Hi (seller's name),
My name is (your name) and my wife/husband's name is (spouse name).
We'd like to buy your property at (property address).
Please call us at (contact number).
Thanks,
(Your name)"
You simply mail this yellow letter to your targeted list and get the phone calls coming in. When you put a number on your yellow letter, be sure to make it a local number. It doesn't work to say you are buying property and it looks real personal - but, then you put an 800 number or out of state number on it.
I know what you're thinking now - do I have to write out hundreds or thousands of letters by hand? Of course not. You can write some by hand (expired listings that come up weekly), you can copy your letters using yellow lined paper, you can copy your letters at a local staples, etc.. When making copies, you use black ink and leave the name and property address blank and just fill it in.
Alternatively, you can outsource this task which is what I prefer. You can outsource it to a local over-55 community, a hospital or someone looking for some simple part-time work. We use a service for this which handles the writing, copying- everthing - and ships them to us to mail. This is your first step in automating your business so you can have a life.
You can also run an ad in your local (small) paper. I have found that the larger papers are too expensive and not cost effective. I usually pick a small town or city paper and keep a simple line or block ad running for the entire year. One of my local papers in R.I. charges $85 per month. That ad is usually good for at least one deal per year so, using the average profit of $27,000 or better per deal, $27,000 from a $1020 investment is a good deal in my book!
You now have your ad running and yellow letters hitting your target market. Now, don't only send two letters out and then email me asking why you didn't get a deal or two. It will cost you approximately $750 - $2200 in marketing per one deal. Let's say it costs you $2500, $2500 to get $27,000 or more = STILL a good deal in my book!
The reason the costs vary is because it depends upon a few variables - buyers' market or sellers' market, your target market, your ability to follow exact directions when doing your yellow letter and not messing around with it, and whether or not you decide to bite write or make your own yellow letter copies to save money.
5. No systems to make offers: One of the biggest mistakes I see that can literally shut you down is your inability or lack of systems to construct and present offers. Now, the main reasons for this can be broken down to three categories: (1) Lack of knowledge to prescreen out sellers that are out to see if they can get retail or higher versus sellers that need to sell, (2) Fear of rejection, (3) Ability and confidence to analyze a deal and get it funded if accepted.
6. No system for funding deals: a simple goal to remember is that you want to buy as much equity up front in a deal while using minimal to no cash of your own. Things that can impact you obtaining funds include, but are not limited to:
" The price you purchase at relative to the loan you need (loan to value ratio)
" Who your lender is and what their policies are.
" How you purchase the property: all cash, subject to, owner financing, option only.
" Your exit strategy for the property: retail, wholesale, lease-option.
Save your personal fund for those months that you'll need to bridge the gap between closings.
