Smart investors are changing their model of deal sourcing.
Those who are surviving and thriving through the effects of the pandemic and current economic shifts are leaving the status quo behind and finding new ways to secure and buy real estate.
If you’ve been seeing prices rising and cringing at extreme asset prices, or have been getting frustrated by trying to find deals where the numbers really work (believe me, I feel your pain), then this is a mindset shift you need to consider.
Here’s the breakdown of the old model versus the new model of acquisitions and why this shift is so important for you.
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The old model of property acquisitions
The traditional method of finding and buying properties is rife with issues for investors. It is leading more and more to low returns and inconsistency in deal flow and income. At best it leads to a lot of extra risk, stress, worry, and overpaying for properties.
The old model of buying properties relies on the menu of properties being advertised and pushed on you at any time—relying on real estate brokers and agents to bring you their listings and popular online public listing portals. In this situation, you and your finances are really held ransom by the brokers and seller optimism.
You are either waiting for deals to fall in your lap or battling in bidding wars for the same properties as everyone else at premium prices. The good stuff often isn’t on this menu at all.
Not only can this lead to the appearance of a shortage of deals, but it also makes it very tempting to take on too much risk and be even more aggressive in your underwriting.
This is extra important right now, when many brokers are convincing sellers to list at lofty prices, and lazy investors are happy to overpay in bidding wars on the little they can find.
Why is the old model out of date?
For example, it was recently reported that out of desperation, one fund paid a builder a 50% premium for their units. One of the recent guests on my podcast in Kansas City, who has built a portfolio of over 4,000 units worth $400 million, told our audience that he is seeing this problem even in the multifamily market on 75-plus-unit apartment complexes.
It used to be that he would face two or three local competing buyers. Now that number is up to 10 or 13 competing bids and they are coming from all over the country and internationally. What makes that worse is these investors often are just happy to park their money in real estate due to its hedge against inflation, or are used to investing for negative yields and negative cash flow to sell in a couple of years and get profits from the property appreciating. They’re willing to pay way more than makes sense for most investors.
We personally encountered this even in Louisville, Kentucky. We ran our numbers on the deal, and at a stretch, we could have almost justified offering $7.5 million, which was probably already too much. Then the broker said the seller was looking for $12.5 million. Completely out of the ballpark.
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The new model of property acquisitions
We’ve been making this shift for years. If you want to have any control over your deal flow, investment performance, or delivery to your own investors, you have to find a better way to acquire deals. Even more so if you don’t want to be stuck speculating or taking on supersized risks for millions of dollars, never mind actually achieving double-digit returns.
The new model is all about how to acquire better deals, with better value, from more motivated sellers. This is where you’ll find more negotiation points, less competition, better prices, plenty more inventory, and higher ROIs.
The new model is about taking control and going out to source the deals yourself—specifically off-market deals. In this market, there are probably infinitely more potential acquisitions in the shadows that aren’t actively for sale yet. There are at least millions to filter through and make smart offers on.
This means lead generation. Pulling potential leads from various data sources, building your own pipeline, working your CRM, and reaching out through methods such as direct mail, cold call, and text blasts.
The next step, where you can really differentiate yourself and get the edge, is following up and converting those leads into contracts. Many times, when you first reach out, the owner may not have a problem you can solve, but things change. It can take creativity, discipline, and a willingness to do what other investors aren’t willing to do (in an ethical way of course), but it can pay off big.
The follow-up will allow you to separate yourself from the competition. This alone saved us just under $800,000 on our latest 156-unit deal.
Taking a hybrid approach
Some of you may not be willing to completely leave the old ways behind and throw yourself all into the new model of acquisitions yet. That is understandable. Consider a hybrid model.
Try taking more initiative and control and implementing the new model. If you are brought irresistible deals through the old model in the meantime, that’s great, buy them.
Then monitor what’s working. Where are the deals you’re closing on coming from? Where are the best-performing deals coming from versus the worst performers or biggest risks?
Start removing the non-performing and underperforming parts of your model and replacing them with more of the better sources. Keep tweaking and improving.
This new model, and even the hybrid approach, is much more evergreen. It will keep you surviving and thriving in all market phases. If you systemize your processes, then the new model can deliver more predictable results and the highest possible returns by providing value and solutions directly to off-market owners.