Why You Should Perform a Dead Deal Autopsy

It is never too late to gain quality information from a DDA (Dead Deal Autopsy). However, somewhere between two-thirds and three-fourths of all deals are done after the original offer is turned down. Hence, resubmitting offers on a regular basis is great strategy to prevent a Dead Deal in the first place.

Gathering information about what could lead to future done deals or gaining a clearer understanding of why a deal was lost may be the “secret sauce” to success in real estate investing.

Obviously, when a deal is lost it can be invaluable to determine who got the deal, at what price and why. In almost every case, it is easy to find out who got the deal. Stopping by the property on lost rehab deals shortly after losing the deal could afford an opportunity to find out who now owns the property and just what kind of rehab they are doing. Getting business cards from contractors and sub-contractors is usually a snap, and the quality and speed of their work may be why you were outbid.

A little investigation could also uncover how the purchaser presented a higher bid but still made money. Maybe they saw how to open a kitchen, add a bathroom, or dynamically enhance the curb appeal.

Once you get in contact with the new owner, talk to them and see if they will share critical information on how they are able make a profit bidding higher than you. It is amazing the information people will share if asked.

On rental units, the concept is the same. Skilled investors will often show you how slight improvements to the rental units can make a large increase in the value of a property. For example, if rent can be increased by $100.00 a month, the property value goes up $10,000.00.

What you learn may not be what you want to hear but it will be what you need to know. If you do enough DDAs you will find there were cases in which you never had a chance. Your offer was only there to keep their favorite buyer honest. Wholesalers can lose deals to someone who just waits for your contract to expire.

In summary, mastering thorough DDAs will open doors to success. You will, one, meet the key people who can help you in the future and, two, understand how to correct your mistakes so you can win the next deal and make money on it.

Real Estate Demographics Research – Rental Rates

There are many things that could affect the real estate market.  The main factors that forecast the trend in the real estate market are the economy, the population growth, the rates of interest for loans, and the demographics.  In fact, according to a study conducted in 2014, there will be an increase of demand for housing over the next few years.  The reason for the increase in housing demands is the surge of population growth.  Population growth depends on two basic components, natural and non-natural population growth.  Natural population growth is rate of live births that occur in the area.  Non-natural population growth refers to the migration of people in a place affecting the demand and supply for food, housing or other needs in that environment.

Demographics are defined as the study of a population’s characteristic. Age, sex, race, education level, economic status and other factors used by the government and private sectors for many purposes, such as forecasting and identifying the buying capabilities of a population on a regional or national basis.

POPULATION

Real estate researchers have forecasted the surge of population growth.  If the data from the research proves to be true, there are four generations in today’s market on the lookout for housing and two generations play a very significant role in the development of housing demands.  The economic capabilities of today’s population tend to favour more on rental rather than homeownership.  The recession has greatly impacted the demand for owning a property and the demographics show that many people are opting to rent rather than own.  Even property owners who had initially planned to sell their homes are renting them out instead because rental rates and high tax rates are lower for rental investors.

GEOGRAPHIC REGION AND JOB OPPORTUNITES

Since the current market is now recovering from the recession that lasted from 2008- 2011, unemployment rates are going down.  A lot of Americans now find themselves moving or migrating to areas where work is available.  This migration makes a lot of people choose to be practical by renting rather than buying a house.  There are certain cities across the country like Los Angeles and New York where rental rates are surging due to the demand for rental properties.  Even industrialized parts of these cities are transforming into residential areas to accommodate the ever-growing number of young people who want to live there.

AGE

Age is another demographic variable the greatly affects the rise in demand for rentals.  Young people ranging from 18-35 years old are the largest percentage of renters.  Traditionally, these young people would have become first time homebuyers as they advance in their careers.  They are predicated to choose renting versus owning due to changes that happened in the economy (recession, job loss, low-income).  Another reason young adults find renting a more attractive choice is that they don’t feel the need to be burdened with a mortgage loan.  Most young adults believe could not afford to own a house and face the financial obligation that it entails.

Demographics cannot be ignored because it greatly affects, if not, dictates the fate of business investments. The basic rule of supply and demand tells us if there is a high demand for a certain product, the more valuable the product becomes.  If there is a high demand for rentals in an area, the higher the rental rates become.

Demographic Research – Housing Inventory

There are many statistics a real estate investor should pay attention to. One of those statistics is housing inventory. This statistic is commonly referred to as “months of inventory”. A simple definition could be, “The number of months it would take to sell all of the homes currently on the market.” For example, ten months of inventory would signify more of a buyer’s market, meaning more homes to choose from. Whereas four months of inventory would denote more of seller’s market meaning fewer homes for retail buyers to choose from. Knowing this statistic would help an investor tell where the market is and what strategy would be most beneficial.

One of the best ways to research the housing inventory is visiting www.realtor.org. This website is hosted by the National Association of Realtors (NAR). The NAR has an interest in gathering housing statistics so that REALTORS and other real estate professionals can keep their eye on housing movement. At the tops of the webpage you will see a tab entitled “Research and Statistics.” By clicking on this tab you will find many types of statistics including housing inventory.

Another resource to find these statistics is your states’ board of REALTORS website. You can find this website with a quick google search. The state’s Board of REALTORS will also keep tabs on housing inventory to help local real estate professionals. An investor is able to use this information to help in evaluating deals.

The previously mentioned techniques will give you good statistics. If you want local statistics, and you do want local information, you should turn to your real estate professional. A REALTOR who has access to the Multiple Listing Service (MLS) would be able to research housing statistics for an individual neighborhood if you need data as specific as this.  The data from the MLS is much more accurate and local than other resources you will find. Simply ask a REALTOR for the data on the current housing inventory. A good REALTOR will supply you with this information along with other statistics that will benefit your business.

Using the housing inventory statistic to determine the market is important for the investor. If we are in a seller’s market then a buy, fix, and sell strategy would be a good choice. Conversely, an investor in a buyer’s market would be better served using a buy & hold strategy. Therefore, the housing inventory statistic is key to determine the market we are currently in.

Appreciation Rates

When investing in rental income properties, two sources of income come into play in determining an investor’s total ROI (return on investment).   One is the cash flow return on investment and the other is the appreciation rate of return.  The cash flow is determined by total income from rents minus all expenses and the appreciate is determined by how much the property increases in market value over time.  In many States throughout the Midwest and Central East a typical cash flow return might be 10-12% while the appreciation is only 2-3% creating a total ROI of 12-15%.  In other States, especially the west coast and sunbelt areas, the cash flow return may be much lower such as 6-8%, but the appreciation can be as high as 5-15% annually, creating a ROI of 11-23% depending on the state of the economy in those states.  These areas can also depreciate the same amount at times where the value of the properties drop dramatically.

Some investors are more interested in the cash flow return so that when house prices drop they still receive a good return on their investment.  Other investors speculate on house prices going up rapidly and aren’t as concerned with the amount of cash flow return on investment from rents because they are banking on making a great deal from appreciation.  This will be the case as long as prices are going up, but if the economy shifts and prices drop then those investors will not make out as well as investors who make sure the net rental income returns are healthy.

So, what effects appreciation rates in different areas.  The simply answer is supply and demand.  As more buyers move into a market place with the same amount of properties available, the prices will increase.  When people hold off on buying and lots of homes are being manufactured, the prices will start to come down.  Highly desirable areas, like sunbelt and coastal regions, attract more migration and higher demands when the economy in those areas is good and there are plenty of jobs.  Smaller towns, with harsher weather, have less growth and can even decrease in population as people move out to find more pleasant environments.  But these trends go in cycles with people moving to the fair weather States when prices are deflated and moving back out when prices become too expensive; opting for less pleasant weather as a trade-off for a lower cost of living.

Building trends also effect the economy.  When large builders stop developing new subdivisions because of a stagnant economy, supply lessens and demand eventual catches up with it.  Then as buyer’s confidence in the economy returns a buying frenzy can pursue driving the prices up rapidly in areas of high demand. The reverse also happens when builders start constructing massive subdivisions, adding a multitude of homes to the market, and the stock market drops or interest rate raise causing investors to become apprehensive of the future thus holding off on purchases.  Then prices can drop rapidly because supply out paces demand. 

So take appreciation into your financial scenario when determining the overall ROI of an investment, but remember that cash flow will continue pretty steadily in any area, whereas appreciate can fluctuate drastically in areas where it has a tendency to go way up or down.