The Making Of A Good Real Estate Deal: Examining Risk Vs. Reward

Every real estate investor is constantly in search of a good deal. The reality is that there are very few of these deals to go around. What one investor may consider a great deal, another may walk away from entirely. The first thing one thinks of when considering a good deal is obviously profitability. The bottom line is important, but considering risk vs. reward is more important. There are also considerations dealing with time, location, ease of the transaction and networking opportunities that also can affect what a good deal is. Just about everyone wants a good real estate deal, but this differs greatly from investor to investor. What are your criteria?

If you were stranded in the woods and someone offered you $100 for a candy bar, would you consider the offer to be a good deal? Under normal circumstances anyone would jump at this offer, but given your surroundings, the money doesn’t do you much good. The same analogy should be considered when evaluating certain real estate deals that come your way. You may be presented with offers that appear too good to be true, but on closer examination you find out they really are. A good property deal for you is one that you can do something with after you take ownership. If you can’t resell or rent the property in question, it offers you little to no value.

The first factor in evaluating the strength of a deal is time. If you are presented with a short sale opportunity that will eat up the better part of a year and you have to deposit the balance in escrow, the property may not be worth pursuing. Any deals that require significant time must equal significant reward. Your time is the most important asset you have in business. If you spend it all on just one deal, you will lose the ability to further grow your business. You may hit a home run on that deal, but it will be at the expense of meeting new contacts and expanding your portfolio. On the flip-side; if there is a deal that you can get in and out of while making less, it would be a better deal than the alternative. If all you look at in evaluating the strength of a deal is the bottom line, you are missing out on the big picture.

The next factor is always location. We all know how important location is in real estate, but it cannot be said enough. If you have a property that is in a prime location, but you have to pay at or near full price, you may think of this as a bad deal. If the location is truly desirable, in a growing town with low taxes and high employment, it will hold appeal for the long term. You may be paying full price now, but that demand will never wane and you will always have options down the road, whether you want to rent or sell. It is these options and the demand the property brings that is worth the price. There is also a lot to be said about the peace of mind it provides. You may not hit a home run, but you are as confident as you can be that the property won’t plunge in value.

The next factor to weigh has to be the ease in which you can complete the transaction. If you have worked with the realtor or seller in the past and you know how they work, it can make the deal worthwhile. As investors, it is easy to get jaded by some of the returns we see on certain properties. The reality is that if you can make 20% on your money with a short term property, it is a pretty good deal. You need to always weigh the risk vs. reward, but if it is an easy deal it is worth looking into. Conversely, if the deal looks good on paper, but you have to fight with a lender or seller for months, it may not be worth the time you spend on it.

Finally, a good deal should be merited on what you can do with the property. If you get a deep discount on a property in a farm region, you may have a difficult time reselling it. It doesn’t matter if the property is in a rural area or city block, if it doesn’t fit with your business plan it may not be worth it. This is not to say that you can’t go out of your comfort zone on given properties, but the time and money spent to get there comes at a cost. If you are unfamiliar with rehabbing; you need to line up multiple contractors, finalize your budget, have available funds, do the work and find an end buyer for the property. This can be learned, but without experience you run the risk of going over budget and turning a profitable deal into a disaster. The property could be a perfect wholesale candidate to a fellow investor. It is important for you to be able to recognize this. You may not make top dollar, but you can still make some money on a deal that your risk was minimal and you got in and out in a short amount of time.

Analyzing deals takes time and experience. The biggest thing to recognize is that every deal needs to be examined before diving in. A good deal on paper may end up being far more of a headache than it is worth.