Real Estate Investing By Mail?

One of my favorite real estate investing stories is about a man in California who used to just send out offers on a hundred MLS listings at a time. He never looked at the properties. He just offered 25% less than the asking price on each one, trusting that the listing agents were pricing these homes somewhere near the actual value, and so assured that he had a good deal if the seller accepted.

Sometimes a seller would accept his lowball offer. This happens more often when you make hundreds of offers instead of just a few. Of course, he always included an "inspection and approval" clause in the offer. This is common, and it meant that if the home had real problems, he could back out of the deal later without forfeiting his deposit. In the meantime, he very efficiently found the truly motivated sellers.

My favorite part about this story, apart from it being true, is that it demonstrates that success in real estate investing, as in life, is often just a "numbers" game. Try enough times, and you are more likely to succeed.

The story also demonstrates that with a good clause or two in the contract, you don't have to worry about making an offer before you see a property. This is true with buy investment property or your next home. If you make the offer in the right way, and the property it isn't everything the seller says it is, you can reject the deal with little or no loss. However, why wouldn't you want to look at the property?

Real Estate Investing By The Numbers

You might skip looking at a property before making an offer because of time constraints, especially if the property is far away. If you can't get it for a price that makes sense, why spend your time traveling to look at it? A good price and terms that make sense - these are what is most important.

You'll probably want to look at the actual property eventually, but whether or not you see the property before you make an offer isn't nearly as important as making sure the numbers make sense. For example, investors value income property according to current cash flow, or at least they should if they want safe and viable real estate investments, so start by verifying income. Ask for actual income figures for the past 12 months. It's a good idea to think about the potential income if the rents are raised, or vending machines are added, but you should base your offer on the current income.

Fortunately, this can be done by phone and by mail. You can also verify all expenses this way, but if any expenses listed by the seller seem unusually low, they most likely are. Substitute your own best guess in place of any suspicious numbers.

Subtract the expenses from the gross income to determine the net operating income, then apply the appropriate capitalization rate to arrive at the value. Not sure how to do this? Learn how, don't just ask someone to do it for you. You really should understand the principle of how to figure value based on a cap rate. Real estate investing is all about the numbers.

Subtract your expected loan payments (talk to your banker), from the net operating income to see how much cash flow you'll have. Now you can figure your cash-on-cash return based on how much of your own money you put into the deal. Simply divide the annual cash flow by your investment.

Do the numbers work? Then you can safely make an offer. The various inspections will tell you if there are problems that will affect the cash flow, and you can always renegotiate if there are such problems (assuming you made your approval of all inspections a contingency of your offer). Of course you can go look at the property now, but real estate investing is about the numbers.