Real estate deals can be lumped into two basic categories. They are known as transaction-based and relationship-based.
Transaction-based deals are the ones where you really don’t meet anyone in person. You buy these properties in places like auction sites, the MLS and foreclosure auctions. This deal type is attractive because, for the most part, you can buy them from the comfort of your home while you’re sitting in front of a computer. You can do this in your spare time, and you can even buy all across the county if you wish.
The other thing that makes them attractive is that this type of deal is totally a numbers game. Because you’re just placing bids, it takes any emotion out of the deal. By that, I mean you have no feeling for the seller. You just work your numbers, put the bid in, and if you get the house, that’s great. If you don’t get it, it’s no skin off your back. You just move on to the next one.
These types of deals are also capital-intensive and rarely offer any sort of creative financing.
Relationship-based deals, on the other hand, require a different tactic. On these deals, your goal is to meet with the seller, which is often more important than seeing the house. Here, you’re asking the seller questions and really trying to find out how you can help solve their real estate problems.
These types of deals tend to be more local because you have to actually meet the seller. You also have to deal with the emotions associated with meeting them. The trade-off here is that because you’re meeting with people you have the opportunity to construct creative deals. This structure is far less capital-intensive than transaction-based deals, and you also can make seemingly impossible deals happen.
So, which is better?
Truthfully, you need both. Just like you switch back and forth between jeans and shorts, deciding what the market “weather” is determines whether you need to focus more on transactional or relationship-based deals.
In my opinion, the current forecast says you need to be hitting relationship-based deals hard and heavy. Let me explain why.
We’ve all heard the mantra that inventory is down, right? This is very true if you’re looking for deals on the MLS. REOs are very low right now. They’re still available, but we have a supply and demand issue. There is a smaller supply and a big demand with investors looking for properties.
This situation drives prices up and makes it harder to find deals in your area. Consequently, the investors I know who only do transaction-based deals are being forced to look all over the country for properties.
(In my opinion, buying way out of your area across state lines where you’re not familiar with the local laws or the market makes this strategy very risky.)
The numbers on foreclosures are way down, too. I was looking at some of our old files from 2012 to 2014 where we saw between 75 and 150 properties being advertised for auction per month. Last month, we saw no more than 16 properties advertised in each of the counties we worked. And only a quarter of those actually made it to the steps.
Finally, online auction inventory is almost nonexistent. Sites like auction.com, Hubzu and HUD have less than a handful of properties between them for each county we work.
Like I said, there is a supply issue.
So, what does that mean for you as an investor? It’s simple: you’re going to have to get out from behind your computer and get face-to-face with sellers. You’ll do that by stopping at every for-sale-by-owner and every for-rent-by-owner sign you see. You will need to get out and drive for dollars and be willing to door knock every time you can. You will need to tell everyone you know what you do and ask for help getting the word out that you buy houses.
If you do all this, if you get get face-to-face with sellers and ask Peter Fortunato’s famous question, “Why are you selling such a nice house as this?” you will thrive in the current real estate market.