The real challenge these days is seller motivation. I'm developing a theory and watching the market and am getting more firm on my idea, but here's what I have so far...
Seller Motivation Theory ver 1.0
In every market you have a range of motivation. Try to draw a mental picture with it as a pendulum where the far left represents very low motivation to sell and the far right represents virtual desperation to sell. The left half of the pendulum are those with internal motivation to sell. As the pendulum swings up to the right, external motivators come into play (foreclosure, job change/transfer etc...) and add to the motivation level.
As investors, especially in the recent past, merely talking to motivated sellers was the key to success.
The Success Equation went like this:
- Get your mailer/postcard/letter/advertising/yard sign in front of enough motivated people and you were bound to buy/wholesale/flip some houses.
- And assuming you could estimate repairs with moderate accuracy and perform basic math in the MAO* (*MAO= Maximum Allowable Offer. MAO=(After Repaired Value x 65%)-repairs-profit) calculation, you would make money.
Late night infomercials and internet real estate gurus sold (and continue to sell) the idea of making money this way.
But... remember that as investors, we need EQUITY to be able to get involved and make money. So, with the relatively quick run-up of home prices from 2001-2006, the moderate-strongly motivated real estate owners had equity to spare and due to their motivating circumstances, were willing to part with a portion of that equity for a quick sale and all the other benefits that we, as investors, could provide.
The true challenge in a declining market is to take those folks on the left half of the motivation pendulum, those with less urgency/motivation, but who have equity and get past the financial motivation to the real reason for selling. It takes time and some real finesse to pull off these types of deals (I've learned this the hard way...)
Downward moving markets strip equity out of many motivated seller deals and traditional investor strategies quickly become out-dated (since most investor pricing models require at least 35% equity to even get started...). Leaving Short-sales, REO's and high equity deals as the remaining ways to make any money as an investor.
But that's another post all together.
Nice to have you stop by. I've missed posting my happenings. Lots of things going on, I'll have to post again this week and we'll get caught up then...
Cheers,
Taylor
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2 comments:
Good to see another post from you Taylor! I agree with what happens to motivated sellers in a declining market. I sometimes wonder what it would have been like to invest 5 to 10 years ago. I guess I'll be a stronger investor for having learned and broken in during a tough market like this one.
Love this Taylor! Great creativity. I really resonate with trying to find the true motivation that would cause a person on the left side of this pendulum to sell. Most investors will stop at the features or benefits they can provide a seller, without ever targeting the emotional based reasoning. People act on emotion, not reasoning. We must continue to ask the right questions. Thanks for your thoughts!
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