Posted on: April 20, 2017

When it comes to valuations, a “best guess” approach is best! Don’t waste time with details when you have an inspection period!

We’re going to explain how our process works, starting with the 50,000-foot view, so that you have a good jumping off point and stop getting in the way of more sales.

 

IN THIS EPISODE YOU’LL LEARN:

  • Why the price is actually inconsequential
  • Why you shouldn’t get hung up on the details of a valuation
  • How to solve the right problem

 

50,000 Feet

You’re not buying a house – you’re solving a problem. Don’t forget this!

 

40,000 Feet

Nobody cares what you think the property is worth, and nobody cares about the cost of repairs except for you.

You are not the hero of this story – you are the guide. The hero is the seller or the cash investor.

 

30,000 Feet

Put the home under contract for as low a price as possible.

 

20,000 Feet

You are benefitted by putting the home under contract because you then have an extra two weeks, or whatever period of time is decided in the contract.

Going into granular detail with your valuation, and not putting the property under contract, will just dam up your cash flow.

 

10,000 Feet

While the property is under contract, you want to get interested real estate investors to give you feedback. Establish where the property falls on a 5-point scale, from “no chance of salvaging” to “recently rehabbed.”

Depending on where it falls on your scale, you should either reduce the price or, if you’re lucky, increase it.

 

As we zoom back out to 50,000 feet, remember: your business should be treated as a servant to you. When you micromanage the process, you become a servant to the business.

 

RESOURCES:

 

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Episode Transcription

Hey, good morning guys. So Quintin has a question on valuations and I wanted to give you a little bit more information, a little bit more specific information on how to deal with what you’re asking about. So essentially what you’re asking about is, you have one way to figure out repairs. And in our model, we’re not really addressing repairs. So you know, what do you do? And you know, how does that all line up? So ,let me give you some really different ways to think about this. That should be, that should give you a little bit of a different approach. Number one, let’s start at 50,000 feet. Let’s start all the way at 50,000 feet, and let’s worry about what this looks like in general.
Number one, remember this, you’re not buying a house. You’re solving a problem. You’re not buying a house. You’re solving a problem. So keep this in mind while you’re going through your valuations. Let’s come down to 40,000 feet. 40,000 feet is nobody cares what you think the property is worth, right? So with all the work of trying to get a more finite way to come up with repairs, no one really cares about that number except for you, right? So you always want to remember, you are not the hero of your story, right? Who is the, you are the guide, right? You are the guide. So, the hero of your story is either the seller or the hero is the real estate investor who has cash, who you’re going to be assigning your contract to, or buying and reselling the house too. So, by deep diving that you are losing perspective early on the journey, on the road, you’re taking the wrong road, right, when you’re deep diving valuations.
Now let’s come down a little bit further. We’ll plan it fly at 30,000 feet. Let me give you an example. You own a pawn shop. You’ve never, you’re brand new or you work at a pawn shop, right? You’re brand new owners out of town and a guy comes in, he says, “Look, I got into an argument with my girlfriend, and she broke my Rolex right.” So let’s just say that you have a Rolex but it’s broken. The girlfriend hit it with the hammer and he’s like, “I need cash. I need to get a bus ticket out of here.” The best way to do that is to have a conversation with that individual and see how much money he needs to get out of town. Right? Is it a plane ticket, a bus ticket, a cab fare? What is he looking to do?
Right? He’s at, he needs this. He needs to sell by X. Otherwise Y is going to happen? What the wrong person would, what the wrong thing to do would be to get out like the Kelly Blue Book for Rolex watches, whatever that would be. And start thinking, well, this particular Rolex at this particular age is worth this much, but then you have to think, it’s broken and you don’t really know… You’ve never really repaired a Rolex watch, so you’re not really sure, you know? “Well, is the crystal broken? Well, let’s see. Well it looks like the Crystal’s broken and also it looks like some of the mechanisms in the back, but the face plate is okay and the hands are okay. They’re not bent. So I can reuse those.” The whole time, the guy’s looking at his watch. “Oh man. Oh man. Oh man.”
And while you’re doing that, somebody in the store comes up and says, “Hey, what are you selling?” And says, “Oh, I have a Rolex. I need to get rid of it. I need to get a plane ticket out of town.” “Oh, well what are you asking?” “Oh you know, 400 bucks.” And the guy goes, “Well, I’ll give you, I’ll give you 800 right now, cash. I have it.” And great. And the guy walks out the store and you hear the bell and you never bought the watch, right? So the question is this, Tom, the 80% works great, right? If everything is equal, but what if there are repairs? Here is the bottom line still, put the home under contract for as low as possible. Why? Let’s move down to the 20,000 feet. Right now we’re going to look at the situation even closer.
The reason is because unlike the pawn shop, you have a major benefit. What is the major benefit that you have that the guy in the Rolex shop does not, in the pawn shop, does not have? What is that major benefit? So think about that for a second, right? The pawn shop guy has to take $800 or $1,200 out of his pocket and pay the guy with the Rolex, right? The pawn shop guy has to do that. Do you have to do that? No. You have to put the property under contract and then you have to, after 15 days or whatever you and your attorney decide to do, you then have to pay the seller.
That’s a huge benefit, right? Because as you send your real estate investors over to inspect, as that’s happening, if you’re holding their feet to the fire, you’re getting feedback on what exactly that is, that assignment is going to be, right? Because you’re not just letting them say no, you’re letting them say no and then you’re asking them, “Why?” and “What is the number?” So you have to be cognizant of this. This is like, this is like water in a river, right? And when you are so granular with the valuations, you’re building dams in the water and you’re blocking the flow of your business to be able to just generate a lot of cash, all the time. So, when you start to build these like “I need to be right before I put it under contract” hurdles, you’re blocking, you’re creating a job, right? Because, when you’re getting, when you’re starting to get so specific with the actual valuation rather than the process of getting the number, what’s happening is you’re building these blocks, you’re building these dams in the river that require your attention.
So you’re, now, you’ve stopped creating a business, right? Like McDonald’s where 24 year old kids can pump out cheeseburgers all day, and now you’re getting into like the, “How do we actually make a patty?” Right? That’s a really interesting question, right? But it’s totally inconsequential to the people who work at McDonald’s. They don’t care about how to, what goes into a patty and why a patty costs X amount and how to actually create, these patties come frozen or whatever. They put them into a machine that’s like a microwave, it warms them up to make it, they follow a process and that’s it. They just burn out deals all day. Right? That’s what McDonald’s is good at. Or Chick-fil-A who’s kicking their butt, right? So that is, that is the point of this, right? So as we come down, you have to see that it’s the process.
Now, you’re saying, “Well yeah, but Tom, how do I then resolve the rehab? Because when I use the model, the valuation of 80% there are some where it’s a complete tear down and some that have been recently rehabbed. Isn’t there some way to tell the difference?” Yes, absolutely. And as like I Irena Kent already said in her response, each market and each subdivision and each area is going to have different expectations of those numbers. So what can you do? Based on the feedback, after you put a property under contract and you take some notes and you, and you get all those years of responses, right? So now we’re at 10,000 feet, right? So you, you put a property under contract quickly for as low as possible and then you get some real estate investors who you want to assign the contract to, and you get some feedback, and you hold their feet to the fire.
They tell you about this and this and this. Then you say, “Okay, let’s come up with one, two, three, four, five different categories of a rehab.” One is it’s a complete tear down disaster. It’s like disgusting dogs and cats defecating on the floor, fire damage, total tear down, termites everywhere. No chance of salvage, just in your opinion, no chance of salvaging this property up to a five. On a five, it would be this home was just recently rehabbed and something went wrong and they need to sell quickly. And then what you could do is you could take the existing model and you could say, “Okay, if it’s a one, we’re going to reduce it by another 20%, if it’s a two we’re going to reduce it by 15, and three and boom. And then if it’s a five and it’s a Recent-, we’re going to actually add, you know, $7,500.” Whatever.
So think about it more like that. Also, one other thing to think about, just to get a little bit lower here and fly really close to the situation is when you are dealing with the three lowest recent sales, those usually, the reason we do that, one of the reasons is that those usually are properties that needed a lot of work, right? So they had a lot of damage. They’re not usually the homes that were just recently rehabbed. So you’re kind of already like steering the plane into that airspace of, “The three lowest are usually the homes that are very low.” But the more important point, so let’s go back up now and let’s just talk about this. The more important point is your business is a servant to you, right? It’s a servant to you to allow you to live the life that you want to live.
And when you start to micromanage the process, you’re now a servant to the business. So what I want you to mean by that is, I know you’re just trying to nail down the exact like process, but just reread your question, right? And just be sure that you’re not getting too specific. So I would ask my brother, Todd, these questions when I got started, you know, “Well how do you know and X, Y, and Z?” And he was like, “Tom, I’m busy. Just lock it up for as low as possible. I’ve got to go bye.” And he would hang up on me. I’d be like, “Oh my goodness.” And I would tell Julie like, “I don’t know what to do. Like Todd’s ignoring me. Like he doesn’t give me the attention, I need and we’re running out of money and…” Right? So here’s the deal.
I know it’s not as specific, but it’s going to provide a lot of deals at high volume. And as you do more deals and you get more feedback, then your process is going to look totally different than mine. Right? So, what you start with is just a jumping off point. But then when I talk to clients in a year, I talk to a student in a year, I say, “Well, what is your valuation method?” They’re going to be there. It’s totally different. “Oh, you know, it’s a percentage of the tax assessor’s value. We found that if we can just put a property under contract for 5% under the tax value, that usually is great.” Or “We found that if we take, you know, 60% of the Zillow number, that’s great.” So whatever. Right? But don’t overthink it because while you’re doing that, other people are building businesses and you’re like going in deep to a process that is kind of inconsequential.
I know that sounds crazy. Like how could the price be in consequential? Believe me, it is. When you learn to listen to why the guy’s leaving the town, right? And you understand that he needs a plane ticket and a plane ticket cost $800, you’re more worried about the $800 for the plane ticket, not the, $15,000 for the Rolex. Right. So does that make sense? Right. You’re not, you’re trying, when you’re deep diving valuations, you’re solving the wrong problem. So be very, very careful about that. Quintin, I hope that helps you, brother. It’s Saturday morning. I’m going to go pick up Lacey from gymnastics and that’s it. It’s a beautiful day out here, man. I wish I could turn this camera. You could see what I’m looking at. It’s a gorgeous Florida day. You guys get down to Florida. All right. God bless guys. Enjoy the day. We’ll talk to you soon. Bye. Bye.

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