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10/21/2012 @ 11:14PM

Hey Jeff Coga here,

As I sit here at 11:14PM on a Sunday I want to write about a conversation I had with another real estate investor in Texas. This conversation started because we were discussing how the next election was going to impact the real estate market and how more and more investors or wanna-be investors are coming into the real estate market.

I’m not going to talk about politics here but the conversation went something like this…

  • Me: “My theory is… more and more investors are coming into the market and you have to become more specialized to compete and stay profitable.”
  • Friend: “Hmmmm… Are you talking about the specialist effect? Kinda like why brain surgeons make more money than a general surgeon?
  • Me: “That’s exactly what I”m talking about…. do you believe it?
  • Friend: “Yeah… competition dilutes the value you bring to the market space. Man, it’s war out here in Huston.  I’m doing like half of the volume I did last year”
  • Me:  “Same here in Los Angeles BUT luckily I changed my acquisition strategy in early 2011 but yeah… the more competition that enters the market, even though you make no changes in your investment strategy such as wholesaling, rehabbing, buy and hold etc you’ll be forced to become change or become extinct because of the market forces.
[content_box_yellow width=”75%”]“If you have no successful example to follow in whatever endeavor you choose, you may simply look at what everyone else around you is doing and do the opposite, because – The Majority Is ALWAYS Wrong – Earl Nightingale “Lead the Field” [/content_box_yellow]

If you’re in the real estate business and feel the competition is “heating up” and you’re not able to get deals as before, you’re not alone.  I too am feeling the same pain, that is why you need to pay real close attention to what I’m about to explain to you.

In this blog, I’m going to cover some strange but true business concepts I’ve learned over the years.  This all has to do with “zigging when everyone is zagging”.

What does this all mean?

Plain and simple is this… If your market is expanding focus on strategies to get a competitive advantage not by looking for your “next deal”.

But you may say…

“Jeff you’re so wrong… How does the market expand when I can’t find more deals? The inventory market is shrinking – so I have to find the next deal!” 

If you assumed that my definition of “market” was the “inventory” then yes. But we all know what happens when you “assume” (ass-out-of-u-and-me)…

BUT my statement of “Your market is expanding“, I was referencing to the expansion of the investor market.

Meaning, as the competition heats up, you must become even more vigilant of the competition. If you’re not vigilant of what’s happening – the market (new investors) will destroy your business.

Here’s a prime example of what happened in my real estate investment business… 

As the market heated up in late 2011 – I noticed that our margins were becoming thinner. We were no longer getting the usual discounts and we we’re getting out bid on our offers from other investors.

No longer we’re we getting properties that we can blow in and out and make $100K+. Take a look at one of our last “easy rehabs” (construction cost is above $30K but really this is an easy rehab).

Project Nightingale 

  • Purchase Price: $115,000
  • Rehab: $32,524
  • Re-Sale: $275,000 (w/ 3% concession to buyer)
  • Finish to Start: 115 Days
  • Purchased at 53% of After Repair Value (A.R.V.)
  • Scope of work: A simple rehab with new windows, new bathroom, new kitchen, new flooring and etc.

By adding $115,000 plus rehab cost of $32,524… we are “all in” (without the cost of money) at $147,524. That is 53% of After Repair Value (A.R.V)… which is a smoking deal.

Take a look at the before and after video below.

Now… if we didn’t change our business model in early 2011 we would be having some serious issues because of the lack of “deal flow” in our business, just like my friend.

So how did we change our business model in early 2011?

We had to make a strategic business decision. Keep in mind, strategy is about making intelligent use of limited resources – to come up with a winning strategy. This requires you to make a series of difficult choices.  The whole point of strategy is to create an intense focus on the right things.  The “things” we focused on was…

“How can we add value in the Los Angeles real estate market place as an investor”

This brought me back to the 80/20 rule and something I learned at an early age.  And what Peter Drucker said…

[content_box_yellow width=”75%”]“Concentration is the key to economic results. Economic results require that managers concentrate their efforts on the smallest number of activities that will produce the largest amount of revenue… no other principle is violated as constantly today as the basic principle of concentration… our motto seems to be; let’s do a little of everything” [/content_box_yellow]

I had to “Carve Out A Niche” to stay competitive – I had to focus intensely on this segment of finding that “micro niche” in the investment world.  This lead me to a few weeks of straight market research and what I found out was this…

Before our rehabs averaged any where from $25k to $35K respectively and we we’re able to buy at 65% of ARV.

When the competition heated up – we we’re losing to other investors because they we’re buying them at 80% ARV+

We couldn’t compete with that and I wasn’t going to stay on the side line for the “next deal”.

So I looked at other deals that had less offers. The ones with less offers (on the MLS) was deals that required more construction. This led me to do more market research…

As I looked at the investors who were “out bidding us” – we noticed a few things.

  1. Some investors we’re flipping out with marginal spreads (I still didn’t see how the other investors made money on some deals)
  2. Some investors we’re flipping them out at obnoxious spreads. As we dug deeper they we’re doing what I call the “added play” rehabs.

Take a look at one of the “other investors” we we’re tracking

When I began investigating the data, I discovered that this investment group added Sq Ft to mostly every deal they did.  By adding additional living Sq Ft to the building they we’re increasing the “flip out price” aka “The ARV”.

Once I saw the pattern we began to do the same type of deals as them and now we do more construction just to stay ahead of the competition.

Here’s what I mean…. Take a look at our projects now.

Project Maple St
  • Purchase Price: $273,000
  • Rehab: $102,671
  • Re-Sale: $500,000 (w/ 1.5% concession to buyer)
  • Finish to Start: 182 Days
  • Purchased at 75% of After Repair Value (A.R.V.)
  • Scope of Work: Heavy rehab with new windows, new bathroom, new kitchen, new flooring, Adding 500 Sq Ft, and even putting in fire sprinklers (city requirements).

Now are rehabs are well over $80K per project and takes about 6 months because of city inspection etc. If we didn’t change last year – I’m sure we would have been hurting like the other investors.

Take a look at the before and after video

Remember folks, positioning is sacrifice and the more specialized you are, the easier it is to win. The power in business doesn’t derive from your products, investment deals, wholesale deals, or anything else.  It derives from your position in the mind.  An investor who is more specialized or focused company is much stronger than a generalist aka just a regular wholesaler aka just another rehabber.

Strive to be different…

I’ll end with a powerful image I found about Small Business Failures…

In the first 3 years, small business has a 62% failure rate and my humble opinion on why is because… the owner didn’t recognize and ignored a weakness internally and/or external competition/market forces.

Don’t become the general surgeon. Strive to become the brain surgeon by constantly studying and upping your game as a business owner.

Jeff Coga

p.s.

I would really love to hear your thoughts on this. Please leave me a comment below. 🙂

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