Buying & Thinking Strategies: Finding Wholesale Real Estate Deals
Nhan Nguyen is a successful property developer with many, many years of experience in the property industry. There is no one better to provide us with his expert advice and best positive thinking strategies that will help you build a profitable property portfolio as he has completed over 100 deals throughout his illustrious real estate career.
Join us as we dive into today’s topic of Buying Strategies as Nguyen shares with us some of his top strategies when buying investment properties, what you need to look at with under market value properties, we learn more about motivated sellers and how to find them, why it is crucial to know the area that you are buying in, and much much more!
– Nhan Nguyen
Have you ever thought about how successful property investors and developers decide what properties to buy? Buying strategies are pivotal in order to get the best deal possible. The first strategy Nhan and I discuss is how to buy property at wholesale prices.
There are so many ways to buy property wholesale. And I know in the past I bought property wholesale in many different ways and forms and things like that. So I think you know, we’ll start with some of the fundamentals of buying under market value and why and that buying under market value is so important.
I think it’d be great for listeners to understand because I think the key component for any property development is to make sure that you are buying well before you actually buy a particular property. You want to make sure that you are actually making money before buying and that’s how you can be successful. And that’s why wholesale is so important. So let’s delve into it.
You will find after you’ve heard me a couple of times on episode one and two that I have a few sayings. One of my sayings is that property is easy to get into, hard to get out, kind of like getting married. So I’m married and Tyrone’s married and I’ve been married for over 10 years now. And when you buy that property and get into that engagement, it’s not a short term thing, right? It’s not a short term thing. And like I said, the property is easy to get in, hard to get out. And so when you’re getting out, you’ve got to make sure that it’s easy to get out by buying well. So that was part of the things I learned in the GFC or pre-GFC is that I’d buy properties and I’d struggle necessarily to get out because I may have paid a little bit too much or I might’ve got a discount, but not big enough of a discount to be able to be negotiable on the end price.
So buying property at a wholesale price is absolutely essential. So I suppose that’s the first thing, but the thing you also need to get your head around is that buying property wholesale is possible. I think it’s one thing to say to do it, you need to do this, like you need to do X, Y, Z to achieve a result, but you also need to understand that it’s possible. Because I know to talk to a lot of people in the marketplace, and I’ve spoken to thousands of people on stages and stuff offline, they say, well we don’t actually believe that we can get property wholesale because where do we find them? How aren’t they all sold? Don’t you need a lot of cash to buy property wholesale? Or you know, if you’re looking for motivated sellers that they’re not going to sell it to you. They want top dollar. So there’s a lot of concern and lack of belief about being able to buy under market value. What’s your take on that, Tyrone? You’ve spoken to a lot of people.
Especially when people say, as I’m invested and says, Oh gosh, you know, the real estate seem to always have these properties that come on, but they don’t go onto the market. And they said that usually they are off-market transactions and they’re the ones that are usually on the market value and people go, that’s hard to get. But I think it’s not true necessarily because you can actually get into that as long as you build those relationships. And I found that if you build a relationship with the agents and you build relationships with, say buyer’s agents as well too, there are chances that they will actually come to you as long as you provide them and show them that you are professional, that you’ll be actually wanting to come back and get more properties. Because if you go in there with the view of saying, look, you know, I’m going to just be buying one property off you and then that’s it.
They’re not interested. They want to be able to have a long term relationship with you to purchase more or sell more properties to you so that they can actually offer you more things to buy. So I think it’s also a perception thing and a mindset thing to change internally saying, look, you know, I’m a professional, I’m going in there as a property developer and I’m looking to buy property at a certain price and also at a certain market as well too. And I think that that’s the key component that I think a lot of people just don’t understand. But I think to talk about buying wholesale, that is going to be very, very interesting to share in this episode.
It’s getting people’s heads around that it is possible. Just like what Tyrone’s talking about there before. I think the other thing is a little bit later we’ll talk about methods to do this and how you can do this. I find it’s just believability. If you believe that it can be done, it can be done. If you believe that you can’t or you doubt it or you’re skeptical, I appreciate that as well. And when I started out, you know, I was buying houses maybe 10, 15, 20% under market value and some of my colleagues at the time were getting properties, you know, 30-40% market under market value and I was just scratching my head going, how is that possible? I find it hard enough to get a property 10-20% under market value, let alone 30 to 40% under market value.
But we’ll talk a little about that later. Probably the easiest way for us is to firstly start with the concept of you make your money when you buy, not when you sell, you know, it’s critical. You get that fundamental in this podcast is you make your money when you buy, not when you sell. And the property is easy to get in. And the moment you decide to buy the property, that’s when you have the most control. What I mean by that is that’s when you can do the most research and the most due diligence. And the most intellectual add value to that property. Whether you figure out you can put a granny flat at the back, whether you can build in underneath to add the extra three bedrooms, whether you can subdivide the property or put 10 apartments on the property at that point in time, you’re not really 100% committed to the property.
So once you’re in, it’s too late. You’ve signed the contract, gone unconditional, have to settle, and once you have settled, you’re committed to the deal. And if you’re not clear on your exit strategies, that’s very, very painful as well because oftentimes people go, it’s a great property, it’s got all this potential, but if you can’t bring that potential to fruition, you can’t get that approval. You can’t do that renovation for whatever reason, council won’t let you. Then you’re stuck with a property that can take 6, 12, 18 months to be able to execute or exit from that deal. And it’s opportunity costs. You know, 50, 100. 200 hundred grand capital’s tied up. You’re not able to exit and you tie up your debt as well. So I just wanted to elaborate on that, before I go into examples.
I think you’ve really covered that extremely well because the opportunity cost is so, so important. And I think unless you’ve got a mindset saying, okay, if things get worse, and this is what we talked about in the money rules in the last episode is if your worst-case scenario is that you’re not making 10% on that or you’re looking to just buy and hold that property, which is fine and everything like that as part of your portfolio, then you know you have lost the opportunity costs and you’ve got to consider those factors. That’s the reason why the first part or the second part of our episode and money rules was so, so important about setting these guidelines to ensure that before you jump into these property deals that you find that you actually make those criteria and that’s only the first aspect. The second aspect is doing the due diligence, which is what Nhan’s going to be talking about right now.
Exit strategy is so key. When a person is a developer and you’re turning deals over or you’re Buy/reno/selling or you’re subdividing and selling, what you will find is when you’re in one or two deals, especially at the beginning, you’ll be maxed out and I don’t necessarily mean maxed out financial. Yeah, you may be, but also headspace. Everybody’s got only so much headspace. It’s like oftentimes a lot of my clients, for example, Kate, one of my earlier clients who did a renovation, she bought a property from a motivated seller. We’ll go into that soon, but she was only able to do one reno at a time. And what that meant is the longer our renovation took, the longer it would take for her to get into our next deal and next deal and next deal.
So when you can only do one deal at a time, generally your finances, your emotions, your headspace is just focused on that. You’re unable to do multiple deals at once. Like at the moment I’m doing three or four deals at the one time, small ones, big ones, mid-size. So I’m able to juggle multiple things as well as run a seminar business and be a parent and all these other things that we all have going on. My point is that it’s that headspace when you’re starting out, your headspace can be quite limited, generally only one deal at a time. So if your deal takes too long and you’re not in and out due to what we call velocity, then it can take six months before you get into your next deal. You know, in this instance I’m with Kate, she signed a contract to buy a property in the middle tier suburb and she got it for a good price.
And it was a motivated seller. The guy was overseas and property was falling apart. Property was falling apart and she was able to negotiate a discount on the property because the property was in poor condition. So in Queensland, as you may know, you’re able to do a building and pest report and then use that building and pest report to be able to get a discount or negotiate on the price. And that’s what happened with her. She was able to get the property at a good price, negotiated for the $50,000 discount on the property, sold it in a period of six months and made around about $110K and the key point of this was a motivated seller, right, so she was able to get the 50 grand discount. The property needs some work. From a termite point of view, she was able to find a tradesperson who was able to fix that termite issue without necessarily knocking the place down and built in that negotiation of $50K discount into her $110K profit. Otherwise you would have made probably only $60K profit on that deal.
What’s interesting about Kate’s situation is that she wasn’t a developer nor was she actually a reno person. Her actual background is nursing and this is what I really love about her story. Maybe you could share with the listeners, what was her background, why did she actually want to get into renovations? Because nursing is a pretty good job to be in, but at the same time to jump into property developments is really out of left field.
I find that some people, they love making things look pretty low. They love making things look better and cleaning stuff up and turning the dogs so to speak, into cash cows or turning the ugly ducklings into the beautiful swans. In this particular instance, the house was ridden with termites and everybody who walked in, all the advice I got knocked it down, light it with a match and just get the block, so being in a premium suburb, she thought, okay, that’s possible, but how can we keep the integrity of the building and still be able to make money? So in her instance, she was working as a nurse part-time and even though she was doing Saturdays and Sundays to get the better hourly rate, she really didn’t like what she was doing there as a nurse.
So she did property for a few years and one of her great claims to fame was that reno there and was able to turn around at $110K profit. The challenge at the time was the fact that she didn’t have a lot of serviceability and didn’t have a lot of cash either. So part of her experience and training with me was totally able to do that deal with the resources she had. She brought her money partner in to help service the debt and also fund some of the cash. And so the $110K profit wasn’t just to her, it was to her partner as well, which was a great story. She’s done a whole stack of deals since, still in the property industry, not necessarily doing developments or renovations, but GSU still has great involvement in helping my other clients make money through property as well.
It’s such an amazing story to be able to hear about Kate and to utilise that in buying it wholesale as well too. So we talked a little bit about motivated sellers. Let’s elaborate a little bit more details on how listeners can actually find these kinds of motivated sellers. Or actually maybe just talk about what are these motivated sellers that we’re looking for?
Look motivated tells, it’s a whole huge topic and we might cover in more detail on the next podcast, but in her instance, one of the tips here was that the owner was an overseas seller. Oftentimes, overseas sellers or interstate sellers, they have their own financial or life problems, as we all do. When I look for a property, I don’t just look for development opportunities. I don’t look for, let’s say upside only. I look for the opportunity to negotiate a better price. As I said, you make your money when you buy and when you buy it, you want to buy with the best price possible with the best terms possible. So it might be the last price with the longest settlement. So in this instance, it was an overseas seller and he had a problem with his property.
So that’s the other thing you may look for is not just problems. Generally you look for potential properties with problems that you can solve. It’s all well and good to find a property on a main road and it’s got flooding and it’s got really busy noise because of, you know, five lanes in front of it or opposite a school. But you want to look for problems that you can solve and makes the property more appealing. So I think that’s a really good one to start with is distance. We call it the four D’s. One of the D’s in this instance is distance overseas or interstate owners when they have their own financial or personal life challenges, that’s where they become negotiable. So, you know, motivation gives negotiation. That’s what I generally look for. When I had a property on the south side that I found a motivated seller for, the property was worth around about $400K and it had been zoned for low to medium residential, which meant that I could do townhouses or units on it.
Lower socioeconomic area, not really fit for townhouses or apartments. That’s not what it was zoned for. Anyway, the rezoning had happened roughly around about 2009-2010 when the market was quite flat and the owner had paid I think $310,000 in 2009. So post GFC, they paid $310,000 in that time since he bought it, it got rezoned to a higher density and I don’t think he realised it. So when it became a motivated seller scenario where he needed to sell the property I was able to get the property off him at $320,000. So now that distance scenario where he lived 200kms out of town, didn’t really understand the value of the property. I bought it off him for $320,000 and within three weeks I’d actually put it on the market. The seller had given us keys to the property and say, look, you’ve gone unconditional now do whatever you want.
Here’s the keys. And we’re able to actually put the house on the market and do open homes for the property. We’d done repairs to the properties, we had a bit of termite damage in the backyard, not a big deal and put it on the market. We actually put it on the market and had sold it under contract before 10. That contract crashed based on the building and pest report. There’s still some termites there, hadn’t been cleaned up all good. We fixed that up and sold it second time round for $405,000. So when we originally signed the contract for $320,000, we put a property on the market and we’re selling it, I suppose off the plan you could say it was ready to roll and then by the time we had paid for it we already had a buyer that was ready to settle on the other end. And that was three weeks after.
So literally you pretty much was in and out of the property after three weeks and you almost didn’t need to necessarily pay any money to it because if you time the settlement at the same time, you would have to just transfer the money directly to the original vendor that you purchased off in just taking the profit it sounds like. So it’s like you just took the cash and the transaction just moved on quickly.
I love those kinds of deals that really pumps up my adrenaline and I love getting the thrill of the game, the thrill of the chase. And it’s like any sport, you know, you want to get better at it, you want to be able to do it quicker, faster, better. Some people like golf, some people like tennis, some people like swimming. So from a property point of view, that’s how I like to test myself and pushing myself hard in the marketplace and see what I can do in that transaction. We bought it for $320,000, sold for $405,000 net after agent’s commission. Sorry, there was no agent’s commission because I sold it privately. There was another experiment that we ran with. We made about $61,000 in three weeks, which is really cool. You know, that money I put into one of the cars that I bought at the time and I’m paid cash and that was really cool. That’s an example of a wholesale scenario where you buy it under market value from interstate or overseas or a distance owner where they don’t necessarily know the market, but they do want to sell the property.
And it sounds quite like this is not just an uncommon scenario, happens pretty regularly because I guess people just don’t have the time to get to know the markets and especially if they’re not even in the industry of property. They wouldn’t know what the property’s worth and they’re just trusting the agent will actually do the right thing by selling them at the right price. But because as developers, we know the zoning, we know the area and I think this comes back down to another topic that we’re going to probably cover is knowing your area extremely well. If you know the area, you know what the zonings are, you know where to go and find the properties, then you can become an area expert, which will allow you to be able to find the opportunities because people who have sold like in a distress stage or distance stage, as you said as a motivated seller, they don’t know the area and so therefore whatever the agent says it’s worth, then you sell it at that price. You can come in and make a profit due to the zoning changes as you’ve just mentioned.
I think you’ve hit the nail on the head, is that one of the things that people often miss in what you’ve just said or what we’re talking about is becoming an area expert. The value of that is so critical. People don’t understand how critical that is. It’s no different to, you know, let’s say my wife going to the shops and buying a pair of shoes. She’ll have studied that pair of shoes or that brand or that style for weeks and weeks and months and months. And as much as I don’t like shoes or handbags, when my wife comes home with something, she’ll always sell me on how much discounts you’ve got on it. Oh, it’s 30-40% off. You still paid 300 bucks for a handbag or a pair of shoes, but she got a 30% discount.
That was a critical part, but you’ve got to be an area expert. You got to know your product and you got to know your area. Oftentimes, one of the mistakes that people make is attempting to buy under market value or getting into the property game is they spread themselves too thin. They might, you know, if you’re in Sydney, they might go north, they might go south, they might go out to Liverpool, they might go to Blacktown and they go to the northern beaches and Port Macquarie and just spread themselves too thin. You need to be really laser-focused so that when a deal comes up, bang, you know what it’s worth. You know what the market value is worth, what it’s worth when you renovated it. Down the track, add an extra bedroom, add an extra bathroom, add an extra car, accommodation. You need to know those values.
Whereas if you don’t know those values, that’s where you’re jumping into something that might seem cheap, but it may be cheap because it has a problem. It might be backing onto the train line. It might not have legal height underneath. There might be a problem with the infrastructure. There are structural issues with the property that might be undermined. There are so many things that could be the reason why it could be cheap. So I’ve made that same mistake as well. Buying cheap property for the wrong reasons versus understanding the market and knowing because I’m an expert, I know exactly what something’s worth and that takes time. It might take you two to three months to do that to become an area expert and understand the nuances of that quadrant of that suburb or this street is worth more because of this reason or that house or that those blocks are backing onto industrial. Therefore it might be worthless. So what are your thoughts on area expertise main and some things you want to add?
Yeah, I think that’s so important to actually understand that. And I guess the question I have for you is becoming an area expert is something that takes time as you’ve said. But how do you determine what would be an area that you want to focus on? Because you know, there are so many different suburbs, there’s so many different parts to different places where you live and not necessarily where you were to become an area expert that’s close to you as well too. Ideally, it’d be best if you can, but it depends on what you’re looking for. So how do you actually choose an area like you’ve done for yourself?
I’d break that into several parts, maybe even three parts. And people who come to me about this question often times are dealing with affordability or more so lack of affordability. So I definitely start there and look at the affordability of what you can afford. So let’s take an example. Let’s say you’re looking at, you can afford $500k or less in the suburb or an area like Sydney, $500k less won’t buy you much at all. And so I prefer houses over townhouses or apartments simply because you get better capital growth, better demand and things like that. Apartments is a lot of construction and decreasing demand based on heaps of supply. So I know that’s a different paradigm to what Harry Triguboff does, but that’s a different play, he’s a completely different machine compared to what moms and dads like you and I are in the marketplace.
But anyway, coming back to the first thing is budget, determine that budget and then you might have to go West, for example, to look at those suburbs or areas that you can afford. So I know clients have, myself in Sydney, I’ve looked at places like Liverpool and Cartwright and Blacktown to be able to afford it. Other clients have gone even further to places like Orange or Cessnock to be able to afford the sub $400k, the sub $300k potential plays there. And for those in Brisbane, you might be looking out at Ipswich or Caboolture or Logan, that kind of key areas. Those in Melbourne might be looking at let’s say Geelong and it might be, ideally, you want to be half an hour or less away from those areas. Sometimes it’s not possible because it’s a further half an hour on top of that half an hour.
You might be an hour, hour and a half to be able to access those areas to get that affordability. So I think first is affordability and you’ve got to come to terms with you’re at where you’re at. Some people might just have to drive two hours every Saturday. One way to be able to do that market research, but it comes down to making a decision that you are going to do it and you’re willing to do what it takes. I think that some stage, some people need to do that. If you want to quit your job sooner rather than later, you need to make that decision that you’re going to do it. You’re going to do whatever it takes. You’re going to cut down your sleeping hours, going to work, start early, finish late to build that momentum. So firstly is the budget. Secondly is geography.
So what I mean by that is within that half an hour, 40 minutes, 1-hour drive, one way that is ideally the other scenario is budget matching that geography or locality and picking two or three suburbs that are close together geographically because then you can study the things like the shops. Is there a Coles, is there a Woolworths, is there an Aldi there? What are the schools like? What is the infrastructure in terms of highway access or noise or train transport or bus transport? So geographically, once you’ve kind of chosen or looking at things, you want to look for opportunities where people are spending, the government is spending money in those areas. Because where spending is that’s where the jobs are and where the jobs are, that’s where people want to live. It’s all well and good. There might be a lot of land out West, but if people don’t want to live there, they’re not going to buy your property.
Or rent your property or become a tenant. So thirdly, in terms of choosing that particular suburb or area is strategy wise. So if you’re looking at doing the granny flat play or you’re looking at, you know, doing the duplex play, you’re looking at doing the subdivision play, you need to be matching all these three things together in areas that enable you to do that strategy. So in Melbourne, let’s say some areas you can do townhouses and some areas you can’t, so if you’re looking at let’s say Clayton or Springvale or that kind of Box Hill areas, some of those areas are not appropriate for subdivision or townhouses. So you have to choose the strategy that overlaps with that particular area of that budget, of that geography and that zoning as well. So in Ipswich you might be looking at areas that are sub-dividable, but the land values is a constraint because the land value might be too low that it costs you 150 grand to subdivide it.
And you can only sell the land for $120k. So yes, there are a lot of considerations and sometimes it takes one to two to three months to realise that area you picked is wrong. But you got to understand that’s part of the investment that it takes to figure that out for yourself. And that’s part of, I suppose what we do in our training is that we teach you where the hot suburbs are, where the suburbs are that you can develop those things, enable you to be able to shortcut that process for yourself and then reduce the amount of time wastage that people can spend months looking for potential deals.
That’s the biggest challenge I think we all want to sort of try to avoid is, you know, wasting time to go and look at the suburban and three months down the track realise, hold on, this doesn’t fit the criteria. I think that’s the great thing about being part of a community like yours to be able to do that and, you know, share that resource. And I think, you know, as being part of this community within the podcast and listeners being here, we can also help each other and support each other out there. And I think there’ll be a great opportunity for everyone to be part of that as well. Let’s take a look at perhaps maybe the next parts of maybe the buying strategy of wholesale. Do you have another example or next part that you could share with us on how to actually determine what would be a good wholesale property?
Another cool thing that I’ve done in the past that might be a bit different is getting a bunch of friends together and getting a wholesale discount from a developer. So I know we’ve talked about this on this particular podcast series, it’s about property development, but sometimes there are opportunities to buy deals wholesale yourself. So I’m going to give you a couple of ideas. When a developer, let’s say is doing a block of apartments or 10 blocks of land, usually the two sales points that they feel the most pressure is at the beginning and at the end and why at the beginning they might have 10 pieces of land or 10 parcels of stock. The first two or three is just getting it out of the ground. And oftentimes people don’t want to be the first mover to buy the first piece of stock or property and usually that you can potentially get, if you and your couple of friends offer really, really low for the first few pieces of development stock, you may be able to get some property at a discount there.
The other one is at the end of our project. So if you’ve got like once again, 10 townhouses, they’ve sold seven of them and they’ve got three left, well that’s really where the profit is. And so they’ll be starving, waiting to consume or getting some profit at the end. And there may have been in the project one to two, three years and all the profits in the last two to three pieces of stock. So an idea from our motivated seller point of view from a developer’s point of view is potentially getting a few friends together. And I wouldn’t say performing in a syndicate, but by as a buying group, negotiating with a seller to give you a group discount if you buy three of them at once or four of them at once and be able to give you a 5, 10, 15% discount to be able to move those pieces of stock. So I think that’s a really lucrative way if you’re looking for that kind of property to be able to get a discount and work on the fact that generally sellers who are developers are motivated towards at the beginning of the end of a project.
That’s really a really smart point. So we’re looking at saying maybe buying blocks of land in bulk, but that’s how you’d be able to get a discount from say a developer who’s actually subdivided the land on all the work and then you’re pretty much just buying those blocks of land to build on. That’s a very, very smart strategy and therefore you don’t have to wait for the 6 to 12 months or so for the land to be subdivided. You can actually go ahead and get them built and then profit from selling those off as well. Like pretty much like a land and house package.
In that instance, the developer’s done all the work, taken all the risk, taken all the stress and that’s what I’ve done in the past when I had the 20 lot subdivision back just pre GFC in 2007, he had 20 blocks of land and we bought them off the plan wholesale off him for a massive discount there. And the market moved as well. So we got it, one, at a discount and the market moves. So that was a bonus for us. We’re able to presale the blocks even though the GFC came along and a lot of those contracts fall over because we bought them well because you make your money when you buy. We’re still able to exit that project with a good profit, six figures when other people were losing money. So you just got to make sure that you buy under market value. In the next couple of podcasts and recordings, we’ll be able to share with the audience some really cool other motivated seller scenarios. But I think that’s a really easy one for people. Just get their head around without being too complicated.
I think these are really, really powerful strategies that we can actually just share at the moment to be able to talk about buying wholesale. I think we’re pretty much at the end of this episode and probably like to give everyone, as we mentioned the opportunity to be here to take some action. So for today’s or this episode that we’re doing here, what is the assignment that we can actually give to everyone?
As you know, last week we had the get clear on your money rules and answer at least two to five questions there. This week we’ll get you to investigate or inspect three properties. Look, ideally, if you could get out amongst it, during the week or on a Saturday, go for an open for inspection. Go talk to the agent, find out what the properties for sale for, and just get some information to build relationships. And look for a motivated seller. I think it’s just a really, really easy assignment. Just to get out there, invest a couple of hours of your time into investing, into your lifestyle of learning about investment properties, learning about properties, what’s selling and what’s not. Ask a few key questions and just to have a bit of fun with it. Looking for a motivated seller.
Discover How To Apply The ATOMIC Model To Any Negotiation
Knowing the different types of buying strategies is a key foundational principle to enable you to achieve success when investing in property. We start with how to look for motivated sellers and what that actually means.
I think motivated sellers are one of those most misunderstood angles of the property. You know, when you’re looking at renovators, you’re looking at free blocks of land development sites. Often times people will just focus on those pure strategies. You know, you go to the block and all they’re looking at is renovating or painting or knocking this down and knocking that down. It’s all in the kitchen, a bathroom, and I get it. That’s the additional value part. But I’ve always said, and I’ll repeat it ongoingly, is you make your money when you buy. What that means is you need to get either a big discount or a big upside. So to get the discount, generally you need a motivated seller and there are so many motivated sellers. I will go through them shortly. But you need a motivated seller essentially, so you can negotiate and get a better borrowing price.
And that makes absolute sense. But I guess sometimes people go, gosh, how do you find this kind of motivated sellers? What are you looking for to ensure that you get them, you know, find the right ones?
We have a formula for that. Like with everything, there’s a formula and we talk about the four DS. There are so many reasons that people have to sell. I’d say there are probably hundreds, if not thousands of reasons people have to sell, but I generally work on the four D’s to get people started. The first one is deceased estate. You know, if there’s someone who’s got a deceased estate and they have to sell, you’ve got three or four siblings that just want to get the money. Number two D is a divorce, as you know, sometimes when people get divorced, they do crazy things. I recall this lady caught her husband cheating, so she put her husband’s Porsche on eBay. It’s sold for $25,000 which was crazy. And I was quite upset too because I missed out.
But people do crazy things. So that’s the second D. The other one is debt where people might have a good job or borrow too much and what does that mean if they have a good job? They might get easy credit and buy cars, boats, houses, jet skis with a lot of debt and the interest rates go up or one of them loses their jobs and the bank takes it back. And the fourth one is distance. So interstate or overseas owners who might have personal circumstances such that they have to sell. So that’s really what I’m looking for to start off with is the four D’s of motivated sellers. And there’s so many ways to find them as well.
Let’s sort of elaborate a little bit more and go into a little bit more detail on some examples of some ways that you’ve been able to find these motivated sellers. It’s great that we know these are the type of motivated sellers, so the four D’s, but how do we actually get to the depth of it because not everyone will go and say advertise, you know, that we’re having a divorce and so forth. How do you find these guys to ensure that they are very, very motivated to sell?
I think it comes down to two things. We have a couple of ways that we approach owners directly as well as approach a real estate agent cause we’re really, you want to get into the deal before it hits the internet. Once it hits it’s kind of too late. So you really want to get up onto the deal before it hits the internet, I think that’s one of the first principles. And the second principle is wherever you can, if you can deal directly with an owner, that’s even better. But sometimes the property is listed with an agent and you’ve just got to go with that which is cool..
But one of the simple answers, if let’s say you’re dealing directly with an owner, which we’ll talk about an example of last year I bought a property off an owner where I sent them a letter. I sent them a letter directly expressing my interest in buying their property and I was able to negotiate with the owner directly and I found out that it was a deceased estate, so it was for kids, part of an estate they’d inherited obviously and they just wanted to sell it. They weren’t quite ready at that point in time, but they definitely wanted to sell it. They were waiting for one of the children who were in the 50s to get an operation and once they were ready, then the property was on the market. So long story short is it also comes down to the approach that you have with the owners and how you can get them to be honest, direct. And from that particular deal, I was able to make $200K and turn it into a five lot subdivision, which was really, really cool. But the key to it was that they were motivated to sell and they were committed to selling. They were happy at a reasonable price. They didn’t necessarily want top dollar but they were committed to selling.
When you said you sent a letter, was that like a mailbox drop? Did you actually find out details from somewhere? Like how did you go about finding those?
There are various ways to do that. And you can do a mailbox drop, you can do flyers, you can look at their details up on places like price finder. There are various ways to do that. We generally find door knocking works as well. But I think the secret here is really finding ways to deal directly with an owner. There are websites, www.buymyhouse.com and things like that, real private, where you can deal directly with property owners. The key to it is to be able to negotiate directly with the seller. I think the other way, if you’re dealing with a real estate agent, is just to ask them questions. I often ask my real estate agents, why are they selling it? And it might take two or three conversations or two or three prompts to find out why they’re selling.
Are they, you know, needing to sell because a mortgage in possession or they live overseas or have they got too much debt or they’re getting divorced. I often tell real estate agents exactly what I’m looking for. I’ll even teach them the four D’s because I want them to be looking for motivated sellers. Because oftentimes it doesn’t matter how run down the house is, if the seller’s not motivated and the seller’s not willing to give you a discount, it doesn’t matter how good a potential renovation is or a development site, the price has to be right.
I think that this is the challenge that we all face this. There’s that fear factor. You know, when you’re talking to real estate agents or talking to the owner, if you’ve never done this before, you go, okay, what are the kinds of questions that I should be asking? You know, you can’t just jump in and say, give me a discount right now. You’ve just got to build that rapport. You’ve got to find out a little bit more about the motivations. And it’s more like just probing, those kinds of things and just getting to know them personally.
You’re absolutely right and having those key questions to ask real estate agencies is really, really important. You know, we talk about the atomic model, This is a really good segue to talk into, what do you say to real estate agents? Because knowing what to say to them. No one teaches this at school. Just like at school, they don’t teach you about money or how to manage money or invest or risk management. They don’t teach you about how to talk to real estate agents. And I came up with a model, it’s just made up really, ATOMIC. The A stands for accept, what will the owner accept. So they might be asking $500,000 but what will they accept?
That’s a completely different question than in some agents who have no filters and don’t care. They say, you know, if you offer it for 50 you know the owners probably will take it. So that’s a really good question. What will the owners accept? T stands for time. So how long has it been on the market? If the property has been on the market for not too long, the owner may not be too motivated, but if the property’s on being on the market for 90 days, 120 days, it’s either they might be asking too much or they’re definitely getting motivated because time is running out. They might have commitments, they might have promises that they need to keep. The O stands for offers. Have they had any offers on the property yet. That’s a really good gauge of what the owner may accept because if you’re offering something potentially that’s lower that’s been offered before, then it might be wasting your time as well as wasting the agent’s time.
So then we’re down to M for motivation, which is what we’re looking at talking about before, you know, the four D’s deceased, divorce, distance and debt. I generally lead into that by asking, Oh you know, why are they selling, so you might have to ask it two, three, four times. The agent will just let go and tell you the real answer because you know, I understand from an agency point of view, they really don’t want to disclose that the owner is very, very desperate to sell and is wanting to look at all offers, you know. So and then the other one is I, which is income. What’s the current rent? What’s the potential rent, can you add a granny flat at the back and increase the rent? Can you subdivide the rooms or lift the house?
Building under increased the rent from an income point of view and is going to contract as in putting in a low offer or putting in another. C which is creative, finding a creative way to negotiate the deal. It might be a 12-month settlement, it might be a vendor finance, it might be able to get early positions. So A, T, O, M, I, C.. Have they had any offers, are they motivated? What’s the income potential as well as see for contracting creative.
That’s a really, really good strong framework to actually work off. And I’m already thinking in my head, you know, how do I apply this if I’m going to go out, obviously it’s going to be a bit funny if I just kept going through ATOMIC with them, you know? But it makes you just think, okay, these are the key components where it doesn’t have to be in that particular order to actually find out from whether it be the direct owner or through the real estate agent. And if we actually have that in mind, you kind of have that mini checklist to go, okay, these are the things I need to find out before I actually even proceed further. Because if they don’t match any of those, then obviously they’re not going to be motivated to sell.
The thing about that is it’s like you said, it’s just a framework. When you’re talking to real estate agents, when you’re talking to a property owner after a few conversations and you’ve tried using those stimulants or those triggers after a while, what you will find is it’ll just become normal and normal conversation. You don’t really need to be like a telemarketer going through the script of it. It’ll become natural like, how long has the property been on the market? Have you had any offers on it? What’s it been renting for? Well, and why is it selling again? So you’ll go basically step from one to the other very much gracefully and naturally. You don’t have to go through it like a machine gun. Next, next, next, next, next. So after a while it will become very natural and then you’ll come up with your own questions on, you know, what do you think you’d be approved for and has anybody, is it rented or is unoccupied?
Those questions become natural and a natural flow and they may or may not help the negotiation, but it is always good to gather information and build rapport. Like you said with the real estate agent because you’re wanting the agent who’s just got no filter, he just opens up, tells you everything you need to know. Now, resistance and in particular in the current marketplace with Sydney, Melbourne and Brisbane, you know, I believe there are more buyers’ market opportunities out there depending on the suburb and depending on the area with the markets, having dropped 5, 10, 15% in certain areas are going to be motivated sellers. And not only that, some motivated agents who are happy just to sell the property.
I guess what people are probably asking now is like, you know, it sounds like the framework’s there, but how much work or effort do you need to put into actually go? Because some people have said, look, I’ve got to look in, speak to like a hundred properties or agents to be able to actually find that one deal. And I just want to see and put it in perspective. Like is it like that or is it actually something else? Like how do you go about searching for these properties in a most effective time frame? Because everyone’s quite, I’m time poor nowadays. You know, don’t have the time to always speak to like hundreds and hundreds of agents or look at, you know, all these properties. Is there a sort of a leverage way to go about handling this?
When I started, it was probably the best use of, I’d just go back to when I started about 15-17 years ago, looking at property when I’d go out pretty much every Saturday to look at houses. And one thing I’d say is that it’ll probably take you somewhere between three and six months to find your first deal because firstly, you may not even know what you’re looking for. You might know in theory, you might know from what we’ve talked about, but until you actually find a motivated seller that you’re negotiating on, you may not even understand it completely until you’re negotiating it directly. So like I said, it may take three to six months to find your first deal. I’d suggest if you can, you know, every Saturday at least half a Saturday go to open homes. My formula was looking at seven properties a week and putting in four offers a week.
That’s something I made up when I was 21. So looking at the half a dozen properties a week, every week for three to six months, what will happen is you will stumble on motivated sellers, whether you like it or not, you know, that’s over 100, 120 odd properties. If you look at six or seven properties a week and you will find a diamond in the rough. And it just happens naturally. And it might take, you know, half an hour a day. I reckon everybody can find half a day with commuting to work or sitting on a train, you know, looking through www.realestate.com a half an hour a day, getting on the phone, maybe at lunchtime ringing a couple of real estate agents. Even if you just ring one agent a day and have a look at half a dozen houses on a Saturday. Part of it is also getting to understand the market.
To know what suburbs are generally worth, what streets houses are selling in, market research, people so misunderstand market research because we didn’t live on an online environment. They think that they can scroll through www.realestate.com, look at 10 houses and that’s their market research. Market research is so much more than that. When you need to be on the ground. I believe that with property, you need to touch it, taste it, feel it. If you’re online, you can’t hear the road noise. If you’re online, you can’t smell what the local region smells like. If you’re online, you can’t know what the slope of the land actually is from a topographical point of view. There are so many factors with property where you just need to get on the ground and touch it.
And that’s why I suggest ideally half an hour a day if you can or you know, looking at half a dozen houses every Saturday, every weekend. And that’s for those who are committed, it might take a little bit longer if you don’t have that time and you can’t do it during the weekends. It just will take a little bit longer. But we’re talking about motivated sellers that’ll give you a 50,000, 100,000, $200,000 discounts. So that’s why, you know, doing that groundwork is important. Otherwise, just getting on the phone, you know, if you don’t have the time to physically go out on a Saturday, get on the phone at lunchtime, 10-15 minutes, making two or three phone calls a day, everybody does that. You know you talk to your mother, you talk to your sister in law, you’re talking to friends for yada yada yada. You know, this is intentional about how to create wealth and quit your job if that’s what you want to do. And two or three phone calls a day to real estate agents, you know, at least put you on the hotlist. But eventually, you do need to visit them and get them to catch up with you face to face to build that relationship.
Nhan and I discuss whether buyers agents can be useful in finding development sites, since a lot of investors nowadays are turning to their services to save time.
I personally have not had buyer’s agents. I find that because I’m a lot more meticulous and a lot more studious with what I’m looking for, I find that the deals with buyer’s agents can work, but they are very, very rare. So I’ve known a couple of buyer’s agents who can find deals from time to time. But generally, I have either a team of my own which I train up to do or I’m out there myself simply because my criteria is very, very strict. And buyer’s agents, you know, if they spent six months looking for a deal for me, they wouldn’t make any money. So buyer’s agents definitely can work. It just depends on the type of deal that you’re doing, whether it’s you wanting to get a discount of 10, 20, 30, 50 grand. If you’re wanting generally development sites, buyer’s agents can do the job, but you need to find the right one with the right skill set and it can take time as well. So that’s a really good way to leverage it as well. There are other mechanisms to get deals to come to you. You know, if you engage real estate agents directly to essentially find your deal, that’s another good way to do it as well. But I do believe that getting on the ground yourself, pounding the pavement is very, very important. If you’ve got the financial resources, find some property investors who have been doing it for a while who might be deal finders and you can partner up with them as a money partner.
I think that’s also a very, very good path to go down. One thing I did want to ask is in terms of say perception coming in and seeing and meeting up with a real estate agent or even just giving them a call, is there a way that you want to perceive yourself? Do you tell them that you’re a property developer looking for this X, Y, and Z kind of development sites? Or do you just go in and say, look, you know, I’m looking for this and I’m just an average Joe in the background. Like I just want to see if perception really matters because do they actually want to work with you or not?
When you’re starting out, I think perception is very, very important for a couple of reasons, that you need them to take you seriously in this game where oftentimes people look at you and they judge you, or they’ll Google you and they’ll judge you. And that’s fair enough. Because sometimes people get a lot of time wasted and I get that. So I remember, I’ll talk about perception in a couple of ways that you may not even have triggered. But when I started out, I remember I had this really balmy car and it was like, you know, 17 years old and probably three or four models old. And I reckon, if they looked at it, they would’ve gone, oh my God, he drives that car.
So for me, I parked around the corner, but I made sure that every time I went to an open home, I dressed up. When I say dress up, I dress up in business attire, you know, slacks and business shirt, just a black and white outfit, business shoes and being, you know, 19, 20, 21, that gave me some credibility. As you know, like being Asian when you’re 20, you look like you’re 12. And I didn’t start shaving until I was about 30 anyway. So but my point is you are dressed up in business clothes and dress smart. And so that’s one tip for you guys is dress nicely. You don’t have to go in a suit and necessarily sometimes that’s a bit over the top, but dress nicely once you’ve made it, I find it doesn’t matter what you wear once you’ve made it and you know in yourself that you’re confident.
Cause I remember, you know, a few years ago, I’d rock up in a singlet and shorts, but you park the Porsche at the front and you just don’t care. My point is I didn’t start there and you think it’s a bit over the top, but my point is when you’ve made it, you don’t care what you wear, but when you’re starting out and you’re pretty insecure, you’re trying to prove yourself, that’s one of the ways, you dress up in business clothes. And the other thing that really helps is having a property investor business card. I’d tell them when you’re on the phone that I’m a property investor. I think that’s important for a couple of reasons. One is when your owner-occupier, you think of it from their point of view, an owner-occupied generally buys a house and lives in it for five to seven years.
So they’re not very transactionally heavy. They’re once-off transaction. Whereas you’re a property investor, there’s a couple of ways that they can make income from you. One, you’re gonna buy it, you’re going to paint it, you’re going to sell it. So essentially they think that there are potential multiple transactions and multiple commissions for them. Not only that, if you’re going to rent it out, there’s going to be a commission from their office for a rental management fee. So it may not go to them, but it makes them look good, adds the rental pool and they’ll get leads from that rental pool down the track anyway. So I definitely believe that presenting yourself as a property investor, I don’t necessarily think that you should say you’re a property developer as such, especially when you’re starting out. Sometimes people just misconstrue property developers and then they think, Oh, you know what, this property can be subdivided or something.
They know that I don’t know. And they’ll want to jack the price up. So I just like to keep it credible, but at the same time, not over the top. So the third tip I would say if I may, is having a business card. I’m just saying property investor on it. So your first name, last name, phone number, email address and the words property investor on the business card. Nothing too snazzy. Doesn’t have to be over the top. Fold out, you know, have a little matchbox car coming out. Just to have basic Vistaprint, you know, even as this black and white or blue texts and white background. Keep it simple, keep it sharp. My only other tip is if you do have an email address, a Gmail address is actually fine. Just keep it simple and easy to spell. If you’re going to have an email address that’s property-related, you know, you might have TSproperty@gmail.com might be initials or whatever, but keep it very, very simple and easy to spell, short and sharp. Those are two of the three tips is dress up. Present yourself as a property investor. Tell people that you are a property investor. And thirdly, I have the property investor business card because then they’re more likely to take you seriously.
I love that because it really does help with regards to putting the right perception to the real estate, whoever you’re dealing with. And especially that they will take you seriously because at the end of the day, and I’ve been a real estate agent myself, is that before I even go ahead to work with a buyer, is I would pre qualify them. I want to make sure that they’ve got their finances, I want to make sure that they actually do have some experience as a developer or not developer, but as an investor as well, you know, the rate to actually move along because I could spend six months working with them, they’re not buying anything, then that’s wasting my time when there are other opportunities out there. So I totally understand that it’s so important and I guess why poor trading and also coming across with the right information, people are going to help you move forward. And that’s the thing I’ve learned about working with real estate agents is that they just want to make sure that at the end of the day, one, they’re going to get paid their commission and two, that they’re going to also help their vendors to sell their properties. So it’s very, very important to look at it from those perspectives as well.
I completely agree with you and I think that that’s why it’s so critical to portray yourself as an investor. And if you’re having business cards and you take yourself seriously, they’ll take you seriously as well. And sometimes it might take going to the same open home or the same agent two or three times through various open homes and bumping into them and building up a brand for yourself. And not everybody has to be, you know, Meriton or build up a brand that big, but necessarily it’s just face to face and building that relationship. Even if you touch base with them, you know, once a week, once every fortnight, there’s various ways on email where you can just automatically trigger touching base with people and prompting them. Hi mate. How are you going? You know I bumped into you at that open home on the weekend.
If you’ve got anything, please let me know. So it might just be half a dozen followup emails that allows you to keep in touch with them. And then in touch with you because sometimes you’re not at the forefront of their mind. You know, they’ve got pressures, they’ve got to pay bills, mortgage payments, car payments. Their interaction with you, if you keep at the front of their mind when a deal comes up like a, yep, here’s an easy sale, finances approved, register goes. Would you say as a real estate agent, I suppose, what are some of the biggest reasons why deals fall through? Is it finance or what is it you find the biggest deals fall through?
I mean there’s so many different aspects, but I think one of them, definitely is the finance. Because a buyer could say, you know, I’ve got prequalification, but when they actually go through the process and actually get their loan and they get to the end of it to be able to get that finance approved the banks may change the requirements based on a certain few things. And when they look at the property, there may be other things that they completely overlooked. And unfortunately, that puts a delay. And then, therefore, you’ve got to go back out into the market and find another buyer and hopefully if you’ve already been working with a number buyers, you do have some in the back, but obviously the person that has put a serious offer on is the one that you want to work with.
That’s probably one aspect is the finance. The second aspect is the vendors’ motivation changes. You know something else might happen is that if they are motivated, yes they’re looking to sell, but then again they may see that, look, there’s a development site down the road. I actually might want to actually get more for that because I know it has, you know, development potential, things like that do change. And unfortunately, it’s out of our hands to control that. But at the same time as an agent, all you want to try and do is present to the vendor the best you can do. And sometimes, I know a lot of real estate agents sort of downplay it and say, look, you know, this is the best offer I’ve got. And then towards the end when they’ve actually got the high offer, which they already had anyway, they would present that and make it sound even better for them.
So they do play the game as well. And I guess being in that I’m going, okay, I know how they work as well. And in dealing with that I can make it an advantage for them. And that’s why it’s so important to put the terms out correctly and at the beginning to make sure that you get your offer placed in front of the vendor before anyone else if there’s a lot of competition there. But in saying that, you know, it’s all experience, it comes down to actually going out there, doing it, meeting with the people and actually getting your hands dirty. You know, if you don’t get out there and do it, you won’t understand, you won’t know what we’re talking about.
I completely agree. And that’s the thing is when you’re starting out, I know the rules are different in Sydney, Melbourne and Brisbane and each state is different. But I know especially in Sydney and Canberra as well, you know, in terms of act you could say is that you don’t necessarily get subject to finance, you exchange and off you go. Whereas in other states it can be subject to finance, subject to due diligence, subject to building and pest. So getting yourself prepared financially is really, really important. Getting that prequalification for finance, if you’ve got investors, getting them prequalified. I’m also getting your cash facilities available. And many times the only way that I’m able to win a deal in front of other people is I’ll say, look, I don’t have issues with finance. I’ve got the cash, I’ve got sufficient cash to buy your property and not everybody in this position can do that.
I definitely did not start with that. I barely had a 5% even a 2.5% deposit level, low paying cash. But my point is that that’s really where you want to get down the track and be in a financially stable position, in a competent position where you can settle with cash. How I structure it after I settle with cash is I refinance. So I pull the money out, I settled with cash, pull the money out with a bank funding 80% for example. And then if I need to I’ll get my investors to tip the cash in to even reimburse myself for the deposits and stamp duty and therefore no cash in. But my point is that going to real estate agents, that’s where you really want to position yourself as a potential cash buyer. Got my finances in order, got investors behind me so that they know that even your offer may be lower.
It’s generally the terms that will win out at the end of the day. So that’s where the motivated seller comes in is that they want the shortest period of time, the least amount of risk and the most certain deal to be able to get them out of the pickle. Let’s say it’s a mortgage in possession and they’re at an auction, right? Generally, if the buyer or the previous borrower has paid a 20% deposit, there is potentially a discount there because the bank monies that is going to them will be net of any of the deposits that the previous buyer has paid. So if you’re ready to roll and you’re able to buy it, that gives you a head start to everybody else.
Why Joint Ventures Can Help Find The Best Deals
Understanding the different types of buying strategies are a fundamental aspect of property investing and developing. The option of using joint ventures is another way to buy property and how working with other people can help you leverage your time and resources.
Let’s talk a little bit about that topic because you mentioned, you know, when you’re looking for motivated sellers, you could go so many different paths, but joint ventures is a way that you could actually help people find someone else working with you to find properties.
Because as we’ve talked about, some people are quite time-poor. You might not have the time to go and look at properties. You may not have the time to even do the research and get to know that. But if you actually go into a joint venture partnership with someone who has the time to do that, but you’ve also got the resources, it might be a win/win scenario. How have you been able to structure this kind of similar joint ventures to be able to do that?
It’s been interesting in my journey. It’s funny you bring that up. Because I remember earlier on in my career I did various joint ventures where I contributed the financial resources or I found the financial resources. I’ll give you an example where earlier in my career I got involved with a lady in North Queensland from a property space and she was finding deals and she was joint venturing with people where she’d go out and find blocks of townhouses and we would strive to title this is probably in early 2000 in North Queensland. In a mining town at this point. And so, you know, we’re buying, she was finding duplexes, blocks of five, blocks of six and the prices back then were quite reasonable, you know, sub 300,000, sub $500,000, very, very affordable for multiple income properties.
And so at that point in time, the Brisbane market that I was involved in was pretty flat. And so we’re looking for other greener pastures and so these opportunities came up. And essentially when you’re looking for someone like that, you’re looking for someone who’s on the ground doing property full time and they know an area very, very well. And so this institute focused on this town and the prices were pretty generic across the whole town. Each of the townhouses were roughly 50,000 to $70,000, which was very, very cheap relative to the rent at the time. You know, the rent was probably closer to 10%, which was really cool. So the properties might be $70,000 and the rent was the 140,000-$150,000. And we were looking at renovating them, strata title and selling them. So that was really, that worked really well for a while until at one stage I ran out of money and that became troublesome.
But long story short, she was finding the deals, running around, organising the tradespeople, negotiating with the agents, negotiating with the contractors, organising the sales. And I myself was organising the finance and at times I contributed the stamp duty deposits as well as the serviceability. Other times when I couldn’t, when I ran out of those resources, I found other partners to be able to contribute that. And then I still got a profit share, albeit a smaller profit share. I think at one stage I was getting a 25% profits to share on a deal. But I didn’t put any financial resources in us putting together the partners who had the finances as well as the partners doing the deal. So I think there are so many ways to do that. You can meet those kinds of people at seminars, workshops you can put it out there on Gumtree or even Facebook.
I’m sure there’s so many people who are looking for money partners, but you need to make sure that they know what they’re doing until your money’s protected.
And we’ll probably delve into another episode in the future about that in more and more detail. So sort of explaining that and even putting examples together. I think that’s a really, really important topic to talk about. It’s not something you just touch on and that’s it. It’s actually quite a structured way of, there’s frameworks around it and I know myself working within this realm as well, working with joint ventures, money partners and stuff like that. There are certain things that we’ve got to do to be able to form these relationships and then to be able to put that investment into the actual property because otherwise you can go out blindly and just think, you know, it’s easy just to find people, but it’s actually not that easy.
So there’s a lot of intricacies and so many different things to talk about on that side of things.
You could do a one day seminar on, you know, that kind of arrangements and protecting the money and exit strategies and things that can go wrong and how to make sure you find the right person. So I know that it’s just a big, big topic. And like you said, there’s a lot of intricacies and you really just got to start one step at a time.
Let’s jump back to the beginning when we’re talking about making sure that when you’re buying, you’re buying well because you know you’re going to make sure that you’re buying on the market. And maybe let’s point out some of the reasons why. Because say for example, if the market changes, what are some of the possible outcomes of whether or not the market changes as it goes down or it goes up or remains flat, how can that actually help your buffer and protect you with the property that you’ve just purchased?
Like I said at the beginning, you make your money when you buy and close. What I’m talking about is the buffers. If you’re able to buy it 10, 20, 30% under market value, it’s absolutely insurance. And you know, after a while for me and focusing on buying right and buying at a discount, sometimes you forget the 10, 20, 30 reasons why you need to buy under market value. But you know that that’s the thing in the last 12, 24, 36 months when the market has corrected and come back down in certain cities as well. You know, that’s where it just highlights is that you make your money when you buy and when you buy under market value, that’s where it’s a big insurance policy to protect yourself against the market downfall. So if you bought it 20% under market value and the market drops by 10% you’re still ahead.
Warren Buffett often talks about rule number one is don’t lose. Rule number one is don’t lose. And if you’ve bought it at a 20% discount and the market comes back by 5 to 10%, you can still sell it. If you want to get out, if you are concerned that the market’s going to go even further and drop further, you can get out and sell at a 15% discount or attempts in discounts and cover your costs and make a small profit and move on. And sometimes you just want to get out to pay off that debt, reduce your exposure and you know, be able to apply again, so to speak. So if you buy it under market value but the market goes up, that’s an absolute bonus. That’s happened to me many, many, many times because you really want to make a profit on the deal.
That’s one of the things that Kiyosaki talks about and teaches in his training is that when you’re wanting to buy a property, you want to make the profit up front. Oftentimes a real estate agent will sell your property double, triple every 10 to 15 years. Whatever it is that is prospective profit and you cannot control that. It may or may not happen. And so when I’m buying a property, I want to have profit right now at the beginning of the transaction, lock it in so that because the rest of the profit may or may not happen. So the market may or may not go up. At the moment after some of the people drop their prices by 10, 15%, you know, they’re very much licking their wounds and interest-only going to principal interest. Some of them are seriously bleeding with a negative cash flow. So it’s very, very painful if you get it wrong. And oftentimes that’s where you start off, you pay retail and you don’t know what you’re doing. And the market goes down and you’re going, geez, this game sucks.
I think you’ve really highlighted the importance of actually buying really well. You know, this is where you make your money when you buy. And the key component here is, and we’ve honed in on this quite a lot over this episode, is making sure that you’re buying on the market value at wholesale, which we covered in the previous episode. And I think this is the key component that everyone needs to just take away. So when you’re actually negotiating, find a motivated seller, and we’ve talked about the four D’s that actually go into this as well. But what I really want to also cover as well in this particular part is, we’ve talked a lot about how to actually look out for motivated sellers, how to make sure that you buy undervalue but what type of property are we looking for to better create that. And I know many times you’ve talked about finding free blocks of land. Maybe you want to share with the listeners exactly what that’s all about and what you actually look for to be able to find that.
This topic is so wide and so broad that we can start at so many different angles. I know when I started out I was looking at cosmetic renovations and it’s very much been very popularised by TV. If you go to Bunnings on a Saturday, you know, you’ll see that Bunnings are absolutely smashed with DIY home renovators and I completely get it. It’s very much an Australian cultural thing. You’ve got Queenslanders and older houses, 50, 60 years old where people can add value and they make a quick buck. I think that’s part of it as well. They like to add value and make a quick buck also to speak and add value that way. So when I started out, I think the first thing that people can look at is a cosmetic renovation where a house is potentially run down.
I wouldn’t say, you know, termite-ridden but you know, run down and all it needs is a lick of paint. Replace the kitchen, replace the bathroom, add a carport, lay some turf, put up a fence and add value that way. So I think that’s the first thing I’m looking for, oftentimes people may find properties with problems that you may want to steer away from. I’ll give you a couple of examples of properties with problems. Some of them might be that they’re next to an industrial estate where there’s lots of noise and lots of smell or it might be on a main road or directly opposite a school where people don’t necessarily want to live there or it’s got undermining where the foundations are falling apart, the slab is cracked, the house is split, and there are some real structural issues with that property. And so we call that properties with problems. You want to look for people with problems and you can add a cosmetic add value to improve the value of that property.
So just to elaborate on that, you said not to look for properties with problems, but people with problems. What do you mean by that?
Once again coming back to making money when you buy, right, you make your money when you buy it, you’re looking for motivated sellers. And that’s what I mean with people with problems, whether it’s a deceased estate, divorce, distance or debt. Tying that back in. So you’re looking for, if the property has a problem, you want to be able to fix it. You don’t want to buy properties that are sinking, undermined, that’s necessarily very expensive or difficult to fix. Having said that, I’ve got clients whose main aim is to find houses with termites but not active termites, the ones that have been gone for decades.
And we’ve got a client, we call them the termite whisperer, and if he can hear the termites, he can hear the money. But you’re looking with properties that are structurally fine, they may be cosmetically really, really ugly or you can even add an extra bedroom internally with a couple of walls with not a lot of costs. So we’re coming back to it. You look for properties with small problems, but more so people with problems where you can negotiate and you can get a really, really good discount on the deal.
I’ve heard some really, really interesting stories and examples that you are able to find properties where, you know, at the front this is the house and then at the back you get this block of land, like a free block of land. How do you go about finding these? And maybe if you want to share some examples you’ve done in the past because that fascinates me. It’s like you’re able to buy a property, maybe, I don’t know, a thousand square metres and you’ve subdivided half and at the end of the day, once you’ve subdivided it and sold the front part for the same amount of what you purchased it for, but you actually get to keep that block out the back, which potentially you could develop on down the track. It’s an amazing idea to do that. But maybe share with us some examples that you’ve done with that?
Free blocks of land, it’s one of those things that is not a new concept whatsoever. It’s been done for decades and decades and decades. I’ve just termed it. So in one or three or four words I’ve summarised what the concept is and in some essential terms what it is, it’s a property with an existing house and you might have a big backyard which you can subdivide off or the house is at the back and you’ve got a big front yard which you can subdivide off.
So I found out that in the marketplace when people were fighting each other for the property, I had to find a different way of finding deals that were in front of people’s eyes, but they still could not see. I know that sounds funny, it was right in front of their eyes, but they still could not see. And so I had to look at things creatively from a lateral point of view. So one of the deals that I did previously was a 600 square metre block of dirt. And oftentimes in that particular era, they’d say it’s zoned for townhouses. Oftentimes what people would do with an existing house is they’d knock it down and build three townhouses on 600 square metres. And that was the typical pace or the typical method that people would do.
And I would question that method and I would go, okay, if I do that, is it going to make money? And 99% of the time I was looking at those deals going, no. There’s no money in it. Generally, there’s only money for the builder because they’re making a build as much as there’s no actual property development margin. So I’d look at deals and I go, okay, how can I buy that same block of dirt and extract more value than what other people are doing? And I thought, okay if I don’t knock down the house if I keep the house at the front and I put two dwellings at the back, I’d still get three dwellings. Yes, the value of the house at the front might be less because it might need renovation as opposed to being brand new as a townhouse. But my acquisition costs would be less.
I’d still be able to rent it out and there are a lot of pluses with that transaction. So my point is that in that struggle, in that challenge of finding a deal, I manufactured an opportunity called the free block of land where you keep the existing dwelling and you cut off the backyard or you put a granny flat in the backyard or put a duplex in the backyard. An example of the one that I did recently in the last 12 months or so is, it was a thousand square metre big brick house, and it was on a corner block. Wherever you can corner blocks are great because you have a corner block, actually means two street frontage. So you’ve got one street on one corner and the other street on the other side, right? So two street frontage. And so this block was I think 50 metres by 20 metres.
So one frontage was 50 metres and the other frontage was 20 metres, which was a thousand square metres. So normally a thousand square meters with no two street frontage, you only have 20 metres frontage. Versus here we had all up about 70 metres of frontage. What does that mean? What that meant was I was able to subdivide that block not into two, not into four, but actually five blocks of land. So we cut down the 1062 odd square metre block. With that particular zoning, we’re able to cut the blocks down to 180 square metres which is crazy. And every time I do a seminar and I’ll put my hand up and say, who thinks 180 square metres block of land? Who thinks I’m crazy? Great. It’s still pushing the envelope and that deal did very well, made $200K profit in 12 months and that was a 22% yield deal.
So my point is that we didn’t start there. You know, we started off with other types of free blocks of land. It’s the filter, it’s seeing the things that other people don’t see. Keeping the house and using that frontage wherever you can. 180 square metres is definitely challenging to sell. But because we knew what we’re doing, we’re testing this testing that, by the time we’ve finished the development, we had already sold the blocks of land. So we don’t suggest that people do that outside the marketplace. Definitely test and measure. But that’s very much on the edge of experimentation.
Continuing on from our last example with 180 square metres, what can you actually put on that block? Because that makes me think it’s almost the size of a townhouse.
It is actually, it is the size of a townhouse block, so when you go back to my previous example of 600 square metres and putting three townhouses on that. Each block is around about 200 square metres for each dwelling. So you’re absolutely right when you have a 180 square meters, the applicable or building envelope that you can put on that is generally around about a four-bed, two bath, one car if you go two-storey. But if you go single-storey you are very much reduced to a two-bed, one car building. So you have to generally go two-storey. Think of it as a three-bed or four-bed, two-storey townhouse block with the size of the block. There are other relaxations. What I mean by that is you can actually build to the boundary and you can build closer to the back generally if you’re able to get some other relaxations. But my point is because the block is quite small, it allows you to build more on that block of land as well versus a 400 square metre block of land.
You may only be able to build a 200 square metre footprint. Whereas on a 180 square metre block of land, you can build like an 80% footprint on that, which is like 150 odd square metres. You know, which with a single-storey home is not that big. But when you go two-storeys at 150 square metres, that’s a 300 square metre home, which is quite significant on 180, it’s all house, no land.
I was going to say exactly that. So it’s like a freestanding house and you get lots of space, top and bottom, but you’ve got hardly any backyard then.
You might be thinking, geez, who would want to live in something like that? And look, the biggest thing that I’m grappling with and moms and dads around the world and Australia as well, it’s just affordability, and they’re busy. They don’t have time to mow the lawn, they don’t want to mow the lawn. They want to focus on what’s important and that for them, for the majority of the time is the dwelling, having enough rooms for their kids to grow up in close proximity to schools and transport. So that’s what we’re finding. It’s all about affordability. So instead they want the 400 square metre block. They want the 500 square metre block. But in terms of affordability, they can’t afford it. They can’t afford it. So if they get more bang for their buck and get a bigger building and less land, oftentimes if the location is good, close to a park, close to public transport, they actually don’t mind it. It’s actually no different, like you said, to living in a townhouse except you have no body corporate.
I was going to say that’s an excellent idea, especially when it talks about affordability. I think we should probably unravel that a little bit more as an example in an episode in the future because it sounds fascinating. Even myself. I’m just like, how did you do that?
There’s a balance of how did you do that? And just excuse my French, having the balls to do it and being able to push the envelope. But look that’s what being a developer is about. You’ve got to test different opportunities, especially when things are getting more and more competitive. Things are getting more and more difficult. So inland versus apartments, I’ll give you an example. Let’s say you’ve got a 1000 square metres inland. You’ve only got a thousand square metres. You can’t manufacture any more land. Potentially you can manufacture more blocks within that land. But with a thousand square metres, the only other way to produce more dwellings is go up. And then that side itself had zoning to go three-storeys. But in that particular area, which is a low socioeconomic area, going up any more than two-storeys just would not stack. So me doing let’s say five townhouses there versus me doing five blocks of land, I did the maths and it’d be a lot quicker just to do those five blocks of land, keep the existing house and make roughly the same amount of profit with less stress and less capital outlay. So my point is that you know, it’s a balance between being competitive and meeting the market.
It’s really fascinating because you just touched on a really, really good point there. You can actually generate the same kind of return or even a little bit more by actually doing land development and actually selling the blocks off and keeping the front compared to actually going all the way to actually develop the whole townhouse project because you know there’s a lot more time frames that’s involved. If you’re going to develop a whole project with townhouses, you’ve got to go through that whole stage of getting architects that design it up, getting the builders in and all that kind of stuff. And it can take up to anywhere between two to three years. Whereas as you’ve just said, if you actually subdivided that land and you’ve sold it off individually and you’ve also kept the front house as well for say passive income or so forth and that would have what taken 12 months, the time frame in that and you get the same on a return in a much shorter time frame seems to be a lot more logical. So why are people not doing that or developers doing more of that?
We can look at the debate between land subdivisions and apartments and townhouses. So do you want to go down that path?
Let’s sort of just give everybody a little taste of the overall concept and then we’ll have to put it into another episode cause we’re going to be finishing up pretty soon with this episode and I think this will be a great opportunity down the track to actually open up for a new discussion between apartments versus townhouses and subdivisions.
There’s so much depth and so much information that we can cover and we like to cover what’s relevant. But at the same time, there’s a lot of thinking behind why I do what I do. Don’t get me wrong in terms of townhouses and apartments there’s a lot of money to be made. However, there are definitely some constraints in land as well as townhouses. So, but just a quick overall view. I started off with my vision of wanting to become an apartment developer and one of my mentors earlier in the day and still now he does apartments. That’s his specialty. But I found that as I progressed along the journey, my preferences for risk, my preferences for timeframes, my preferences for profitability, I’d found that land was a lot more congruent with who I was and being able to get in and get out and get paid.
So what you were alluding to before is let’s say you’ve got a thousand square metres and you’re building five townhouses versus just subdividing the blocks of those same five townhouses. There’s an additional cost to build those townhouses, call it $250,000 each. That’s an extra $1.25 million. Versus with the land subdivision, you’re going to have to do the civils anyway. When you’re doing the townhouses, there might be a little bit more because you’ve got to retain the existing house and redirect some traffic in terms of sewer and water. But the bigger picture is that it’s a lot faster to do. And it’s a lot more proficient because there’s a lot less capital required, a lot less debt. So in that instance, you don’t need that $1.25 million of construction costs. So you’re holding onto that property for at least six to eight months less because you’re not building that building during that time.
Not only that, it costs you a lot more to do building plans. It can cost 15, 20, $50,000 depending on how expert the architect is and how ornate the drawings are and to what level, whether you’re close in the town or outside doing cookie-cutter designs. But my point is that with land subdivisions it’s pretty much five rectangles, which pretty much anyone can do. I reckon my daughter could do it with a bit of training, but it’s more so the thinking and understanding the town plan and the intellectual side of things. So long story short is you can get in and get out a lot faster when you’re doing land subdivisions. On the flip side though, the land is harder to sell versus townhouses because townhouses, when they’re built, you can touch it, taste it, smell it, see where the kitchen is, the bathroom, the tiles look amazing.
Whereas selling land, it is an art and a science and you’ve got to know how to do that. And now I think that’s where people fall down is they don’t understand how to sell land and because they don’t have to sell it, they just want to go back to what’s tried and true, which is townhouses or apartments. But you know, in this current market, apartments are very, very hard to sell off the plan. And essentially if you can’t get off the plan sales, you can’t get finance. And if you can’t get finance, you’re stuck. Its game’s over.
We’ll definitely have to make sure we bring you back on another topic to talk about this one in more depth and also explain it and unravel it and talk about selling land as well. That’ll be very, very interesting. Now the last thing I want to do is cover passive income. If you’re looking for motivated sellers and you’re making sure that you’re getting all those things in place in what we’ve talked about, how can we actually generate passive income and how does that actually fit into all this?
Passive income is very, very critical. And when I started out doing property, I thought, you know, passive income is where you generally start. And the thing about passive income that I love is that it comes in week in, week out, month in, month out. And I’ve got dozens and dozens of properties that just get rental income all the time. So I love passive income properties. I’ve got one that I’ve owned since 2003 and just keep renting it, albeit only 200 bucks a week. But it’s proven to me that as long as the building stands, which I’m sure it’ll stand for another 50 years, it’s just a Queenslander, it’ll stand. I’ll still get 200 bucks a week. When you accumulate that over time, it’s very, very, very powerful. So my point is that I think with all the activities that people do, passive income, I believe is something that you accumulate along the way or you accumulate towards the end.
And the reason I say towards the end is oftentimes if you’ve got capital like a deposit and you’ve got serviceability if you buy just passive income investments, let’s say you buy 10 properties and get passive income properties right now, it’s great, but then you get stuck. I’ve seen so many times where people do the buy and hold strategy, they run out of capital and the debt up to their eyeballs and they’re negatively geared with the dream of creating passive income. So passive income is where the rental income is more than the outgoing, so you call it positive cash flow, right? Positive cash flow. And that’s what I intermingle or interchange with passive income. So I use the opportunities. So let’s say to buy property under market value, if you’re buying under market value, it means you’re paying less for it anyway. You’re having less debt, less interest and more likely to have passive income. So I mix it up and I do a bit of buying, sell and a bit of buy and hold. So let’s say I’m doing a five lot subdivision, I might sell the full blocks of land and potentially keep the house to create that passive income and then the profit from the land I can pump into reducing the house debt and make it even more positive cash flow.
It really ties in well together. All back towards what we’re talking about because we started talking about motivated sellers, we started talking about buying free blocks of land and how to actually generate from that free block of land, the passive income. So this topic has just really rounded out very, very well and we’ve shared with the audience a lot about the differences between the motivated sellers, the four D’s. We’ve talked about making sure that you buy well, you know, that you make your money before you actually buy the land. So all these topics have mingled in extremely well. So I think we’ve covered everything that we wanted to today and hopefully, the listeners have really enjoyed that.
Maybe to top it off, let’s give everyone an assignment then too before we head off.
I’ve been thinking about what assignment to give people on this particular episode. I reckon what you can do as part of this episode is go and visit three investment properties or three properties. I don’t think we’ve given this assignment out before, but if people can just go out and go to three open homes this weekend, just go out and have a look at whatever it is. It’s near your area or what’s relevant to you. So if you’re looking at apartments, if you’re looking at townhouses, just go out and look at three open for inspections, collect business cards, have a chat to the real estate agent. I suggest go and have a chat with them and use the ATOMIC model, right? A, T, O, M, I, C. If you listen to the earlier parts of the podcast, you remember what those key triggers are to ask those agents and then start testing and see what difference it makes. When you have a structured conversation with a real estate agent, they’ll actually treat you differently. When you ask those structured questions, it makes you sound like you know what you’re talking about. You may or may not know it, it doesn’t matter. But definitely ask them those key questions and see what comes of it and see if they follow you up. But build that database of real estate agents. It’s important to build that rapport and keep looking at houses, keep asking questions and building up your repertoire of information.