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SFREI #23: Opportunity Vision–Seeing all the elements of possibility in a deal

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SFREI #23: Opportunity Vision–Seeing all the elements of possibility in a deal

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In this episode, host Jeff introduces the concept of Opportunity Vision–the ability to not only see what a property already is, but more importantly to be able to see what the property COULD be.  Jeff explains three big categories of Opportunity Vision: physical and value vision, income vision and financial structure vision. When you learn Opportunity Vision, you learn how to squeeze the most value possible out of every possible deal!

References in this Episode

The Opportunity Vision Analyzer Worksheet: Free Download!

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Episode Transcript

This is Jeff from a Thoughtful Real Estate Entrepreneur. Welcome to episode number 23 of Sleaze Free Real Estate Investing. A show for those of us who never really felt at home in that we buy houses crowd. Now in this show, we take a stand against what we call the lowbrow approach the mainstream guru seminar distressed seller approach that ends up giving real estate investors a slimy reputation and instead we discuss the strategies, the tactics and the philosophies that we call the thoughtful way. This is an enlightened approach to real estate entrepreneurship that focuses on constantly sharpening the sophisticated real estate entrepreneurs three most critical capabilities, seller relations, skills, deal architecture, skills, and opportunity vision. When all of these three capabilities are successfully in motion, you can make an excellent living today and be building long term wealth while creating value for everybody that you touch along the way. So today’s show notes are at WWW.thoughtfulre.com/e23 e Two, three. So please do yourself and do us a big favor by hitting that subscribe button in your podcast app, it really does help us and will help you make sure that you know exactly when the next episode is released. And today’s main course, we’re going to be discussing something that I call opportunity vision. This is one of those three main pillars of what we do as Thoughtful Real Estate Entrepreneurs. But as always, first a little food for thought. Because we are Thoughtful Real Estate Entrepreneurs. And we do like to feed our minds with things to think about and here’s what we’re thinking about today.

Today’s Food for Thought is based on a quote that I heard a little while back, but before I give you the quote, I want to tell you just a short story. As you probably don’t know when I started my full time real estate, entrepreneurship business. I originally had a business partner and we work together for probably about three years and And then our partnership woke up. And he wanted to leave and do something different. And it was a difficult and challenging time. And I remember feeling very upset and very bitter for quite a while. So I’ll pause the story there. And here’s the quote, forgiveness is giving up the hope that one day, you’re going to have a better past.

Forgiveness is giving up the hope that one day you’re going to have a better past. And what an interesting quote, now, I can’t remember where I heard this. I just wrote it down as soon as I heard it, and that was several weeks ago. And so I tried to do some research to figure out who said this, I could give the proper attribution but it appears that similar thoughts have been attributed to a lot of different people. So I’m not sure exactly who to give this credit to. However, I think it’s a really poignant point that we should break down here a little bit.

The past is what it is. So why can’t we immediately come to terms with the fact that it is what it is? Obviously, we can’t change the past. Why is it that we’re still angry or disappointed that the past happened the way it did? And then we act like we’re not willing to let it go until somehow that story rewrites itself. That obviously is never going to happen. That doesn’t make any sense, of course, at all. And it doesn’t make any sense. It’s not going to happen. And that means we’re never going to end up letting it go. Well, forgiveness is letting go and being okay with the fact that something wasn’t okay at the time. It wasn’t okay at the time, but we’re becoming okay with it now. So what is it in your own past that you just need to let go? What story in your own past Are you kind of secretly waiting to magically rewrite itself? Maybe it’s a story about you and the things you’ve tried to do before times that you tried to do something in real estate perhaps, and it didn’t work out as you’d hoped. Maybe it’s a story about a relationship with somebody who was once really important in your life. And the things that happened in that relationship that you wish had not happened.

Maybe it’s a story about your health, or your fitness attempts that you’ve made to improve your health that didn’t stick into it last in the past. So my question to you is, where do you need to give yourself the gift of forgiveness in order to be able to move forward?

Well, back to my own story. When it all happened several years ago, I was frustrated and I was bitter and I’m, I was upset. And I’m sure that he was too. But about a year and a half ago, one day I was I remember it clearly I was walking my dog and I thought popped into my head related to my former business partner. And I noticed a difference in inside myself that at that moment when that thought popped into my head, I didn’t feel any frustration. I didn’t feel any anger, any resentment, any bitterness anymore. It was as if that had just completely gone away almost overnight. And I’ve never felt that way ever since then.

I apparently had given up the hope that somehow my past would become different. And I just became accepting of the fact that that past was what it was. In fact, two days ago, we met for happy hour, he and I, it was really fantastic. I’m truly and sincerely glad to see that he’s doing so well. And I’m so glad that that forgiveness has taken place in my own life. So once again, forgiveness is giving up the hope that one day you’re going to have a better past.

That is today’s food for thought.

Alright, we’re moving on to the main course of today’s episode, and this is a great One This is a meaty, meaty topic. Today’s topic is what I call opportunity vision. So let’s just first start by answering the question, what is that? What does that even mean? One time I remember my own coach Greg Pena said something that was really simple, but it really stuck with me. And he said, the average person sees what is there. But the entrepreneur sees what could be there. And now this is what I now call opportunity vision. It’s seeing all the elements of what could be there, and evaluating each of those elements to determine where the greatest opportunity lies. My coach, Greg’s term for this is expandability. It’s something that is what it is now, but it could be more in the future. And it’s almost like the difference the delta between what’s there and what could be there.

So we’re going to talk about opportunity vision. We’re just seeing all of the elements of what could be there and then evaluating those elements to determine where the greatest opportunity really lies where you should focus your time and energy. Now, I went ahead and created a special tool for you, just for this topic. And I’ve called this tool, the opportunity vision analyzer. It’s a simple worksheet that is going to guide you on a project or project basis, deal by deal basis, guide you through evaluating the different potential forms of opportunity that a deal can offer, and gives you a way to score each element of that deal. So that you can ultimately determine which forms of opportunity are the best ones for you, so that you can then craft your deal to focus on that, right. So if you’re working on three different deals right now, and they’re in this kind of analysis and negotiation phase, you’re going to want to print this vision opportunities. Vision analyzer out three times. So you can fill out this worksheet on a unique basis for each of those three separate properties. You can get this free download on the show notes page for today’s episode. So again, that’s WWW.thoughtfulre.com/e23 as an episode 23 slash e two, three, and you can download the opportunity vision analyzer PDF. So let’s talk about the difference between what’s there now and what could be. And now this can come in many different forms, I want to go over some of those forums. And as I go over these forums, I want you to do something I want you to listen for a theme. There’s a common denominator across all of these examples of the different forms of opportunity difference between what’s there now what could be there. And I want to see if you can identify this common denominator across all these examples. going to give you three categories. And the first category of opportunity that you could envision is about the physical aspect of what is there versus the physical aspect of what could be there. And this then becomes about the value of what’s there, versus the value of what could be there on just a straight property value basis. So, first simple, simple example. There’s a rundown house on this property now, there could be a repaired nicer version of the house on the property instead. Okay, so this is a play based on property condition. You can change the condition of the property to take it from what’s there to what could be there. And this is of course, what we do in a simple house flipping or wholesaling type of mentality. I personally did one of these in the last few months. I bought the property of one of my neighbors next to where I live. It was a rundown kind of home that just hadn’t been maintained in a long time. I didn’t need to really change the house, I just needed to make it a better, cleaner, more repaired more modernized, updated version of what it already was. So I took it from what it was to what it could be, and then that increase the value, a great deal. That’s a very simple and relatable example. I’m sure anybody listening to this can relate to that concept. Here’s another example. On this lot. There’s one house there now, but there could be two houses there. Okay, so this is a play on you having a basic understanding of tax lots and how they work and how a zoning works in your town or in your city. In my area, we call this as some basic infill development houses on one lot that the lot and the zoning could allow two homes so You build a second one, you tear down the first one to build two more. But either way, this lot has one, it could have two. And that’s the opportunity that we see. Some similar idea would be that one unit is on this lot, but there could be multiple units, whether they’re separate homes sold separately to different people or not. So you have a single family home in a duplex type zone, for instance. And in order to do this, you’re making a basic zoning allowance, this type of play.

I did this myself a few years ago. This is one of my favorite long term, medium long term holds in my portfolio, I found a house that was a single family home in the zone for a duplex. And so I took the opportunity to create a second unit using the exact same existing square footage in the house. And I’ve various significantly increased the income and thus the value of the property. By adding the second unit into the property that was already there. Here’s a third example within the category within the under the guise of physical changes that could be made to take something from what it is to what it could be, let’s say a small structure is on this property now, but a larger structure could be there. And I don’t just mean a small houses there in a larger house could be there. That certainly could be true as well. But what I’m talking about is more of an understanding of zoning code. So for instance, I am working on a deal like this right now. I don’t own it yet. I’m just talking with the seller and we’re kind of doing our slow dance. And the idea though, is that this is a commercial property. And it currently has a one story building on it. But the zoning would allow for a 45 foot building which is going to be four stories. And so there’s a big difference. Friends between what is there, and what could be there. And as I look at this, and I see the opportunity to create value, that’s the greatest opportunity that I see in this particular example. Okay, so the first category is physical aspects of these properties, physically what’s there now physically what could be there? And thus, what is the value or the price of these properties once you take them from what they are to what they could be? Let’s take a look at another category. The next category is looking at opportunity from an income perspective. What is their income wise versus what could be their income wise? So here’s a simple example. What’s there now is a house renting for $800. But what could be there is the same house maybe with a couple of minor improvements and cosmetic updates. The same house could be renting for 15 hundred dollars. So your play here is basic rental market and property management experience. If you know the market better than the current owners, or you’re more willing to actually bring things to market than the current owners, then you could move something from what’s there to what could be there. I did, I’ve done lots of property deals in this particular category. But I think of one in particular, where the numbers were almost exactly like this. This was a little tiny old house, it was renting for about $800. And I knew that this same house could without even even making any updates more than maybe just a coat of paint rent for 1500 dollars. The current tenants were just way, way, way under market, because the owners didn’t have the knowledge or the wherewithal to adjust the rents to market and so when I bought the house I was able to slowly adjust those rents to what the market said and it created a big win for me. So that was where I saw value in taking the property from where it was to what it could be. Here’s a slightly more sophisticated example. Let’s say, what’s there now is a house house structure, a residential structure in a commercial zone, and it’s renting to residential tenants for 1500 dollars. Okay, so think of a little Main Street area of your town, for instance, with a house on it, and around it or businesses, but this is a house and there are people living in it like it’s a house. And those residential tenants are paying 1500 dollars a month, but what could be there would be 20 $500 a month, coming from a commercial tenant, maybe it’s a professional services business like a CPA firm or an attorney who wants to use this residential structure in the commercial zone, as an office. Maybe A retailer who wants to have a cute little store there on the main street. But your play here to take this from 1500 dollars as a residential use to 20 $500 a month as a commercial use is again your rental market demand and property use expertise. You know what this could be. And you know that there would be demand from these commercial tenants. And that is the play that you make in order to take it from what it is to what it could be living. Let me give you another example. What if you had an apartment building with a big empty basement and that apartment building with a big empty basement could be an apartment building with a basement full of storage units renting for $25 a month each. So your play in this case would be a play on tenant amenity demand. You see the availability of space in the basement. You know that tenants would gladly be willing to pay $25 a month to have a storage section or kind of a cage built out within that basement. And you decide to do that in order to capture that. Now, as a side note, you might say, well, 2500 or $25 a month is really not all that significant.

But let me give you this math because I personally have done this with an apartment building that I have that has eight units. And those units each were given a storage space in the basement. So there were already storage units and storage cages in the basement. But the previous owner had given those to the tenants as a freebie that goes along with their tenancy in the residential unit upstairs. Well, I looked at that and I said, this is something we could charge for separately. And if you do the math and you understand the basics of cap rates, Which of course is beyond the scope of today’s today’s episode, but let’s just suffice it to say that if you have eight units who are paying $25 a month.

If you are in a cap rate market of a say, let’s call it a five cap, a 5% cap rate market, eight units paying $25 a month adds $48,000 of value to your building. So it adds $200 a month of cash flow into your pocket, but it actually increases the value of this building by $48,000. So not insignificant whatsoever. Let me give you even a couple more examples of ways to take income from what it is to what it could be.

Let’s say you have a generic apartment building of average units. And these units are renting on average for 1100 dollars each. But what could be there is the same apartment building but an apartment building that’s up now a branded Community of dog owners with a dog friendly amenities like fenced small yards, maybe a little dog run where the dogs could play a little dog park area, a dog wash, sink, base and type of an area. And if you were to do that, take the same apartments and rebrand them remarket them and reorient some of the amenities towards dog owners, you might be able to get 1400 dollars a month. So this is a play on managerial strategy and marketing strategy for a property. Let’s say you’ve got a duplex that has no dishwashers, or laundry in the units or on site.

And those duplex units are renting for $1,000 aside, that’s what’s there. Now maybe what could be there would be the same duplex units with washers and dryers and with laundry in each unit. And now they might rent for 1200 and $50 aside This is a play Have you understanding the amenities that tenants have preferences for and the demand that that would create for your units. I did this exact thing and a triplex that I bought in 2018. There was no laundry on site. There were no dishwashers, we’re going to be remodeling the units anyway. We put dishwashers in each of the units, we put private laundry in each of the units as well. And that allowed us to charge an unbelievably larger amount of rent than we were able to charge before because those amenities are very important to the type of tenants who wanted to rent in that building. Let me give you one more example, under this category of income based approach to what is there versus what could be there. similarly to what we talked about in the physical section If you have a, let’s say one story commercial building that is there now generating $50,000 a year in net operating income noi. But it could be that four story building, generating $200,000 a year of noi. This again comes back to a play based on rental demand, and knowing market rates for rental demand. So in this case, if you were to take this one story commercial building from what it is now that two of the four storey commercial building that it could be, you increase the income, and you increase the value and in the case of a building like that a commercial building a larger one, the income and the value are very, very closely correlated. But the point is that you increase both by taking it from what it is to what it could be. Now, I want to move on and give you a third category of things that could be transformed and a property things you could go from what it is to what it could be. Now, this is a little bit different. And this is a little bit more of an advanced topic. So stick with me here and I’m going to do my very best to explain this in an easy to understand way. When most people look at the acquisition of a piece of property, they see one thing, the property that they are buying, and what they can do with that property. Others however, realize that when they’re buying a property, they’re actually buying two things. They’re buying a property, and they’re buying financing. Now, every property is financed. Let’s just start with that little bit of truth. And in fact, real estate news is just really a vehicle for financial structures. My coach Greg is is kind of famous for saying Real Estate is just the clothing that finance wears at the end of the day.

The real estate is just the physical manifestation of financial structures. Okay? So I said something a moment ago that you may have scratch your head out, every property is financed. And the reason I say that is the financing that’s needed to buy a property is always sourced from somewhere. It’s either coming from, let’s say, a bank, a private lender, an equity partner, the seller, or it’s coming from you and your own cash. And yes, even if you are using your own cash, you are acquiring financing for the deal. By buying effectively your cash from yourself. Think about the concept of opportunity cost. Once you’re using that cash to buy this property, you can’t use that cash for something else. So even You don’t have to pay yourself interest in the most literal sense. In order to use your own money, you are acquiring financing from yourself, even if you are buying something with cash. So the point is that financing is being sourced for your deal from somewhere. And ultimately, to put a deal together, you both need the financing, and you need the property. Okay? Now, a very sophisticated real estate entrepreneur, in my opinion, looks at both of those things that they’re buying the property and the financing, and they consider both of them together, but they consider both of them separately as well. In the case of financing as they look at the financing, that they’re going to be acquiring one way or the other.

They’re evaluating the value of that financing, and what opportunities that that financing presents offers to them. Now most financing is sort of disposable, you might say it’s disposable, single use financing. If a bank makes me a loan to buy a house, that’s a single use disposable bit of financing, because when I sell that house, I must pay that loan off.

But not all loans work that way.

Some loans are not single use loans at all. Some loans can be carried forward and can be continued to be used and remain in place, even if the property that they were originally associated with has been sold. So there may be an opportunity to buy financing that you can use well into the future beyond the scope of this current project, and if that were the case, that would be a huge opportunity that you would want to be able to see As an opportunity vision specialist, as well, let me give you a simple example. A couple years ago, I bought a house and I paid around $200,000 for this house. I saw potential in the house a little bit. But the greatest potential that I saw the greatest opportunity that I visioned, so to speak, in this deal was actually the seller financing loan that I was able to to negotiate with the sellers. These sellers wanted to make me alone. I didn’t have to ask them, they practically insisted, because it fit their own financial strategy, their own tax strategy, and I was able to negotiate a great loan with them, and they did not want to be paid back anytime soon. on that loan. I knew I wasn’t necessarily going to own that property forever. So we negotiated something where I could sell this property and give them a different piece of collateral for their loan and not pay off their loan because they didn’t want it to be paid off. And frankly, I didn’t want to have to pay it off, if I could find them a different piece of collateral to use instead. So I bought this house for around $200,000 I put a few thousand dollars into it. I sold it for around to 25. And I effectively netted almost nothing on the flip. I mean, maybe a couple thousand dollars, but it wasn’t enough to make the project worth it for the profit on the flip.

But that is not why I bought that property. I bought it because in buying the property, I was buying some financing that I liked a lot. So with all this in mind, there’s a skill of opportunity and vision that evaluates all the possibility that the financing brings to the table as well beyond just the opportunity that the physical dirt sticks and bricks The property brings to the table as well. Okay, so now we’ve gone over three big categories of opportunity vision, and the idea of seeing the difference between what is there and what could be there in the future. And those three categories again, to recap, are the physical perspective and thus, the value perspective of the property, the income perspective of the property, which in a commercial property does lead to the value perspective as well. And then the financial structuring perspective of opportunity that a deal can present. So here’s my question for you. As I went through the three categories and the examples within each of those three categories of different types of opportunity, you might be able to spot Did you see the common denominator? Did you hear the common denominator in those examples? I’ll tell you what it is. It’s knowledge If you go back and re listen to this, you’re going to find that what I talked about every time was you having some knowledge. Let me give you a couple quick examples. Going back to the previous examples I gave you, when I talked about a house being run down now and you knew that it could be a nicer repaired version of that, it’s because you had knowledge of what it would take to move the property from its current condition to a better condition and knowledge of what the market would offer you. If you did that. In other in another example, you knew that this particular lot could allow two homes instead of just one. You had knowledge of tax lots how they work in your, in your city in your town and knowledge of zoning. You had a house running for $800 it could be running for 1500 dollars, you had knowledge of property management processes for Raising rents, you had knowledge of your own property management market and its demand and what prices are when you had an apartment building with an empty basement, and you decided to add value by building storage units, you had knowledge of what tenants wanted and what the value is that they would be happy to pay for those additional amenities.

Knowledge.

When you were able to look at your deal and see that while you were buying a property that was maybe only modestly exciting, that the loan you were able to negotiate with the seller was the exciting part. Knowledge. So that’s what it all comes down to is in order to see in order to see what is there in terms of opportunity, you have to know what is possible. First, you can’t see the possibility if you don’t know what is possible. So It’s up to you to be educating yourself on what the greatest bit of possibility is in each scenario, and then you can train your eyes to be able to see it very clearly and be able to see things that other people don’t see. Let me give you one quick example on that.

If you’re looking at a property, and another investor standing next to you is looking at the property. And you know that this zoning will allow you to build a second unit and they don’t know that. Well, who’s got the more expansive understanding of possibility in this case, you do by a long shot, because they’re going to look at this deal. And they’re going to say, I can only pay x for that because it’s just a house. There is no more. Maybe they could paint it and spiff it up and put new kitchen cabinets in it. But it’s still just a house, but you’re looking at it. And you’re saying like I see an apple right now, but what I really see here is an orange and I know I can transform this and this competitor standing next to me He has no idea that this could be so much more than it is he thinks it could just be a prettier version of what it is, I know it could be a completely different thing. So knowledge, where can you create new value that does not currently exist? You have to know what is possible. Because when you know what is possible, then you know what could be there. That’s opportunity vision. And when you have opportunity vision, this is going to allow you to squeeze the most value out of each deal that you do. Another way to look at this would be to think back on all the previous deals maybe that you’ve done, and ask yourself, Oh, my gosh, I wonder what I didn’t see at that point. I wonder what opportunity I left on the table because I just didn’t have the knowledge at that time to know what the full breadth of possibility was on that property at that time.

Okay, so In conclusion for this, and this is just the beginning of a conversation. We’ve talked about the idea of seeing what could be there. And there’s lots of different ways that that can happen, different categories of what could be there, and that it takes knowledge in order to be able to see that. In

the next episode we’re going to discuss now, once you have that knowledge, and you see the opportunity, you have opportunity vision, how do you put it to work in order to create huge wins for yourself? I want to remind you, I’ve created a special tool for you, just for this topic of opportunity vision, called the opportunity vision analyzer, simple worksheet, that will guide you one worksheet per property that we’re working on, guide you through the process of evaluating these different forms of potential and forms of opportunity that a deal is offering. And then you can score each one and you can ultimately sort through those scores to determine which forms of opportunity are going to be the most important that you are going to pursue? So get that on the show notes page at WWW.thoughtfulre.com/e23. The opportunity vision analyzer. thank you as always for listening to Sleaze Free Real Estate Investing on the next episode, we’re going to continue this discussion we’re going to keep talking about opportunity vision. And we’re going to get more tactical about what do you do with the opportunity vision.

Now that you have it again, please do yourself and do us a big favor by hitting the subscribe button in your podcast app. And that way you’ll know that the second the next episode is released and we’ll be able to get it into your hands. Show Notes including a full transcript can be found Of course on the show notes page at thoughtful our E comm slash e 23. And until next time, this is Jeff from the thought for real estate entrepreneur, signing off.

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