A Profitable Deal Comes from Finding the Delta

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How do we make money in real estate investing? Simply put, we seek to find “a Delta”—the difference between what we see in a property, and what the Seller sees. Entrepreneurs don’t see what is there, they see what COULD be there. There are many different “Deltas” we can find and profit from, and in this episode Jeff walks through eight examples of common “Deltas” we can look for and often find!

Episode Transcript

Let’s tackle a really broad basic question that we’ve all thought about a million times, especially at the beginning of our journey. How do you make money from a real estate deal? I mean it whether you’re doing a flip, whether you’re doing long term hold rentals, whether you’re doing any other form of deal. How do you make money in a real estate deal? And the answer is actually pretty simple. The simple answer is we have to find the delta, and in today’s episode, I’m going to talk to you about what finding the Delta means and all sorts of different types of Delta’s you can find. Let’s cue up the theme song, we’ll dive right into this.

Welcome to Racking Up Rentals, a show about how regular people those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented dealmakers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media. This show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

See, thank you for joining me for another episode of Racking Up Rentals. Show notes for this episode can be found at www.thoughtfulre.com/e85. Please do us a big favor by hitting the subscribe button in the podcast app you’re using. It really does help fellow thoughtful real estate entrepreneurs to find us onward with today’s episode.

In today’s episode, I’m really excited to chat with you about the idea of the Delta. In fact, I can’t believe that it’s taken me 85 episodes to talk to you about this. So directly, so profitable deals come from finding the Delta — finding the delta between what you see and what the seller see. So what’s a Delta? Well, first of all, delta is a gap. It’s a difference. It’s a difference between two ideas, two visions, two numbers, the delta between 10 and eight is to write the understand what I mean with that there’s a delta, in your vision of what you see a property could be or could do versus what somebody else sees as well. Now, entrepreneurs, we don’t just see what is there. We see what could be there. I remember learning that idea from my own coach Greg the very first time and it really struck me and I thought, Oh my gosh, yeah, my job is really to be able to see different things than other people now, that could be seeing different things than other investors, right? Because at some point, I may find myself with some competition, right? We try to market in a way that that prevents that from happening. But occasionally, there’s somebody else who might be interested in a property and there needs to be a delta between what I see and what they see. But the most important Delta that we need to focus on like on a daily basis that we’re going to focus on in this episode, is the delta between what you see is possible with a property and what the seller who you’re negotiating with sees is possible with the property. And this really brings us back to one of the core ideas, I feel like I’ve created a few proprietary terms, as I created the thoughtful real estate entrepreneur. And one of those is opportunity vision.

And so opportunity vision is very, very closely related to this topic today. And I define opportunity vision as seeing all of the elements of what could be there, and evaluating each of those elements to determine where the greatest opportunity lies. So when you look at a property or when you look at a deal, and you see either physically what could be there or use wise, what could be there or financially, what could be there. You have a vision for what you think the highest and best use is. And oftentimes there’s lots of different ideas, you’ve got different options that come through your mind, you think, Wow, we could do that. This could be better than that way could be better on that way could be better that way. Which of these paths do we want to choose? And that is the process of developing and refining opportunity vision.

And so opportunity vision is very, very closely related to this topic today. And I define opportunity vision as seeing all of the elements of what could be there, and evaluating each of those elements to determine where the greatest opportunity lies. So when you look at a property or when you look at a deal, and you see either physically what could be there or use wise, what could be there or financially, what could be there. You have a vision for what you think the highest and best use is. And oftentimes there’s lots of different ideas, you’ve got different options that come through your mind, you think, Wow, we could do that. This could be better than that way could be better on that way could be better that way. Which of these paths do we want to choose? And that is the process of developing and refining opportunity vision.

So we’re going to talk today about how you can have an opportunity vision that is different than the seller’s vision for that property and what it is they are selling you. I actually like to refer to this often as the seller is selling you an apple and you’re negotiating based on them selling you an apple, but really in your mind’s eye you’re seeing an orange, so you’re paying them fairly for what they think an apple is, but you know you’re about to come verted and transform it into an orange. You know, there’s one really interesting philosophical point that I want to make here. This, this might be something you’ve never thought about before. It’s not something I’ve thought about many, many times, but it has come up a few times in reading that I’ve done every time it comes up, I just think it’s absolutely fascinating. And the philosophical point is this: In order for us to have a deal, in order for us to agree to move forward in a deal, a buyer and a seller, there has to be a disagreement on value. Okay, wait, let’s back up. That doesn’t make any sense, right? In order for us to agree to a deal, there has to be a disagreement on value. And the reason that this statement is true, what this statement means is that let’s say you are talking to a seller about buying their single-family home and the price that you’ve agreed to is $200,000. For you to say yes to that, you have to feel like that house is worth more to you, than the $200,000 that you will spend on it. And at the same time, the seller has to feel that that $200,000 is worth more to them than the property the house that they already have. Right. So it kind of comes down to sort of a business version of beauty is in the eye of the beholder. And in this moment, I would rather have that thing that the seller has the money in my pocket. And at that moment, the seller would rather have the money in my pocket, rather than this house that they have. So in order to get to an agreement, to make a deal, there actually has to be a disagreement on value. Isn’t that fascinating? And now we’re going to talk about sort of very intentionally making sure that there is a disagreement on value by you developing your own opportunity, vision, and creating the delta between what the seller sees, and what you see.

There are a lot of different ways that there can be a Delta in your opportunity vision and the seller’s vision, there’s a lot of different ways that you could be seeing an orange, and they could be thinking that they’re selling you an apple. So I’m going to run through a few simple examples that you’ll be able to relate to a couple that get a little bit more advanced. But you’ll see what I mean.

So the most obvious, obvious difference, right in front of us is of course market value, right? There could be a difference in vision between what you understand market values are and what the seller understands. market values are now this could come from lots of reasons, right? You could be looking at this house saying this $200,000 house is worth right now to 25. And the seller might be thinking, yeah, this house knows it’s worth 200. Now why would there be a difference in those things? Well, there could be lots of reasons, the seller might just simply not be all that tuned in are spending much time and energy focusing on that. They might just be looking at simplistic outside data points like Zillow estimates and thinking that those are 100% accurate, they might live out of state and not know that both of the properties adjacent to this particular one has been renovated recently, and it just sold for a lot more or about to be sold for a lot more, there could have been a market correction a while back. And now the market is increasing rapidly in value and the seller just doesn’t necessarily know that. Those are definitely easy ways that there could be a delta between your idea of market value and their idea of market value. Then we take that idea and we even pivot that further and say, how about the difference in your idea of ARV after repaired value and their idea of after repaired value, you know, you might know that spending $30,000 painting and reroofing this house and re-landscaping it would actually add $50,000 of value. And they don’t really realize that some of those repairs would help quite as much as they actually what. So number one is simply market values. This is the entirety of the thought process for most people who are involved with wholesaling the entirety of the thought process for most people involved with flipping alone. But it’s a very important Delta that you’re seeking a delta between what you think the current value is, and they do this pretty obvious.

Let’s move on to the next one, which would be about income rents. I’ve talked to lots and lots and lots of sellers who when I when I chat with them, they say yes, my duplex, getting 11 $100 for each of the units, but that’s under market and I say great. Well, what do you think the market rate should be and they say, it should definitely be 12 $100 per unit but um I’m looking at that going, that should be 15 $100 per unit? So there’s a Delta there between my understanding and knowledge of what the market rents should be in their understanding of what the market rents should be. And when you think about this, from the income approach to value, like cap rates and things along those lines, that delta equates to massive amounts of difference in values, right? If you’re talking about a 10-unit building, and they think they’re under rent by, you know, $100 per unit, you think they’re under rent by $300 per unit, all of that income. extrapolated over a cap rate could mean a tremendous difference in the value, the appraised value, even of that property, once you get those rents up, so another Delta, that’s just really kind of low hanging fruit that we should be listening to all the time listening for all the time, is the delta of income in the form of rents. Here’s another one, there’s often a delta between the repair need, or the cost that the seller perceives, versus you. Now, you might think this delta often works in in reverse, it works against you, you know, the seller says, Oh, your other property needs $10,000 of work. And it actually means 30. And that can happen a lot of times too, but absolutely is possible that the opposite can happen as well. I bought a property from a woman a couple years ago, who when we spoke on the phone, and we were kind of arranging our meeting, she said, Yeah, you know, I used to live in this house. And then I rented it out because we move somewhere else and it’s vacant now. So I’ll show it to you, we should just meet up, I’d love to show it to you over there. But I just need to warn ya, it sits in rough shape. And they just really did not meet my expectations. And I just can’t stand renters. And so, you know, she put me in this frame of mind about what this property was going to be like when I got there and went inside. And when I got there and went inside, you know, she kind of before she opened doors, she’s like, okay, just you know, brace yourself, it’s not very good. And we open the door, and I’m looking around going, this is your idea of a disaster. I’m looking at this going with, you know, 20 $500 worth of lipstick, I can get this thing looking good. Again, this is no big deal at all, or there are people there’s another type of example there are people who have renovated their own homes. And when they renovate their own homes, they hire the Rolls Royce renovation company and they think a kitchen remodel costs $80,000. And so they’re extrapolating that out and saying, well, this, this rental kitchen remodel, even if we don’t, you know, do all the bells and whistles is still $60,000 and I’m looking at it going, dude, I can get that done for like $25,000 with my team. So there’s a delta between their idea of repair cost and repair need and my idea of repair costs and repair need.

Here’s a fourth example. There can be a delta between their idea of remodel options and yours. One simple example in my primary market of Portland’s we have a lot of old houses and a lot of old houses have basements. And basements can be if the ceiling heights are, are good enough really great things to renovate and add a lot of square footage to house maybe even add another bedroom with some additional modifications, this and that more living space. If nothing else, you do a quick easy framing in of the room and put some carpet down and it becomes a family room. That’s very, very simple. And sellers don’t always see that they can, they don’t see that there’s additional opportunity to remodel their property in a pretty easy way. I bought a house last year, that was a very small home is about 900 square feet. And it was three bedrooms and one bath. And I thought to myself, boy, this thing would be a lot more marketable. If it was a three-bedroom, two-bath house, but it’s a very small house, there’s not a lot of space to add another bathroom without doing an addition, I didn’t really want to do an addition. But we looked very creatively at the floor plan. And we saw you know what this laundry room here is a little bigger than it needs to be. And it already has some of the plumbing that we need for a bathroom. So what if we take this laundry room that has two side by side units, and we convert the laundry room to having stacking units and we carve off some of that space and a little bit of an adjacent closet and we make that a second bathroom. And so we did that it was really quite easy. It wasn’t even terribly expensive. And it really changed the overall marketability and desirability of that house and its potential target market of buyers. So there was a Delta there between what I saw was easy and possible to really change the overall picture of what this house is then what the seller saw as well.

Number five — zoning is a big topic and zoning varies of course from market to market, and city to city. But the idea of zoning, of course, is that the zone of a property dictates what is possible there. And if you’re buying, let’s just say as, as a simple but extreme example, a single family home from somebody whose property is zoned for 75 foot building, you can definitely pay them fairly for the single family home that you are buying that they think they’re selling you, because that’s the apple, but the orange that you see is you see, my goodness, at some point, we’re either going to sell this to a builder, or we’re going to tear this thing down and build a much, much, much larger building. And so the zoning by itself, that’s an extreme example, can be a huge source of a delta. But here’s even just a simpler, more subtle version of the Delta, what if the zoning for this property would allow a duplex and you have a single-family home? Now, you know, gosh, I without buying any additional dirt or land, I could build an adjacent attached structure to this, that would give me a whole other unit. And now I’d have two sources of income than just one. It’s like having a free lot to build on or another bit of low hanging fruit is in many municipalities now, including the ones that I do business in. There’s the concept of the ADU — the accessory dwelling unit. And that’s a really easy way to add another unit to a property. So you’re looking around the property saying this residential zoning will allow me to add an ADU, do I see a physical place that makes sense for this as well, whether it’s inside the current structure, like in a basement, or there’s a big backyard or something like that, that I could use, but there can be easily a delta between your vision and the sellers vision in terms of zoning.

On a somewhat similar note, number six, how about something to do with your ability to divide the land that you buy or divide a lot, right. So in especially an infill type neighborhood, lots are at a premium, because that’s where people want to be, and there’s not much buildable space. So if you buy a property that say 10,000 feet, in an area that is zoned for lots that have a minimum of 5000 feet, you very well might be able to divide that lot and have a second lot that you could either sell, or build something else on and then sell or do anything on. So the rules of exactly what’s possible were will vary from town to town. But if you see the ability to buy a piece of property and actually turn it into two pieces of property, and the seller doesn’t see that possibility, that can be a very important Delta for you.

Also, let me give you number seven, how about builder or tear down value. Seller is selling you a property, and they’re thinking they’re selling you this house, because you want to buy the house, and what you’re looking at those you’re seeing, I’m buying this house that is an apple. But what I’m really seeing in myself and my opportunity with this is the opportunity vision of this being a great building lot for a builder who will build a much larger home on it, or maybe a builder who will build two homes on it, depending on the zoning. You know, in my city, for instance, if a lot is on the corner, there are different rules and possibilities for what you can do there than if the lot is in the middle of the block. And if it’s on the corner, you can often build two homes, that one that’s sort of facing each of the two directions. And that gives you an ability to change the pitch picture significantly too. So you could buy a house from the seller, pay them very fairly for the house that you’re buying, but know that you’re not buying it for what it is the apple, you’re buying it because you know that it could become the orange, which is a two-lot building opportunity for a builder who you could resell that property to. And number eight, while there’s no limit to the number of things, there could be deltas on we also don’t want this episode to go for five hours.

Let me give you another example that’s a little bit more maybe sophisticated or advanced. And that might be the arbitrage of money or the arbitrage of interest rates. Okay, so you might see a Delta in the price of money that you can borrow, and the price of money that you can rent out to other people. So let me be more specific and precise. And what I mean here, what if you were to negotiate a seller financing deal? Well, that would be right up our alley on this podcast right in this community. What if you are able to negotiate a seller financing deal that has supercharged seller financing elements and you negotiate it at say 3% and your negotiated terms do not involve a due on sale clause, and this now opens up your ability to resell this property to somebody else with seller refinancing without paying off your underlying debt using a rap note. Now, the where’s the Delta you might be asking? Well, the Delta here is that you see that there’s somebody who would gladly pay 5% interest to be the buyer in a transaction where you are the seller financing seller. So you buy a property from somebody on seller financing with no due on sale clause at 3% interest, you resell it to somebody else, at 5% interest. And now, you are capturing the arbitrage at the interest rate difference, the delta between 5% and 3%, you could sell the property for exactly the same price that you bought it for, and still be making money because you saw a Delta in the interest rate that you negotiate.

So deltas are very, very important. And if you remember several episodes ago, we talked about something called solving for awesome. Solving for awesome is about coming in with your opportunity vision, figuring out what the best part of a deal is, and then designing the deal in a way that captures that specific thing like an algebraic equation we’re solving for the awesome Well, the delta is the awesome. In most cases, the delta is that thing that we see as the greatest potential and we are now solving for that, we’re going to design our deal in a way that allows us to capture this important distinction difference gap between what we see and what the seller sees.

So your job, my friends is to be as educated as possible. To be able to see as many different angles of value as you possibly can, right, you need to know a little bit about zoning, you need to know a little bit about the comp plan and what’s coming in the future in terms of zoning in your town or your city, you need to know what minimum lot sizes might be to know if you could divide something, or a minimum lot dimensions and this and that you need to know values, you need to know market rents, you need to know repair costs. And when you do you give yourself the greatest possible chance of being able to create a delta. Now I should point out, there are a lot of cynical people who would look at this type of conversation and say, Oh, that’s not fair. You are abusing the seller, because you have information, you have an informational advantage that they don’t have. And to that, I simply say that’s a very cynical perspective. And if I’ve taken the time to educate myself on exactly what the minimum lot size is, and the land requirements to do a land division and what something might sell for, and after we build XYZ product and exactly what that product would cost to build. If I’ve taken the time to do that, and they haven’t, then I believe I’ve earned the ability to have that educational advantage. And probably the most important point that I’ve alluded to now, in this podcast a couple times, is that in order for you to benefit from the Delta does not mean that they the seller have to suffer at all, this is really truly abundance mentality. If they think they’re selling you an apple, and you’re giving them a fair deal for that Apple, even though you believe you’re buying an orange, that’s what matters. If you feel like you are giving them if you’re confident that they’re getting for themselves a fair deal for that Apple, then that is what matters. And that’s what we will go about doing thoughtfully.

So my message to you is your education is your advantage. So get out there, keep developing that education and seek to find delta is between what you see and what the seller sees because at the end of the day, there has to be a disagreement on value in order for you to get your deal tied up.

That is it for today’s episode of Racking Up Rentals. Again, show notes for this episode are at www.thoughtfulre.com/e85. Please do us a big favor by hitting the subscribe button in your podcast app and take just a second to rate and review the show. I personally see all of those and I am so grateful when you do that. It really helps the platforms know that people are listening.

Hey, did you know also that we have a Facebook group for thoughtful real estate entrepreneurs? It’s called Rental Portfolio Wealth Builders. You can search for that on Facebook or you can just type in group.thoughtfulre.com, and it’ll take you right there. We’d love to have you join us there.

If you liked this episode, please take a second and screenshot of it and post that to Instagram. That’d be awesome! Tag us; we are @thoughtfulrealestate. I’ll catch you in the next episode. Until then this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.

Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember solve the person to unlock the deal and solve the financing to unlock the profits.

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