5 Tips for Building Successful, Long-Term Relationships With Real Estate Investors
According to a recent CoreLogic study, investment activity has been declining over the past few years; the share of all homes purchased by investors in 2020 was 15.5%, down from a 16.8% peak in 2018.
Now that many markets across the country are stabilizing and inventory is beginning to improve, investor activity could be poised to tick back up. To ensure you’re prepared to be an excellent partner to your investor clients — and that they continue to come back to you for their future investments — now’s the time to brush up on how to address their specific needs.
At a recent Side Masterclass, we checked in with Matt Miller. Matt is one of the founders of Fair Trade Real Estate, a Southern California boutique that operates specifically in the wholesale investment space. Matt knows his stuff — he and his partners have bought and sold over 2,000 investment properties since 2013 — and he shared with us his top five tips for working with investor clients.
1. Learn your investor’s “buy box” — and stick to it
Investors tend to specialize in one of the following categories:
Renovation. These are fix-and-flip investors who purchase a property, alter it, and then resell it.
Buy and hold. These investors are looking to build up a rental portfolio.
Developer. These investors buy a piece of land, rezone it, and get it ready for a builder.
Builder. These investors oversee the actual build of a new piece of construction on an empty lot.
Wholesale. These investors seek out properties they can buy below market price. They then reposition the property and sell for a profit without completing any alterations.
A new investor might not be aware of their preferred category yet. Matt suggested asking the following questions of your investor client as soon as possible to learn what category they fit into and what types of properties are in their “buy box.”
- What types of projects are you buying?
- What areas have you purchased in?
- What’s your comfort with renovations?
- What’s your strategy post-renovation?
Matt specializes in the wholesale space — and concentrating solely on that space helps him ensure he and his clients are always aligned.
“At Fair Trade, we will buy and sell distressed properties primarily to renovation companies working on fix-and-flip projects,” he said. “The other day, I had a developer who was also a broker in Beverly Hills send me a piece of dirt that cost $17 million, even though I had told him I work with detached single-family homes that are physically distressed. I don’t know what to do with a $17 million piece of dirt. And the quickest way to lose an investor’s interest is presenting them properties that are way outside the scope of what they’re actually looking to buy.”
2. Understand the dynamics of the deal before you get started
Investor clients have different needs, motivations, and considerations from traditional buyers and sellers. Here are four key differences to be aware of:
Most investors have partners. Figure out who the real decision-maker is before you go into escrow — because sometimes, that’s not the person who first approaches you.
“You need to make sure the person you’re working with can actually sign the contract,” said Matt.
Most investors use leverage. Whether it’s hard money, a line of credit, or private money, investors tend to have leverage when they’re approaching a purchase.
“One of the beauties of real estate is that you can buy at a leverage position,” said Matt. “You need to know exactly what your investor’s funding source looks like before you go into escrow with them.”
Most investors work with a general contractor or project manager. Sometimes an investor will have the opportunity to walk through a property themselves, but most of them outsource that responsibility to a third party. You need to understand your investor’s process for estimating renovation costs from the onset.
It’s not always about the money. Matt listed the following key motivations driving real estate investors:
- Profit. Most investors do this full-time; they use their investments to support their families and pay their bills.
- Competition. Investors tend to be extraordinarily competitive and love to win. If they know they’re competing with someone else on a property, they tend to step up to the plate to get the deal done.
- Creativity. Many investors genuinely love transforming properties and changing communities; for some, that’s an even greater driver than the profits.
- Keeping crews at work. It’s not just the investor and agent who earn income from an investment; it’s the general contractor, the sub-contractors, the suppliers, the escrow company, the title company, etc. Some investors will take a project primarily to ensure their crew has a new job.
- Cost-efficient way to deploy capital. An investor completing a 1031 exchange may have to place capital into a new project. Or perhaps they have a line of credit, which means the clock is ticking for them to spend that money.
The better you understand your investor’s situation and motivations, the better equipped you will be to help them achieve their goals.
3. Know your numbers
“Working with investors isn’t as simple as sending them an address and saying, ‘Do you want to buy this?’” said Matt. “You have to know their ROI expectations and be able to run the numbers based on properties that have sold in the area to show them what they can expect.”
Fair Trade developed an ROI calculator for this exact purpose, which Matt shared. If you plug in the price of the property, any non-lender closing costs, the exit price after renovation for the home, the anticipated renovation budget, the sales expense (e.g., agent commissions), and the holding time, you can quickly calculate the cash-on-cash return, the annualized return, and the initial rate of return.
You can find a link to the Fair Trade ROI Calculator here — make a copy of the Google Sheet to be able to edit.
Here’s a simple rule to remember when it comes to ROI: The longer the hold time, the greater the risk. If you’re building new construction, you may have to wait two years before the property is ready to sell — and who knows what changes the market will undertake in two years. But providing the market stays stable, the anticipated returns will be higher than a shorter fix-and-flip investment.
4. Make it easy for your investor to make a decision
Providing your client with succinct, well-researched data is going to show you’ve put in the time and done your due diligence. But remember: More information is not necessarily better.
“Often investors have dozens, if not hundreds of opportunities coming through email and text every week,” said Matt. “Being able to give them the specific details they need to make a decision will be incredibly helpful for them — and hopefully it will lead to more deals down the line with that investor.”
Matt suggested plugging a property into his ROI Calculator, taking a screenshot, and sending that to the client. He also recommended Cloud CMA to find details on similar houses in the same neighborhood that sold in reasonable timeframes.
“When you send me this concise amount of information, you’re going to get my attention,” said Matt. “I don’t necessarily need to see your entire marketing presentation. I'm probably going to pick up the phone to call you to see how we can get this property in escrow.”
5. Don’t be intimidated
Don’t worry if you haven’t worked extensively with investors at this point in your career — you can still bring immeasurable value to the table.
“As a top agent, you have a deep understanding of local market trends that most investors just don’t have themselves,” said Matt. “You can speak to the new Whole Foods that’s coming to the neighborhood, or the major commercial development that could impact the market, and that insight will help your investor clients make more informed decisions. Through you, they’ll be able to see the potential of a neighborhood beyond what they can see on paper.”
And the benefits cut both ways. A great thing about investors is that they tend to be repeat clients.
“It’s great to have clients where you’re not waiting five or six years before they’re ready to move to a new property,” said Matt. “You can work with the same investor on a new transaction every month.”
If you take the time to understand your client’s needs and clearly present the potential ROI on each investment opportunity, you could lock in a mutually beneficial relationship for years to come.
For more tips from Side’s network of top agents, check out more Masterclass videos here.