How to Specify Your Real Estate Acquisition Criteria
Whether you’re new to real estate investing or are a seasoned pro, one thing is for sure: the hunt for great deals never ends. So when it comes to staying focused and using your time wisely, one of the most important things to have in mind is well-defined acquisition criteria.
Not knowing your acquisition criteria, or not communicating it well, can dramatically decrease your chances of finding a deal. Why? Because brokers and other investors are a great source of deal flow, and if you approach them without well-defined criteria, you’re asking them to go through the low-leverage, low-hit ratio exercise of “deal fishing”—repeatedly casting lines (deals) out to you and seeing if you bite. This is something they may or may not be willing to do.
Many investors who lack qualified deal flow find out they’ve relegated to a broker or investor’s database where the only deal notifications they’ll see are also seen by hundreds, often thousands, of others. One deal + a lot of eyeballs = low probability of securing a great deal.
Defining your acquisition criteria and communicating it succinctly to others helps them separate you from the crowd of people looking for “good deals.” Remember to strike a balance with the details—too little is not helpful, and too much decreases likelihood of being a close enough fit to get a phone call. Since brokers and investors talk to many people in a given week, be persistent with reminders of what you’re looking for and implementing other synergistic strategies.
7 Key Components of Your Real Estate Acquisition Criteria
- Investment strategy
Do you flip deals? Renovate, refinance and hold? Do you do ground-up development with the intent of selling? Do you need to have specific deal criteria or performance benchmarks that trigger different strategies? It’s okay to have more than one investment strategy, just be specific about your criteria for each.
- Property type
Include size (rentable SF/lot size), unit counts, building class, physical characteristics, and location characteristics (mid-block, hard corner, along a certain retail corridor, etc.). Think about specific numbers, and include a range, if applicable to you. These items show others that you’re thinking about things beyond the surface and that you have a unique viewpoint.
- Return hurdles
What is your minimum rate of return on a prospective project? Remember, the higher your hurdles, the harder it will be to come across a deal, so it’s better to be less aggressive when discussing with others. This will allow you to see more opportunities and see if there’s even greater return potential than previously estimated by the person bringing you the deal.
- Geographic boundaries
Don’t say “anywhere.” Talk metropolitan statistical area (MSA) or cities, then specific sub-markets when applicable.
- Price range
This is a tough one, since many factors change how much you can afford, such as life circumstances, capital market swings, property values, and more. To get this right, consider the capital you have available to you, how much leverage you want to apply, the general loan terms that are available for the properties you’re considering, different loan payment scenarios and how they impact your cash flow, as well as who and how you can raise money from others.
Another way of looking at this: If an excellent deal comes up that is priced higher than you can afford, what other resources do you have at your disposal? How high could you go?
- How you structure deals
In conversations, it’s best to keep things simple, even if your structure is complex. If you get to the point where a deal is likely to happen, you can provide granularity.
- How you perform if a deal fits your criteria
In other words, how fast can you move and on what terms—days to non-refundable deposit and closing—if a deal is a good fit? The faster and the more money “at risk” (non-refundable) the better, but be honest. Don’t put yourself at risk with a due diligence period that limits full discovery of all necessary information unless you’re prepared to leave the money behind.
Don’t forget to include lender timing (plus a 15 day buffer) in your closing timing. If quick timeframes are important based on market conditions, you can usually satisfy brokers and/or seller by going non-refundable quickly even if a closing has to be pushed past 45 days due to lender issues.
Know these seven criteria, and you’re on your way to a great career in real estate investing. But of course, leave some room for flexibility. When speaking to other investors and brokers, you’ll want to explore fringe opportunities that are close to your criteria but aren’t necessarily a bullseye.