Business opportunities are needed to both start your venture and to grow it. But how do you know what opportunities to pursue? Shouldn’t you jump on every opportunity that presents itself? Not necessarily. From personal experience, I can tell you that you will be far more successful if you limit your opportunities and only focus on the best options. Your income is more likely to increase with a small, focused set of initiatives. If you read any of the studies on the topic published by the top business schools in the country (as I have), you’ll find that they overwhelmingly support this approach.
What Is A Market Opportunity Analysis?
A market opportunity analysis is exactly what it sounds like: it’s a way to review and analyze your real estate investing business opportunities. What makes it powerful is it is a very deliberate process and not just a “gut feeling.” The mistake many real estate investors make is that they fail to focus on what makes them money. Instead, they focus on shiny objects, get rich quick schemes, and big dreams. The irony here is that big dreams are more likely to come true with focus!
What Makes It Important?
Researching market opportunities makes you, as the business owner, aware of money-making opportunities and potential threats. A market opportunity analysis will keep you in tune with your business and force you to focus on what makes you the most money.
How To Carry Out The Analysis
Although real estate investing is a unique business, it’s not so different from any other industry when it comes to performing a market opportunity analysis. The following are the steps you’ll need to take to conduct your analysis:
Identify Consumer Segments
Generally speaking, a business has customers. Customers come to you for your service or product, which you exchange for money. In real estate, the term “customer” can mean different things. For example, if you were a real estate agent, you might differentiate first-time homebuyers from real estate investors. They’re both customers — but they’re very different types of customers. As such, they are considered different consumer segments.
As investors, we start with understanding how we make our money. If you are a wholesaler, you should focus our consumer segments on home sellers and fix-and-flip investors. If you are the fix-and-flipper, you should be more concerned with locating deals, so you would want to focus on areas to find houses or inventory. In this case, wholesalers would be considered one customer segment. By understanding the different customer segments, you can focus on a plan to find the consumers, houses, buyers, or tenants you are looking for.
Review Of Purchase Analysis
Understanding your buying process as a business owner is essential to securing profitable deals. Most businesses with inventory track their inventory and purchases to ensure the largest profit margins possible. Real estate investors should do the same. Start with the properties you are buying. Do you have a reliable system for identifying buying opportunities? Do you have the right people (even if it’s just you) analyzing the numbers to ensure success? And most importantly, do you have a system or criteria for what constitutes a good purchase and what deals you should pass on?
Most real estate investors have a buying rule. The most common rule that I’ve come across is the 70% rule. The 70% rule states that if you find a deal where you can buy the property and fix it up for 70% or less of the after-repaired value, you buy it. If the purchase price and repairs are over 70%, you pass on it. Although the 70% rule is a good rule to follow to ensure profitability, it can be challenging to find deals this strong in a hot real estate market.
I think the 70% rule is a fantastic start, but I see many profitable deals that go over 70%. I believe that 75% is a more realistic number for that rule, and any opportunities that go over 75% probably need to be looked at more closely, although not necessarily eliminated. Check our Maximum Allowable Offer (MAO) worksheet in the resources section of this site. This worksheet is free and can be used to dig into the numbers on a deal to ensure you are buying with a safe profit margin. Using a system like the MAO worksheet prevents errors and will help you and your team make better purchasing decisions.
Analyze Substitute Industries
Substitute industries refer to the competition for your goods or services from outside industries—for example, a pizza delivery service vs. a fine dining restaurant. Neither likely considers the other as competition, yet we all need to eat somewhere, and if you order pizza, you are not eating at a steakhouse. Because real estate investing is not cut and dry, this can be a challenge.
When I think about real estate investors, I think about finding highly profitable deals to fix and flip or buy and hold. When competing for houses to buy, the common owner-user is an example of a substitute industry: the home buyer who will use the property they purchase as a primary residence. The common owner-user is a challenging buyer to compete against because they are highly motivated by emotion and will not necessarily make buying decisions based on numbers. As a result, they are willing to pay much more than you. Fortunately, there are multiple ways you can gain a competitive advantage:
- Get creative – As an investor, you can purchase homes in ways that homeowners do not understand. Creative buying strategies, such as lease options, subject to, or other owner financing terms, will help give you a competitive edge. You can also get creative with what you do with the home. For instance, it may be worth it to pay more for a house if you plan to add value. Demolishing a house to replace it with a new home construction in a desirable area is one way to achieve this. However, always consider other ways to add value, such as creating an additional unit, separating part of the lot, improving the floor plan, adding a second story, or building any other addition. These are all winning strategies when correctly implemented.
- Close fast – Most owner-occupied buyers use a loan to buy their home. These loans take a long time to close, especially right now with appraisers being backed up. If the home seller needs a quick sale, a real estate investor might be their best option — even at a bargain price!
- Look for uninhabitable homes – Homes in need of a lot of work are hard to sell. Your standard owner-buyer may not be able to see past the damage and smell. Most people can’t see the potential, which makes these houses harder to finance. A foul smell to them might smell like money to you. Not only can you spot the potential, but odds are you were planning to rehab the home anyway. As such, run-down, beat-up houses are typically sold to real estate investors.
Analyze Competing Complementary Products & Services
Another threat to take seriously is the direct competition: other real estate investors. We are all taught that there are plenty of houses to go around and that other investors are not really our competition. We’re even told that we should all work together. That sounds nice — but let’s get real. While I agree that investors work well together, and for the most part, this is a cooperative and friendly business, once you start losing houses to other investors, you will understand how competitive they can be.
Essential Keys To Conducting An Opportunity Analysis
The following are the three keys to conducting a thorough opportunity analysis.
Researching Your Customers
With most businesses, this is a pretty simple concept to grasp. For real estate investors, it’s not so black and white. For a fix-and-flip real estate investor, who is your customer? I view the customers of real estate investors as the exact opposite of customers for a typical business. For example, in a regular business, a customer gives you money in exchange for a product or service. For a fix-and-flipper, the customer receives the money. Of course, you’ll eventually sell the house to a more traditional customer, but your Realtor generally handles this transaction. Instead, I choose to focus on finding homes to buy.
The most successful real estate investors I know market themselves and their companies to potential sellers. When sellers contact them, they have the chance to work directly with them to buy the house. As a result, much of the competition you have when purchasing homes on the market is eliminated, thereby opening up opportunities for a significant profit.
To complete a good opportunity analysis, begin by focusing on your customer. Identify what makes them motivated to sell, where they hang out, what they like and dislike, and where you can find them.
Getting A Bigger Picture Of The Market
As you research the market you want to be working in, you will begin noticing areas that give you a competitive advantage. For example, if you want to work in Denver as a fix-and-flipper, you will discover the zoning changes that happened several years ago. Knowing the zoning changes and the areas the city marked for growth would allow you to buy homes to develop for big profits.
Markets to research are not restricted to location. You can research types of financial hardships, foreclosures, evictions, or other indicators that could tip you off to seller motivation.
Understanding Environment Factors
Environmental factors play a significant role in the success of most businesses. Such factors include anything that can impact a large group, for example, COVID-19. The pandemic affected everyone, so that might be an extreme example, but think of other things outside your control that could impact your business that will also impact other companies. Consider potential environmental factors like the future public construction plans within a city, changes in rules or laws, interest rates, stimulus packages, and any other factors that could affect your business. Although identifying these factors can be difficult, it’s a good idea to research potential environmental factors as much as possible and to plan for them.
Identifying Market Opportunities
If you want to be a run-of-the-mill real estate investor, you might be able to get away with not doing a market opportunity analysis. But if you want to be a great real estate investor, identifying market opportunities is essential to your success. Doing a market opportunity analysis will bring focus to you and your team. It will also help you determine what you’re doing well and what is needed to grow results — and by results, I mean your bank account!