Don't Buy a House Without Defining Your Buy Box First

TLDR

Pro investors know exactly what type of property they buy. Amateurs buy anything. Nine factors define your buy box, and once you have it, every other decision gets easier, your marketing improves, and wholesalers actually bring you deals.

Table of Contents

• Why the Buy Box Matters
• Factor 1: Location
• Factor 2: Property Type
• Factor 3: Property Class
• Factor 4: Size
• Factor 5: Age
• Factor 6: Work Level
• Factor 7: Style
• Factor 8: Price Point
• Factor 9: School District
• How to Build Your Own

Why the Buy Box Matters

If you walk into a room full of wholesalers and real estate agents and say “I will buy anything anywhere,” nobody serious will work with you. You become bait for the sharks. Either that, or you get ignored.

Compare that to the person who says: “I buy single family houses in this neighborhood. Under 1,500 square feet. Three beds, two baths. I hold them as rentals. If you find one, I close.” That person gets deals called in before they hit the market.

A defined buy box does three things for you. It frees up your bandwidth because you stop second-guessing every listing. It builds your intuition, because you see the same type of house over and over and you start knowing the numbers cold. And it makes you a marketing machine, because now you have something specific to say to sellers, agents, and wholesalers.

A buy box is not a limitation. It is the thing that lets you move fast.

Factor 1: Location

Two prongs here. Area and urban versus rural.

For area, there is one right place to buy real estate. That is IMBY. In my backyard. If there is no deal flow in your town, find one within two hours and drive there once a week so you have a presence. If there is none within two hours, go four, go five, or move. That is what I did. My wife and I moved to Tennessee to buy real estate.

You do not need a massive city. All you need is a town where you can find houses with three good comps that have recently sold. Three good comps tell you a city has adequate deal flow, real buyers are closing, and there is enough data to make a numbers decision instead of a gut decision.

For urban versus rural, pick urban. Here is the analogy. An urban house is the Kelly Blue Book 2016 Honda Accord. You know the value. A rural house is a 1932 classic hot rod at auction. It depends on the story, the shape, the buyer on that particular day. I do not like guessing.

Buy close to home. Buy where the data exists.

Factor 2: Property Type

Here are the main categories: single family homes, small multifamily (two to four units), condos and townhomes, land, small commercial, big commercial.

Only buy from the first two. Start with either single family or two to four unit multifamily. That is the perfect mix of profitability and control.

Here is why, and I learned this from reading about Ray Kroc, the founder of McDonald’s. McDonald’s is not a burger company. They are one of the largest real estate companies in the world. They use the burgers to pay for some of the best land in every town. What they really own is the land.

That is how I look at rentals. I am buying the land. Land is scarce. They stopped making it. The rental on top is just paying for the land. So the bigger the structure relative to the land, the worse the deal. Single family is a small structure on a big piece of land. Multifamily is a bigger structure, and the land does not grow proportionally. Not bad, but not where I started. I own big multifamily now, but not until I had a lot of single family first.

Control means I do not get knocked out of the business tomorrow. Single family is the most resilient because the buyer pool includes both investors and owner occupants.

Factor 3: Property Class

Houses come in four classes. The fair housing act might not love this framing but the classes are real.

I am a Walmart guy. I buy B-class properties because that is where the numbers work best for flips. But I also have a solid foundation of section 8 rentals, because section 8 is a great baseline of income. The government pays. Thanks.

Factor 4: Size

Actual square footage. I look at this differently than most.

At its core, a house is a kitchen and a bathroom. That is what makes it a house. Every additional square foot is watered down. The kitchen and bath are the burgers. Everything else is the soda and fries.

Why that matters: rent is priced on bedrooms and the presence of a kitchen and bath. It is not priced on square footage. So in the ideal rental, I want the smallest square footage with the most bedrooms. Three beds under 1,000 square feet is perfect.

But the sale price is set by square footage. So for a flip, I do want a little more square footage, because the soda and the fries are cheaper to renovate than the burger.

Here is where I land. I am ultra conservative because the market can change fast. Any flip might become a rental. We are in what some call a silent recession right now, and a lot of houses I planned to flip I am refinancing and renting instead. So I buy in the middle. Most of my houses are 1,000 to 1,600 square feet. That is the happy medium.

Pro Tip

If any flip could become a rental, buy like it might. I have a handful of houses over 2,000 square feet that I had to hold as rentals when the market did not cooperate, and the hold cost relative to the rent is not great. Middle-size houses protect you from your own optimism.

Factor 5: Age

Three time periods.

Historic. World War II and before. Pretty houses. Built with whatever stones and lumber they had. There is no code book you can flip to that says “this is what they did in 1912.” A contractor cannot say “my grandfather taught me this” because his grandfather never saw it either. Historic houses require conceptual knowledge about how things go together, and that is a rare skill.

Modern era. 1950s on. Standard framing techniques, block or brick foundations, code you can reference. This is most of the housing stock.

New build. Also modern, but priced at a premium. You are not getting a deal on a new build unless something is seriously wrong. When new builds drop in price enough, they become modern era to me.

If you are starting out, stay in the modern era. Historic houses have great deals if you really understand what you are looking at, but if you do not, they will eat you.

Factor 6: Work Level

Four levels.

Clean it up and list it. The whole tale. Barely any work. Hardest one to find because it requires a killer deal on the front end.

Cosmetic. The lipstick flip. Paint, hardware, maybe new floors, maybe a little kitchen polish. This is the right starting point for most new investors.

Deep renovation. The gut job. The drywall comes off. Once the drywall is off, you are touching mechanical, electrical, and plumbing, and most of that gets pulled up to current code because existing work is often grandfathered until you touch it.

Actual building. Addition or new build.

Start with cosmetic. You will get your feet wet, build relationships with contractors, and see how things come apart without drowning.

Factor 7: Style

When I started, my realtor asked if I was looking for a bungalow or a mid-mod. My answer was, what the hell is a bungalow. I still do not really know. That is the point.

Style does not matter. Look at the comps, look at the factors we are covering, and if they line up it is good. Style is for HGTV. If you want to be a designer, great, it is a hobby. You can have a hobby and still be a profitable investor. Just know which is which.

Factor 8: Price Point

This varies by city, but anchor it off the median price in the city. Price point basically maps back to class. Below the median usually means C or B class. At the median usually means B to A.

I sometimes flip a house that sells just above the median. I have almost never bought a house above the median, except my own personal house. And I got a great deal on that too. You buy below the median because you are adding value through rehab.

Safety equals longevity. The longer you stay in the game, the more corners you can see around.

Factor 9: School District

Buyers and renters care about schools. But when I am buying, I do not think about it much because it is already priced in. A nicer school district sells for more, and I saw that when I comped the house.

One edge case. Some houses sit right on the boundary of a school district. You can get confused comping a house and accidentally use comps from the better district when yours is actually in the worse one. Watch that boundary.

How to Build Your Own

Research is the step. You have heard my filters. Now figure out what fits you.

Use Zillow. Get a realtor. Go to showings. Drive the neighborhoods. Get a feel for where you could see yourself buying over and over.

Then pick three neighborhoods. Not all of them. Three. Learn them like the back of your hand. Know what houses sell for per square foot. Know what they rent for. When someone calls you and says “I have a house for $1,200 a foot,” you should already know if that is a deal.

Here is what that sounds like in practice. “I know houses here sell for $200 a foot. That house at 1,200 feet will sell for $240,000. It probably needs $15,000 to $25,000 in work. So using the 70% rule, 70% of $240,000 is $168,000. Minus $20,000 in work, I can pay $148,000. Is that your asking price?”

That is intuition. That is a comp radar built from knowing three neighborhoods cold.

Once you have that, you go market to direct sellers, wholesalers, and realtors. And then you buy.

FAQ

How many neighborhoods should I really focus on?

Three, tops. You want to know them so well that when a listing hits, you know inside of 30 seconds whether it is a deal. If you are watching 12 neighborhoods, you know none of them.

What if I cannot find a neighborhood with three good comps?

Widen the geography. Go to the next town over. Extend the comp window back to 12 months instead of six. If you still cannot find three comps, that is a city where you should not be investing. Not enough deal flow.

Does the buy box have to stay the same forever?

No. My buy box in year one was different than year five. As you learn, you get more specific in some places and more flexible in others. What stays the same is that you always have a buy box. You never go back to “I buy anything.”

Should I care about the fair housing act talk around property class?

Class is a real thing investors use. Just do not use it to discriminate against tenants, and do not put class language in your rental ads. Use it for underwriting, not marketing.

I am brand new. Can I just copy your buy box?

Do not. My buy box is calibrated to Chattanooga and my operation. Copy the structure. Fill in the parameters for your own market. The nine factors are the skeleton. The numbers are yours.