Why You Need to Buy a Crappy Deal

TLDR
Your first deal should be slow and boring. Buy it on the MLS, through a real estate agent, on a barely bankable house that needs cosmetic work. You will overpay compared to what I pay now, and that is the point. The goal is survival plus skill acquisition, not profit. The deals that make real money come later, once you can comp, manage contractors, and read your buy box.

Table of Contents

What a Crappy Deal Is

A crappy deal is a house you buy on the MLS, through a real estate agent, at close to market price. It is the opposite of the 50% to 60% discount deals I buy today after 15 years of doing this. For somebody just starting out, a crappy deal is exactly the right deal.

The word crappy is about the price, not the property. The house itself should be a cosmetic rehab: a barely bankable property, livable but ugly, where the work is paint, floors, fixtures, and trim. Something a bank will lend on. Nothing structural, nothing mechanical, nothing the city will condemn when you open a wall.

The point of a crappy deal is not the margin. The point is staying in the game long enough to build the intuition that every other deal depends on.

The Four Ways to Get a House

There are four acquisition channels in real estate. They sit on a supply-and-demand spectrum.

The first is through a realtor on the MLS. This is where sellers list to expose their house to the biggest pool of buyers. Biggest demand, highest price. Crappiest deal from a margin standpoint. Safest from a risk standpoint.

The second is through a wholesaler. They have a smaller buyer list, so demand is narrower and prices are a little better. The catch is that great wholesalers build huge buyer lists over time, and their prices creep right back toward the MLS. I once paid a $100,000 assignment fee to a wholesaler on an apartment complex. That was them extracting the full market value of access.

The third is direct-to-seller, usually through direct mail. You become a market of one. The demand is just you, the supply is the seller. This is where the real margins live, which is also why it takes skill, time, and a list to do consistently. Not a beginner channel.

The fourth is auctions, foreclosure, tax, sheriff. Different animal, different risk profile, skipped here.

MLS > wholesaler > direct-to-seller > auction is the supply and demand hierarchy of price. Start at the top of the price curve when you’re learning, work down the curve as your skill stack grows.

Why Beginners Should Start Crappy

Six reasons to start with an MLS deal.

1. Safety nets. MLS deals have inspection periods. You can find problems after you’re under contract and walk or renegotiate. Wholesale deals rarely give you that. Direct-to-seller gives you whatever you negotiate, which as a beginner won’t be much. The inspection period is a beginner-level airbag.

2. Proof of life. You need a financeable house that a bank’s appraiser and inspector will both sign off on. MLS houses mostly meet that bar. Direct-to-seller deals are often houses people cannot sell on the MLS for a reason, which is a reason you don’t want to learn about on your first deal.

3. Limited scope. A cosmetic rehab on a barely bankable house caps the universe of bad surprises. Paint and floors cannot bury you the way a full re-plumb or a structural floor joist repair will.

4. Small discounts compound. The MLS occasionally gives up a 5% to 10% discount on a property that’s been sitting. You’re not trying to hit a 70-percenter on your first deal. You’re trying to pay market, do a clean renovation, and sell at market.

5. You learn in calm conditions. The pressure curve on an MLS deal is gentler. You have time to think. A wholesaler is pressuring you for EMD the day you see the deal. A seller on a direct-mail lead wants to know what you can pay in cash tomorrow.

6. Staying in the game beats home runs. Most first-time investors who swing for the fences strike out on deal one and quit. The ones who stick around long enough to see around corners are the ones who bought boring deals first and treated them as training reps.

Dumb Mistake I’ve Made
Early in my career I bought a huge project I thought was the home run deal. I had no idea what I was doing. I bit off more than my skills allowed for, lost a ton of money, and ended up sleeping on job sites for years to fix it. I didn’t have a family then. If I did, it would have taken me out of the business permanently.

The Three Skills a Slow Deal Builds

A crappy deal is the classroom. The tuition is the margin you leave on the table. What you’re learning is three skills that compound over the next 10 years.

Skill one: your buy box. Before you buy anything, decide what you’re actually looking for. Neighborhood, price range, square footage, bed/bath count, style, condition, lot type. Ross-level investors have all nine factors dialed in; beginners haven’t thought about any of them. The MLS deal forces you to pick because the search filters require it.

Skill two: comps. Pulling comps is a skill that only develops by doing it wrong a few times. Three sold comps, same neighborhood, same size, same style, within six months. Your first ten comping attempts will miss something important. Your first buy teaches you which comps you should have used and which ones you got fooled by. The range of comps inside that set tells you where you can list when you’re done.

Skill three: contractors. Every beginner underestimates how hard managing a renovation is. A cosmetic rehab on a boring MLS house is the right environment to hire your first general contractor or first few subs. Low stakes, understood scope, short timeline. You’ll make every mistake in the book, and they’ll cost hundreds instead of tens of thousands.

Pro Tip
The three skills compound. Better buy box → better comps → tighter rehab → better sale. Miss one and the whole flip wobbles. Do them in order on every deal until they’re automatic. On your 10th flip they’ll be intuition. On your first they’re conscious work.

When to Graduate

You graduate from crappy deals when you can hit a buy box in your sleep, pull comps that match reality within 2%, and walk a property estimating the rehab within 10% of what a fixed bid will come back at. That usually takes three deals. For some people it takes five. Either way, the number isn’t calendar time, it’s deal count.

When you’re ready, the next step is usually wholesalers. Narrower market, tighter margins, more skill required, and the bids start coming in at 20% to 30% below retail. Then direct mail to sellers. That’s where my own business lives, but it took me years of MLS and wholesaler deals to earn the right to scale mail.

The deal you can afford to be wrong on is the only deal you should be learning on.

FAQ

What if I already bought my first deal and it wasn’t crappy?

Then you either got lucky, got burned, or you’re still in the middle of finding out. If it was too cheap to be true, go walk the house on a rainy day and check the crawlspace. If you’re already in and the scope has expanded, tighten the scope of work on whatever’s left and don’t add anything. Survive the first one, buy a boring second one, and call that your reset.

How much can I afford to lose on a crappy deal?

If you can’t afford to lose it, you can’t afford to buy it yet. Set a number you’d be OK writing off as tuition and don’t exceed it. My first deal budget looked reckless to my corporate-job-self and trivial to my 30-flips-in-self. That’s the spread the MLS is buying you.

Should I use my own money or borrow?

For the first one, your own money. Borrowing puts calendar pressure on a deal that’s supposed to teach you patience. You want time to make mistakes without a hard-money clock ticking in the background.

What about using an agent to make offers on off-market houses?

Don’t bother yet. The skills to prospect, underwrite, and negotiate an off-market deal are the skills the MLS deal is teaching you. Trying to run off-market with no skill set is how beginners lose money at speed.

How long does one crappy deal take?

Four to eight months start to finish. Shop the MLS for two to six weeks. Under contract for 30 days. Renovate for 60 to 90 days. Market and sell for 30 to 60 days. Budget for all of it being slower than you think. The slowness is part of the training.