In the 1976 movie “All the President’s Men” depicting events of the Watergate scandal, the character playing the informant known as ‘Deep Throat’ is known for a particular catch phrase.  What his character told Bob Woodward was to “Follow the Money” during his investigation.  Although it was later confirmed that the phrase was not actually a part of Bob Woodward’s interaction with “Deep Throat” (Mark Felt Jr.) during his investigation of the Watergate story.

Regardless, the advice to “Follow the Money” is quite appropriate when examining the business models of companies that are engaged in selling real estate.  Since real estate has attracted so much attention over the past ten years, it is critically important to understand the various business models for investment real estate and the economics that drive them.  With that in mind, we have prepared a listing of the businesses you are most likely to run into when looking at investment real estate, along with an analysis of their business model and its underlying economics.

  1. Traditional Real Estate Company
    1. Examples: Century 21, RE/MAX, Coldwell Banker, Keller Williams, Prudential, ERA, etc.
    2. Strengths:
      1. These companies carry large, national brand names and have access to many resources for sales and marketing.  Most offices are focused on people who are buying and selling their primary residence, so agents will develop extensive knowledge into a limited, specialized market area.
    3. Weaknesses:
      1. Because of their specialized knowledge, agents are partial to their local area.  Since most traditional real estate agents specialize in primary residence, very few will have much knowledge in regard to investment real estate, nor will they be able to offer much in the form of investor education.
      2. Traditional real estate agents specialize in the buying and selling aspects, but typically have very little experience in next steps for property investors.  This leads to a disconnected approach where agents offer a ‘piece’ of the solution, but are unable to assemble the complete package.
    4. Business Model:
      1. Traditional real estate agents make all of their money from commissions when you buy or sell property.  Because of this, most agents attempt to move from one client to the next as quickly as possible, since that will increase their earning ability.  It is unlikely that most traditional real estate agents will provide much follow-up help with your investments, since their earnings come from generating new sales.
  2. Internet Marketer, Infomercial Guru
    1. Examples: Armando Montelongo, Than Merrill, Carleton Sheets, etc.
    2. Strengths:
      1. A strong engaging presentation that quickly communicates the key business concepts to new investors.  Internet marketers must become adept at communicating complex ideas simply and quickly to potential clients.
    3. Weaknesses:
      1. Internet marketers offer products and services that are typically quite expensive.  This issue is compounded since most do not have actual real estate for their clients to buy.  This means that the customers end up being ‘on their own’ for the highly difficult and complex process of deal identification, acquisition, and execution.  It is not uncommon for information marketers to move onto a different strategy if their current plan is producing unsatisfactory results.  Follow-up is frequently nonexistent.
    4. Business Model:
      1. Typically, internet marketers sell a “system” for generating wealth.  These systems are offered at a relatively high price, and are typically targeted at new investors.  Most investors who go through one of these plans quickly find that the system is much more difficult to execute than they were made to believe, and that they are receiving no help from the “guru” who sold them on the system.  This business model depends on a consistent ‘churn’ of new investors to buy the system.
  3. Author With Back-End Coaching and Seminars
    1. Examples: Robert Allen, Robert Kiyosaki, etc.
    2. Strengths:
      1. The books published by these authors are frequently good, and sometimes great.  Most of the time, they contain very solid business concepts and fundamentally sound analysis.  For people who discover these concepts because of reading one of the books, it can be trigger a change in their perspective on investing and life that generates very favorable results.
    3. Weaknesses:
      1. The “Back-End” of this system typically involves solicitations to join coaching programs or attend seminars.  The seminars and coaching are typically quite expensive, and are sold by high-pressure salespeople or telemarketers.  The coaching is frequently done by people who are following a script.  This system sells information, and does not have any direct attachment to the results that customers achieve.
    4. Business Model:
      1. The books serve as a marketing tool for the coaching programs and seminars where the authors make their “real” money.  These seminars and coaching programs are typically very expensive, and marketed with “success stories” from cherry-picked clients who produced spectacular results.  Most of the actual information being sold through the system can be found elsewhere for a considerably lower cost.
  4. Clubs and Associations
    1. Examples: Local Real Estate Investors Association (REIA)
    2. Strengths:
      1. Investor clubs are typically great for networking.  There will be a mix of experienced investors, new investors, and people who have big dreams that they want to fill.  There is also the opportunity for education on multiple strategies that is offered by the speakers at the club meetings.
    3. Weaknesses:
      1. The format of REIA clubs typically means that they fall into following fads or the “flavor of the month” for investing.  Most of the education and networking is wrapped around selling systems or books / CD’s.  Since the speakers rotate regularly, there is not a consistent philosophy or methodology that drives the Investor club.
    4. Business Model:
      1. Real estate investor clubs make their money by taking a cut of the products and services that the speakers sell at the meeting.  The format is designed to attract new investors, since those are the ones who are most likely to purchase the products offered for sale.  Since the club and speakers are both unconnected from customer results, the emphasis is typically on selling as many products as possible.
  5. Local Rehabber
    1. Example: Contractors and PPIN Local Market Specialists
    2. Strengths:
      1. Local rehabbers frequently have access to some of the best deals, and develop an excellent business model.  This stems from a deep knowledge of the process for acquiring rehab properties in the area, relationships with sub-contractors, and established suppliers.
    3. Weaknesses
      1. The deep knowledge about a particular market frequently means that the contractor is partial to their local market.  This prevents them from being Area Agnostic™ and pursuing the best deals if they are not in their particular area.  This results in a “one trick pony” effect where the business model only works as long as the local area remains healthy for investment.
    4. Business Model:
      1. The business model for rehabbers in the current environment is to purchase distressed property in a specific area at discounted prices, organize a fast but thorough rehabilitation of the property, and then sell it to an investor for a profit.  Some rehabbers also offer property management on the back-end to generate residual cash flows and subsidize being able to sell properties to investors at lower prices.
  6. Advertising & Promotion Portal
    1. Example: “The Real Estate Guys”
    2. Strengths:
      1. Highly engaging and interesting shows.  This business model has the ability to efficiently broadcast information to many people in a manner that is easy to understand and act upon.  By partnering with vendors who have investment inventory available, they can effectively bring the buyers and sellers for investment properties together.
    3. Weaknesses:
      1. The nature of a promotion based business model means that the advertiser is not personally vested in the outcome of the investment deals.  Since they are serving as the bridge between buyer and seller, they can do little more than offer deals up for sale.  This disconnect sometimes results in promoters who advertise investment property that is not of the highest quality, simply to earn commissions on sales.
    4. Business Model:
      1. The promotional business models are all based on earning a commission on what is sold through your show or portal.  This business model is all about attracting customers, and retaining their attention.  Once the customers are ‘tuned-in’ to your content, it becomes much easier to convince them to buy from one of your vendors.
  7. Full Service Real Estate Education and Referral Network
    1. Example: Platinum Properties Investor Network
    2. Strengths:
      1. The great virtue of a full service education and referral network is its vertically integrated business model.  This means that all of the stages from education to deal identification, to deal acquisition, and post-sale support are part of the model.  By keeping all of the parts connected together in a holistic approach, it creates a complete solution for investors.  This full solution also allows the network to be area agnostic™ about its deals and direct investors to where the best deals are available.  It also provides much more leverage for clients when dealing with vendors, since many customers are represented by the network.
    3. Weaknesses:
      1. The vertically integrated business model does not have sufficient margins to support a large marketing campaign.  This means that you are not likely to find them through mass media channels.  The systems that are marketed the most heavily through mainstream channels are typically the ones that charge the highest price for their seminars, books, CD’s, and coaching programs.  The lack of margins from over-priced products means a limited reach for marketing efforts.
    4. Business Model:
      1. Integrated referral networks earn their money from a referral commission on properties that are purchased through local market specialists.  Events and educational materials are typically sold at relatively low margins since they are a catalyst to the primary revenue source of repeat investor purchases.  Since the commission per transaction is relatively small, the system relies on cultivating a pool of repeat-buyers who are building their investment portfolio.  This is done by offering holistic education, deal analysis, deal execution, and post-sale support.

Action Item: Examine the business model of companies offering information, advice, or deals before spending your money.  Pursue business partners who have a vested interest in your personal success. (Top image: Flickr | tvol)

The Jason Hartman Team

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