What Is A Buy Box & Why You Should Have One
A ‘buy box’ is an investor’s description of specific criteria that helps predefine the types of homes they want to focus on sourcing, diligencing, and ultimately investing in.
The buy box framework can be applied to sourcing efforts to save time and optimize risk-adjusted returns. A thoughtful buy box prompts investors to decide what property and market characteristics are important to their investment strategy, and focuses their attention on deals that meet the established criteria.
Seasoned investors think hyper-critically about their future plans for homes that may end up in their portfolio and their business plans to monetize the homes – for example, is your strategy to flip homes for entry-level homebuyers to purchase; or are you employing a long-term rental strategy where you rent each room separately (co-living)? The criteria you would use for your buy box could look quite different for each. In either case, knowing your future plans will help you narrow down a specific buy box.
The two primary benefits of using a defined buy box are: i) sourcing efficiency, and ii) investment discipline. Using a buy box, investors can efficiently filter a large universe of investment opportunities down to only the desirable assets. Additionally, a predefined buy box helps investors stick to their strategy – which is especially important during a competitive acquisition landscape.
5 Buy Box criteria that you should consider before investing in a property:
Specific Location – school zones, nearby entertainment, etc
- Schools are especially important for understanding demand from the all-important cohort of “young families” (aka. with children)
- What are the trends of school ratings?
- Schools drive both short-term demand (renter/flip) and long-term price appreciation (an important driver of overall returns)
Occupancy Rate by Type (Owner Occupied vs Renter Occupied)
- What is the typical make-up of the community? More renters, more owner-occupied homeowners? If you’re flipping, having owner-occupied homes in the neighborhood will encourage end buyers to feel comfortable purchasing your investment when you are ready to exit.
Purchase Price Range (As-Is Value & After Repair Value)
- Certain price points appeal to a specific segment of the overall demand. First-time home buyers are not likely to spend $400K+. Similarly, there are more families that can afford $1,000-1,800 per month rent, then families that can afford +$2,500.
- How does your forecasted sales price compare to the market? Do you want to be setting records for the highest price in the neighborhood, or do you feel more comfortable being able to sell near the neighborhood average?
- Are you seeking yield? Total nominal return? Or something else entirely? Understanding the returns that you’re targeting helps you back into certain price ranges that can help achieve the desired outcomes.
% of Housing Units with a Specific Attribute (ie. % of Housing Units with 3+ Bedrooms)
- Understanding what the housing stock in the surrounding neighborhood is like can help in many ways. You may want to “conform to the norm” or you may want to “stand out” relative to other homes.
- Understanding the competition is generally a good business practice.
City demographic data for investors who are ready to explore investing in alternative Geo locations.
- Important to consider: Major Employers and Industries, Employment Growth Rate, Unemployment Rate, Median Household Income, and other demographic factors – many of which are published by the U.S. Census Bureau.
- What is the demand of a given area? What is the demand from renters? What is the demand from owner-occupied homeowners? Depending on your strategy, knowing either or both can be important.
- What is changing in a city? What is the expected future demand?
Incorporating Your Buy Box Into Your Strategy
The first step in establishing a buy box is to have a clear vision of what you aim to accomplish with your investment strategy. This should be written down, and serve as your guiding “north star” for all investment decisions. The best investors design their buy boxes to help them achieve their goals. Like anything, without a clear strategy and associated goals, a buy box is unlikely to be effective.
To benefit from sourcing efficiency gains afforded by a well-designed buy box, it’s important to understand the output is only as good as the data you can input. You want to start with data that is easily accessible, and consistent for most properties in your target geographies. Choosing nuanced features that are not routinely discoverable will make it difficult for your buy box to work properly. For instance – if you decide that you only want to invest in properties that have backyard treehouses – it will be hard to obtain that data in an efficient way.
An under-appreciated buy box benefit, but arguably the most important one, is that it helps enforce prudent investing discipline. Buy boxes remind investors to steer clear of tempting but risky assets. For example, an investor may decide they do not want to acquire properties in high-risk natural disaster zones (flood, fire, etc.). When an opportunity comes along that otherwise looks great, their buy box reminds them: “I told myself I wouldn’t buy a property in a high-risk flood zone” which can make it easier to overcome emotional decisions and stick to making rational decisions.
Hundreds of investors use the Backflip Returns Analyzer early in their sourcing process to quickly assess if an investment meets their target return requirements as a fix and flip, or a long-term rental. Additionally, Backflip’s algorithms suggest current “as-is-values” and “after-repair-values,” supported by recent comparable transactions. Given the number of potential SFR properties available to invest in, the Analyzer can be used to quickly understand if a property has strong returns (or not).
Why Understanding a Competitor’s Criteria Can Be Useful
Having a sense for other investors’ buy boxes can help inform your own. If most investors in a market are looking to acquire the exact same type of property – for example – a 3 Bed / 2 Bath home that will rent for under $2K – that can be a good thing, because you can be relatively confident that the 3/2 housing product type benefits from high renter demand, since independent research from many investors suggests the same.
Alternatively, you may decide that competing for the same investment properties as everyone else is not the best use of your time; in that scenario it can be hard to earn better than “market” returns. Therefore, you can craft your buy box to filter for specific niche opportunities you believe are overlooked by others. An example could be searching for properties where an accessory dwelling unit (ADU) can be added to increase rental potential (based on zoning, lot size, access, etc.).
If your monetization strategy includes selling to investors, understanding their buy box puts you at competitive advantage. If you are confident your properties will be in high demand from other investors, you can take steps to mitigate “exit liquidity risk” and improve the odds of executing your business plan.
Finally, it is important to remember that lenders are investors too. They often have the most rigid buy-boxes; investors who focus on deals that fit squarely within a lender’s buy-box will have a significantly easier time obtaining investment financing than those who don’t.
How does property management help you determine an appropriate buy box?
For investors focused on rentals, property managers offer unique insights to inform an investor’s buy box. They are on the front lines of tenant interactions, which provides an incredibly valuable perspective that can be hard to obtain elsewhere. They help with forecasting market rents and expenses – critical inputs to determine monthly cash flows.
Additionally, property managers are privy to granular market dynamics – they can help you understand which property features are most desired or valued by renters. For instance, a property manager may inform you that 1-story homes in your target neighborhoods always have higher occupancy than 2-story homes. If maintaining high occupancy is important to your business plan, you might decide to include “only 1-story” as a requirement in your buy box.
Partnering with an experienced property manager can make all the difference. The experts at Marketplace Homes can help you set up your rental property for success quickly and efficiently. From start to finish, they will be there to assist you in managing your property and work with you to create a custom solution that fits your specific needs.
Download the Backflip App and read how to create your Buy Box.